At What Age Can i Withdraw From TSP Without Penalty

The Thrift Savings Plan (TSP) recently announced that account holders are no longer required to wait 30 days between withdrawal requests. This change is part of the ongoing implementation of the TSP Modernization Act of 2017, which allowed participants to make withdrawals more frequently than before.

However, easier access to funds doesn’t necessarily mean withdrawing is always the best choice.

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At What Age Can I Withdraw From TSP Without Penalty?

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You can typically withdraw funds from your Thrift Savings Plan (TSP) without penalty once you reach 59½ years old. However, withdrawing before this age may result in a 10% early withdrawal penalty.

Exceptions to the 59½ Rule:

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• Financial Hardship – You may withdraw funds for urgent financial needs, such as medical expenses or to prevent home foreclosure.
• Separation from Service – If you leave federal or military service in the year you turn 55 or later, you can withdraw penalty-free.
• Permanent Disability – You can withdraw without penalty if you meet the IRS criteria for permanent disability.
• Special Provision Employees – If you are a law enforcement officer, firefighter, air traffic controller, or customs and border protection officer, you may withdraw penalty-free if you:

Separate from service in the year you turn 50 or later, or Have at least 25 years of service at any age.

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TSP Withdrawals for Those Aged 59 1/2

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At age 59½, you can make in-service withdrawals from your Thrift Savings Plan (TSP) account, although there are some restrictions. Typically, you’re allowed up to four withdrawals per calendar year. Each withdrawal must be at least $1,000, or you can withdraw your entire vested balance if it’s less than $1,000.

While there’s no early withdrawal penalty after reaching this age, the TSP is legally required to withhold 20% federal income tax on the taxable portion of your withdrawal—unless you choose to roll it over into an IRA or another employer-sponsored plan. Keep in mind that the actual tax you owe will depend on your total taxable income for the year.

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TSP Rules for Making a Financial Hardship Withdrawal

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• Minimum Withdrawal Amount – You cannot withdraw less than $1,000.
• Eligible Funds – Withdrawals are limited to your own contributions (including rollovers) and any earnings on those contributions.
• Mutual Fund Window – To withdraw from the Mutual Fund Window, you must first transfer the funds to a TSP core fund.

Traditional vs. Roth:

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• Withdrawal Source – You must specify whether the withdrawal comes from your Traditional, Roth, or pro-rata (proportionate to both). Pro-rata withdrawals maintain the balance ratio between Traditional and Roth funds.
• Financial Hardship Withdrawals – These are strictly for genuine financial hardships while you are actively employed in federal or uniformed services. Eligible expenses must be current and cannot have been previously paid or covered by insurance.
• Withdrawal Limits – You can only withdraw the amount necessary to address your immediate financial hardship. If your eligible balance is lower than the requested amount, you will receive only what is available.
• Six-Month Restriction – After a hardship withdrawal, you cannot take another withdrawal from the chosen source (Traditional, Roth, or total) for six months.
• Active Employment Requirement – Withdrawals are only allowed from the TSP account linked to your current federal or uniformed service employment.

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Requesting a Penalty-Free Traditional TSP Withdrawal

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To request a penalty-free Traditional TSP withdrawal, you must meet specific eligibility criteria. Below are common scenarios that may qualify you for a penalty-free withdrawal:

Age 59½ or Older – Once you reach this age, you can typically withdraw from your TSP without facing the 10% early withdrawal penalty. You can also use TSP calculator.

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Separation from Federal Service:

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• Rule of 55 – TSP rule of 55 menas If you separate from federal service in the year you turn 55 or older, you can typically withdraw from your TSP without a 10% early withdrawal penalty.
• Special Categories of Employees – Certain public safety employees, such as law enforcement officers, firefighters, and air traffic controllers, may qualify for penalty-free withdrawals at any age after completing 25 years of service.
• Substantially Equal Periodic Payments (SEPPs) – You may avoid the penalty if you withdraw funds as a series of substantially equal payments over your life expectancy.
• Qualified Retirement Plan Distributions – In specific cases, such as certain disabilities or death, penalty-free withdrawals may apply.

How to Request a Withdrawal:

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• Gather Necessary Information – Confirm your eligibility and collect any required documentation, such as proof of separation from service or disability documentation.
• Contact the TSP – Visit the official TSP website (tsp.gov) or call 1-877-968-3778 to begin the withdrawal process.
• Complete the Required Forms – Fill out the necessary withdrawal forms and submit all supporting documents as required.
• Understand Tax Implications – Traditional TSP withdrawals are generally taxable as income, so be aware of potential tax liabilities before proceeding.

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Required Minimum Distributions

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What are RMDs?

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• Mandatory Withdrawals – RMDs are required annual withdrawals from your Traditional TSP account.
• Tax Requirement – They ensure that you eventually pay taxes on the funds that grew tax-deferred in your retirement account.
• Roth TSP Exception – Roth TSP accounts are not subject to RMDs during the account owner’s lifetime.

When do RMDs begin?

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• Starting Age – You must begin taking Required Minimum Distributions (RMDs) from your Traditional TSP account in the year you turn 73.
• Deferral for Active Employees – If you are still employed by the federal government, you can delay RMDs from your TSP until you retire.
• Other Retirement Accounts – Even if you are still working, you may be required to take RMDs from other retirement accounts, such as IRAs.

How are RMDs calculated?

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The amount of your Required Minimum Distribution (RMD) is based on two factors:

• Account Balance – The balance of your Traditional TSP account at the end of the previous year.
• Life Expectancy – Your life expectancy, or the life expectancy of you and your designated beneficiary (if applicable).

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Consequences of failing to take RMDs:

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Failing to take your full Required Minimum Distribution (RMD) by the deadline can lead to substantial penalties. Under the SECURE 2.0 Act, the penalty for not withdrawing enough has been reduced:

• Previously, the penalty was 50% of the shortfall.
• Now, the penalty is 25% of the shortfall.
• If you correct the mistake promptly, the penalty can be further reduced to 10%.

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Making an Informed Decision

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Justin is facing a significant financial decision. After consulting with a military financial service provider, he now has a clearer understanding of his options. He has learned how an early TSP in-service withdrawal or a TSP loan could affect his overall financial situation.

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If you're considering a financial hardship withdrawal, remember that you’ll need to complete an online affidavit explaining the nature of your hardship. To qualify, you must show either recurring negative cash flow or specific extraordinary expenses. These conditions are outlined in the TSP booklet, In-Service Withdrawals.

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For those thinking about a TSP loan, keep in mind there are minimum and maximum borrowing limits. Additionally, if the loan is for purchasing a primary residence, documentation is required. The rules and guidelines for TSP loans are detailed under Loan Basics on the TSP website.

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FAQ

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Can I Withdraw From my TSP at 55 Without Penalty?

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If you leave federal service at age 55 or older and retire immediately, you can withdraw from your TSP without incurring a penalty.

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What is The Age Limit for TSP Withdrawal?

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If you are 59½ or older, you can make withdrawals from your TSP account as long as the funds you withdraw are from vested contributions. The withdrawal amount must be at least $1,000, unless your total vested balance is less than $1,000, in which case you can withdraw the entire amount.

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How do I Avoid 10% Penalty on TSP Withdrawal?

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The simplest way to avoid early withdrawal penalties is to wait until you turn 59½. At that point, you can access your TSP funds without any penalty for early withdrawals.

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Can I Withdraw 100% of My TSP?

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If you choose, you also have the option to request a full distribution of your entire TSP account balance, allowing you to withdraw all your funds from the TSP.

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