If you remove funds from your Thrift Savings Plan before age 59 1/2, be prepared for penalties. Because a TSP is a defined-contribution plan, not only do early withdrawals incur penalties, they also reduce the amount of money available in retirement. TSP regulations prohibit repayment after money is removed. You can move TSP funds to another qualified retirement plan without penalty if done within a specified period.
If you withdraw money from your TSP account because of hardship, you must pay income taxes on the withdrawal. The Internal Revenue Service charges a 10 percent early-withdrawal tax penalty on such removals from TSPs, as it does with earlky withdrawals from other tax-deferred qualified retirement accounts. If you withdraw money for financial hardship reasons, you cannot make additional TSP contributions for six months. You also lose matching contributions from your agency for that period.
To avoid tax penalties on a TSP early withdrawal, consider taking out a TSP loan. Although the IRS considers a TSP loan taxable income and you must pay taxes on the amount, you can repay the loan, with interest. The repayments are done through payroll deductions. If choosing this method rather than a withdrawal, you avoid the 10 percent IRS early-withdrawal penalty, and the amount of the loan is restored to your account. The TSP offers general loans for any purpose and without documentation. It also offers residential loans, for buying or building your primary residence. This loan does require documentation of the house or land purchase.
If you reach age 59 1/2, you can make an age-based withdrawal without an IRS penalty. But you are limited to one such withdrawal while still serving in the military or employed in federal service. This withdrawal is subject to federal and state income tax. To avoid taxes, you can roll over the withdrawal into a qualified retirement plan. Those plans' rules on further withdrawals might differ from TSP regulations.
When you move money from your TSP into your individual retirement account or your new employer's 401k, the transfer is called a rollover. To avoid the 10 percent IRS tax penalty on the money when you move it, and to avoid current income tax on the amount, you must complete the rollover within 60 days. You can ask the TSP administrator to roll over the money directly into your IRA or 401k. You can instead have the funds sent to you and do the rollover yourself. However, if the money is not transferred within 60 days, you are subject not only to penalties from the IRS, but to a mandatory 20 percent federal withholding for tax purposes.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Financial Advisor, Sapling, nj.com and The Nest.