In a previous blog, I covered the ability to take a loan from your Thrift Savings Plan (TSP) or employer 401(k) account. This month, I am covering another avenue for obtaining money from your TSP: in-service withdrawals. An in-service withdrawal lets you take money from your Thrift Savings Plan (TSP) while you are still on active duty to meet an immediate financial need. Restrictions apply, and withdrawals can trigger taxes and penalties, so consider the short- and long-term effects before initiating a withdrawal.
Two types of in-service withdrawals
Financial Hardship Withdrawals:
- Who Qualifies: Participants who can certify an immediate financial need. Examples of qualifying needs include ongoing negative cash flow, extraordinary medical expenses, casualty losses (storm, theft, or automobile damage), and unpaid legal fees or court costs related to separation or divorce.
- Minimum Amount: $1,000.
- Source of Funds: You may withdraw only your own contributions and the earnings on those contributions; employer or agency contributions and their earnings are not eligible.
- Traditional vs Roth: You may withdraw from your traditional (pre-tax) or Roth balances; if you have both, you can prorate the withdrawal between them based on your balances.
- Use and Documentation: Funds must be used to cover the certified hardship and may not exceed the amount of need. Documentation of the need is required before funds are released.
- Frequency Limit: One hardship withdrawal per six-month period.
- Account Restriction: The withdrawal must come from the account associated with your current employment. If you have separate military and civilian TSP accounts, you may withdraw only from the civilian account while employed in civilian status.
- Contributions While Pending: Regular contributions to your account continue unless you stop them.
Age 59½ Withdrawals:
- Who Qualifies: Participants age 59½ or older who are still employed.
- Frequency: Up to four withdrawals per calendar year.
- Vested Funds Only: You may withdraw only funds in which you are vested; your own contributions are always vested, agency contributions vest according to the agency’s schedule.
- Minimum and Proration: Minimum withdrawal is $1,000. Again, you may request funds from either your traditional or Roth balances. If you wish to withdraw from both, the distribution must be prorated based on your account mix (for example, 70% traditional and 30% Roth if your account is 70/30).
- Rollovers: You may roll over all or part of an age 59½ withdrawal to an eligible employer plan or an IRA. Eligibility to roll over and tax consequences depend on the source of the funds and the receiving plan’s rules.
How Withdrawals Are Disbursed:
- Withdrawals are taken pro rata from the funds in the TSP balances you choose. If you withdraw from traditional funds, the distribution follows the same allocation percentages as your traditional balance (for example, 50% C Fund, 25% F Fund, 25% G Fund).
- Roth distributions contain a proportional amount of Roth contributions and earnings; you cannot elect to receive only Roth contributions.
- Disbursement options include direct deposit to your bank account or a paper check mailed to the address on your TSP account. If you roll funds into an IRA or another employer plan, the check can be mailed to you or to the receiving plan’s custodian.
Taxes and Penalties:
- Traditional Amounts: Withdrawals from traditional (pre-tax) balances are subject to federal income tax and any applicable state income tax in the year withdrawn.
- Roth Amounts: Qualified Roth withdrawals are tax-free; nonqualified Roth earnings may be taxable.
- Early Withdrawal Penalty: If you are under age 59½ and take a distribution that is not a qualified hardship, a 10% early withdrawal penalty may apply in addition to income tax.
Financial Impact:
- Withdrawals permanently reduce your TSP principal and stop that money from compounding. A withdrawal has a significant long-term cost compared with taking a loan that is repaid to your account.
- Taxes and penalties reduce the immediate value you receive from a withdrawal.
Alternatives to Consider First:
- Build and use an emergency fund to avoid touching retirement savings.
- Pause TSP contributions temporarily and use those dollars for the short-term need, then restart contributions when able.
- Contact service relief societies for assistance: Army Emergency Relief, Navy-Marine Corps Relief Society, and Air Force Aid Society. These organizations offer grants, interest-free loans, and counseling. They operate reciprocally across services.
- Consider a TSP loan if available, because loans preserve retirement principal while being repaid to your account.
Before You Decide:
- Seek financial counseling. Every installation has financial counselors who can compare the long-term effects of withdrawals versus loans and help you model different scenarios.
- Calculate and document the exact amount you need.
- Keep clear records of the withdrawal, tax forms, and any documentation used to certify a hardship.
Learn more about TSP and the official in-service withdrawal rules and forms:
- Financial Hardships
- In-Service Withdrawal Types & Terms
- Making an In-Service Withdrawal
- Alternatives to Withdrawals
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