Thrift Savings Plan Withdrawal Options - Before Retirement
You can take a Thrift Savings Plan withdrawal before you retire - but there are important things you need to know before you do it.
This section talks about taking money out of your TSP before you retire. But click here if you want to
learn more about TSP Withdrawals *after* you retire.
There are actually two different types of Thrift Savings Plan withdrawals you can take *before* retirement:
- Financial Hardship TSP Withdrawal
- Age-Based In-Service TSP Withdrawal
Let's take a closer look at each one...
Financial Hardship TSP Withdrawal
You can take a Thrift Savings Plan withdrawal due to financial hardships.
But - when you take money out of your TSP while you are still working for the government - and before age 59 1/2 - there are big penalties to pay.
In order to take the money out - you will have to prove that you are taking the money out for financial hardship.
If you take an in-service Thrift Savings Plan withdrawal, you will have to pay ordinary income tax on the full amount taken out. And - if you are below age 59 ½, there might also be a 10% penalty to pay to the IRS.
People typically think about taking money out of their TSP when they are having financial difficulties. If you are in this situation, withdrawing money from your TSP should be one of your last options.
Example of Financial Hardship Withdrawal
Let's say you take a Thrift Savings Plan withdrawal of $50,000. TSP will withhold 10% of the amount you request for taxes and send you a check for the rest. In this example, you get a check for $40,000.
Because you have taken money out of a retirement account for non-retirement reasons - you will likely have to pay a 10% penalty.
In addition to this penalty - you will also have to pay ordinary income tax on the full amount money. You can't 'deduct' the $5,000 penalty - you pay taxes on $50,000.
For easy numbers, let's say you pay 25% taxes...
$50,000 x 25% tax rate = $12,500 owed in taxes + the $5,000 penalty = $17,500.
You now owe the IRS $17,500.
In our example, TSP withheld $10,000 for taxes. But you owe $17,500 - which means you will need to come up with an *addtional* $7,500 at tax time.
Unfortunately, most folks don't remember to set aside this extra money for taxes. Or if they do set it aside in a savings account - they often end up spending that money too.
And come tax time - they are back in financial trouble. It just gets uglier and uglier.
So many times, taking a TSP withdrawal doesn't actually solve financial problems - it just makes them worse.
In addition to the taxes, there are other consequences to taking money out early. For example, you won't be allowed to contribute any money to your TSP for 6 months.
If you are considering taking a Thrift Savings Plan withdrawal, I encourage you to really look hard at all of your options. Seek advice from a financial professional, or a debt counselor.
Age-Based In-Service TSP Withdrawal
If you are age 59 ½ or older, you can do a one-time transfer of all (or a portion) of the money in your TSP into a Traditional IRA.
This is also called an Age-Based In-Service Withdrawal.
Why would you do this?
Having your money in an IRA gives you more investment choices. In fact, you can have almost all the same options you had in a TSP, and much more.
If you do take this type of Thrift Savings Plan withdrawal - you MUST take the rest of your TSP money out when you separate from service.
But for many people, it makes sense to transfer their money from the TSP to an IRA at retirement anyways. So this requirement usually isn't a big deal.
TSP Withdrawal *After* Retirement?
We've just discussed ways that you can take money out of our TSP before you retire.
But, what if you want to learn more about the ways you can take money out of your TSP *after* you retire?
Learn about what you can do with your TSP at Retirement.
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