Cashing Out a TSP

You usually have to share some of your TSP withdrawal with Uncle Sam.

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If you have an account in a thrift savings plan, you generally don't want to cash out until retirement. If desperate times call for desperate measures, understanding when you can cash out your TSP and the resulting tax consequences can help you determine if you can withdraw the money and, if so, how much you need to take out to meet your needs after accounting for the taxes and penalties.

In-Service Withdrawals

If you're still employed when you want to cash out your TSP, you can only take distributions if you've reached the age of 59 1/2 years or in specific cases of financial hardship. To take a financial hardship withdrawal, you have to certify under penalty of perjury that you have a hardship because of medical expenses, negative cash flow, separation or divorce costs or a personal casualty loss. You have to withdraw at least $1,000, but you can't withdraw more than is necessary to cover your hardship.

Traditional Versus Roth

When you take a distribution from a traditional TSP account, the entire amount is taxable regardless of whether your cashout is qualified or not. With a Roth TSP account, the contributions that you cash out are not taxable because you didn't receive a tax deduction for investing the money. The earnings are also tax-free if you take a qualified distribution. However, if you take a non-qualified Roth TSP withdrawal, the earnings are taxable and subject to early withdrawal penalties. To take a qualified Roth TSP account withdrawal, you must be at least 59 1/2 years old or permanently disabled and the Roth TSP account must be at least five tax years old.

Early Withdrawal Disadvantages

When you take an early withdrawal, not only do you have to include the distribution as taxable income, but you also have to pay a 10 percent additional tax penalty unless an exception applies. The 10 percent tax applies to the taxable portion of the cashout. For example, if you cash out a Roth TSP account with $18,000 of contributions and $7,000 of earnings, the penalties only apply to the $7,000 of earnings. In addition to the penalties, you can't put the money back into your account if your situation improves. You also cannot contribute to your account for six months after taking the early withdrawal.

Penalty Exceptions

If you cash out your TSP account before turning 59 1/2, you avoid the penalty but not the income taxes if you meet the requirements for an exception. For example, if you retire after turning 55 and then cash out, you won't owe the penalty. Other exceptions include if you have a permanent disability, medical expenses exceeding a specified percentage of your adjusted gross income or the distribution is taken as a result of a domestic relations order.