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LEARN MORE ABOUT: Thrift Savings Plans
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What’s the penalty for withdrawing from a thrift savings plan?
A thrift savings plan (TSP) is a retirement savings plan for federal employees. Similar to a 401(k) plan, it allows employees to contribute a portion of their salary towards their retirement savings. While contributing to a TSP can be a prudent financial decision, there may come a point when you need to withdraw funds before retirement. However, it’s important to understand the potential penalties and restrictions associated with early withdrawals from a TSP.
The penalty for withdrawing funds from a TSP account depends on your age at the time of withdrawal. If you’re currently under the age of 59 ½, the Internal Revenue Service (IRS) imposes a 10% early withdrawal penalty in addition to regular income tax on the amount you withdraw. This penalty is intended to discourage individuals from using retirement savings for non-retirement purposes. So if you’re considering withdrawing funds from your TSP before reaching the age of 59 ½, it’s important to carefully consider the financial implications.
However, there are some exceptions that may waive the early withdrawal penalty under certain circumstances. One such exception is if you separate from federal service at age 55 or older. In this case, if you withdraw funds from your TSP after separating from your job, you will still owe income tax on the withdrawal but the 10% penalty will be waived. This exception recognizes that individuals who retire or leave federal service after the age of 55 have a valid need for accessing their retirement savings earlier than the traditional retirement age.
Another exception is for individuals who choose to take substantially equal periodic payments (SEPP) from their TSP. In this case, if you set up a series of substantially equal payments over a minimum span of five years or until you reach the age of 59 ½ (whichever is longer), the IRS waives the early withdrawal penalty. However, it’s important to note that once you start SEPP, you must continue taking the payments for the specified period, even if your financial circumstances change or you no longer need the funds.
Additionally, if you have a qualified financial hardship, you may be eligible for a penalty-free withdrawal. The TSP recognizes certain hardships, such as medical expenses, eviction or foreclosure prevention, or funeral expenses, which may allow you to withdraw funds without incurring the early withdrawal penalty. However, you’ll need to provide documentation to support the hardship claim.
It’s worth mentioning that once you reach the age of 59 ½ and separate from federal service, you can make penalty-free withdrawals from your TSP account, as you’re now in retirement. In fact, once you reach this age, you’re required to start taking minimum distributions from your TSP account each year, in accordance with IRS rules.
In conclusion, withdrawing funds from a thrift savings plan before the age of 59 ½ incurs a 10% early withdrawal penalty in addition to the regular income tax owed. However, there are exceptions to this penalty, including reaching the age of 55 or older and separating from federal service, setting up substantially equal periodic payments, or experiencing qualified financial hardships. It’s important to consider the potential penalties and restrictions before making any early withdrawals from your TSP, as it may impact your retirement savings and future financial security.
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