TSP Withdrawal Options: In-Service, Age-Based and Still Trucking
When it comes to TSP withdrawal options, three choices usually come to mind: early withdrawal due to financial problems, early withdrawal for a down payment on a house (exempt from the 10% early withdrawal penalty), or monthly withdrawals in retirement. Federal Employees often forget that they can also make a penalty-free withdrawal once they reach age 59 ½, even if they are still working.
Nowadays, it’s pretty common to see people in their 50’s or older who are just starting government careers, hoping to eke out another 10 or more working years in the public sector until it’s time to permanently throw away the alarm clock. So there are many Federal Employees over age 59 ½ who aren’t quite ready to retire yet but may want to access a portion of their TSP funds. After assessing their retirement needs, they may decide to use the funds for down payments on retirement properties or other purposes.
In that case, there’s no 10% withdrawal penalty or six-month suspension of contributions and matching to worry about. You’ll still have to pay taxes on the amount you withdraw unless you roll it over to a qualified retirement account, like an IRA.
It’s important to remember that you are only allowed one in-service partial withdrawal, and spending money from your TSP account will reduce your retirement savings. You should only take out what you absolutely need, but what if you aren’t sure how much it will take to cover an emergency situation?
A few years ago we had a client facing this problem. He wasn’t sure how much money he would need or how many times he would need to make payments to cover his emergency situation, but he estimated about $30,000.
He had two options. He could use his one-time in-service withdrawal to collect the entire estimate he thought he might need, paying taxes on the whole amount and losing the benefit of tax deferral on any remaining funds, or he could use the same one-time withdrawal to roll over the entire estimated amount to an IRA. We advised him to do the latter, and here’s why:
First, the rollover to an IRA is a non-tax event. Second, you can withdraw from the IRA the exact amount you need as many times as you need it, without losing the benefit of tax-deferred growth on whatever portion stays in the IRA. You can even roll any leftover funds back into the TSP if you don’t think you’ll need to make any more withdrawals.
Unfortunately, our client didn’t roll his $30,000 over to an IRA. Instead, he took the payout, and had to pay taxes on the full amount. In the end, all he needed to cover his emergency was $10,000, so the remaining $20,000 lost the benefit of tax-deferred growth because it was no longer in a qualified retirement account.
Of course, you should only take withdrawals from any of your retirement accounts if you have to, and only take what you truly need. Even if you are working well past age 59 ½ and withdrawal penalties no longer apply, you will probably rely heavily on the savings in your retirement accounts when you retire. So before you tap into your TSP savings, speak with a federal benefits specialist to consider all of your TSP withdrawal options.
Want to learn more? Download our free resource, 7 Steps To Getting A Grip On Your TSP