Understanding Early Withdrawal Penalties
If you withdraw money from your Thrift Savings Plan (TSP) or other retirement accounts before age 59½, you generally face a 10% early withdrawal penalty in addition to ordinary income taxes. However, there are important exceptions that federal employees should know.
The Eight Key Exceptions
1. Separation from Service at Age 55 or Older: If you separate from federal service (retire or resign) in the year you turn 55 or later, TSP withdrawals are not subject to the 10% penalty. This is one of the most important exceptions for federal employees planning early retirement.
2. Substantially Equal Periodic Payments (72(t)): You can take penalty-free withdrawals by committing to a series of substantially equal periodic payments based on your life expectancy.
3. Disability: If you become permanently disabled, early withdrawals are penalty-free.
4. Death: Beneficiaries who inherit retirement accounts are not subject to the early withdrawal penalty.
5. Medical Expenses: Withdrawals used to pay unreimbursed medical expenses exceeding 7.5% of your adjusted gross income are penalty-free.
6. Qualified Domestic Relations Orders (QDRO): Withdrawals made pursuant to a QDRO in a divorce settlement are penalty-free.
7. IRS Levy: Withdrawals made due to an IRS levy on the retirement account are penalty-free.
8. SECURE 2.0 Act Provisions: The SECURE 2.0 Act added several new exceptions, including emergency personal expense withdrawals (up to $1,000 per year) and terminal illness withdrawals.
Planning Your TSP Withdrawal Strategy
Understanding these exceptions can help you plan a tax-efficient withdrawal strategy. The Spivak Financial Group specializes in TSP withdrawal planning for federal employees — contact us for a free consultation.