TSP Early Withdrawal Penalty Myth

[James48843]

Good article recently in Fedweek- about the myth of Early Withdrawal penalty:

TSP Early Withdrawal Penalty Myth

Published: November 13, 2017
More in: TSP
Many federal employees believe there is an early withdrawal penalty for taking anything out of the TSP before reaching age 59 ½, but this isn’t true. The rules for the early withdrawal penalty for the TSP are different from the rules for IRAs.
With the TSP, you are exempt from the early withdrawal penalty if you separate from federal service in the year in which you reach age 55 or later. For IRAs, the early withdrawal penalty will apply on anything you take out up until you reach the age of 59 ½.
Further, if you are a special category employee (SCE), you are exempt from the early withdrawal penalty if you separate in the year in which you turn 50 or later. (An SCE is a law enforcement officer, firefighter, air traffic controller, nuclear materials courier, Supreme Court or Capitol Police Officer, Customs and Border Protection Officer and DSS Special Agent with the Department of State.)
The early withdrawal penalty is a 10% penalty. In addition to any taxes you owe on your withdrawal, you will owe an additional 10%.
The ability to avoid the early withdrawal penalty if you separate in the year you turn 50 or 55 only applies if you leave your money in the TSP – rollovers are subject to the penalty. If you were to rollover your TSP into an IRA after separation before 59 ½, you would be subject to the early withdrawal penalty, regardless of whether you are a special category employee or not.

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TSP Early Withdrawal Penalty Myth

 

[Skorcher]

There is no 10% early withdrawal penalty for rolling over the TSP to an IRA. The author is probably confusing this with the early withdrawal penalty from an IRA before age 59 1/2. The lesson is if you retire before age 59 1/2 and need that TSP money to pay the bills don't rollover all of your TSP to an IRA until after age 59 1/2.

Good article recently in Fedweek- about the myth of Early Withdrawal penalty:


More:
TSP Early Withdrawal Penalty Myth

 

[evilanne]

Good article recently in Fedweek- about the myth of Early Withdrawal penalty:

"The early withdrawal penalty is a 10% penalty. In addition to any taxes you owe on your withdrawal, you will owe an additional 10%.
The ability to avoid the early withdrawal penalty if you separate in the year you turn 50 or 55 only applies if you leave your money in the TSP – rollovers are subject to the penalty. If you were to rollover your TSP into an IRA after separation before 59 ½, you would be subject to the early withdrawal penalty, regardless of whether you are a special category employee or not."
More:
TSP Early Withdrawal Penalty Myth

IRS Publication 575, Pension and Annuity Income https://www.irs.gov/publications/p575, is what allows you more flexibility in withdrawals from TSP or other employer retirement accounts if you retire at age 55 or later (age 50 for LEOs), but prior to age 59.5.

If you transfer funds to IRA, you can still access funds without penalty for certain exceptions, which are outlined in IRS Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), but you have to be very careful and follow the rules. See Topic Number: 557 - Additional Tax on Early Distributions from Traditional and Roth IRAs https://www.irs.gov/taxtopics/tc557 to see good summary. The most common exception is SEPP or 72(t) “Made as part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary” TSP is still best option prior to 59.5 to ensure your compliance with the rules especially if you retire early.

 

[offroad]

There is no 10% early withdrawal penalty for rolling over the TSP to an IRA. The author is probably confusing this with the early withdrawal penalty from an IRA before age 59 1/2. The lesson is if you retire before age 59 1/2 and need that TSP money to pay the bills don't rollover all of your TSP to an IRA until after age 59 1/2.

Of course its not mentioned that you can take out funds, but I think you are limited to when you can take out the funds during the year. So yes you retire (separate) but then you are limited at how much and what time you can remove funds. Is it true you can only do this once a year? or can you remove funds monthly or quarterly?

There should be some clear instructions in this, but of course there is not.

 

[evilanne]

If you roll over to IRA you can still withdraw money without penalty using 72(t) rules. One of the alternate SEPP methods allows for level payments (calculated at start) & life expectancy rules (calculated annually based on your end of year balance & age factor) but when you take the payments during the year is more flexible as long as you take the calculated amount each year. Important note: The SEPP rules require you do it until you reach 59.5 or 5 years, whichever is later. Once distributions begin, if the series of payments is modified in any way, the 10% early distribution penalty will be imposed retroactively beginning with the first year of distribution.

If you retire after turning age 55 (50 for LEOs), you have more flexibility in TSP in taking lump sum distribution/rollover and/or monthly payments that can be changed once per year. Note: Currently, you cannot take lump sum payment or roll over once you submit full withdrawal with monthly payments.