How to Withdraw from TSP While in Service

The Thrift Savings Plan is a good retirement savings vehicle for federal employees and members of the uniformed services. A TSP, by definition, is intended to prepare for retirement, but sometimes, participants may be permitted to withdraw funds while still in service. This blog will walk you through the requirements, processes, and considerations of withdrawing from your TSP account while in service.

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Yes, you can withdraw from your TSP account while in service if you meet the requirements outlined for Financial Hardship Withdrawals or Age-59½ In-Service Withdrawals.

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Understanding In-Service Withdrawals

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TSP participants have two main options for in-service withdrawals:

1. Financial Hardship Withdrawals
2. Age-59½ In-Service Withdrawals

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Each type of withdrawal has specific eligibility criteria, limitations, and tax implications. Let’s explore them in detail.

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1. Financial Hardship Withdrawals

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Financial hardship withdrawals are designed for participants experiencing serious financial challenges. These withdrawals allow you to access your contributions and any earnings accrued on those contributions.

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Eligibility Criteria

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You must demonstrate financial hardship due to one or more of the following reasons:

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• Major medical expenses
• Purchase of a primary residence
• Payments to prevent eviction or foreclosure
• Funeral expenses

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Key Rules for Financial Hardship Withdrawals

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• The withdrawal amount cannot be less than $1,000.
• You can only withdraw funds from your own contributions and their earnings.
• If you have both a civilian TSP account and a uniformed services TSP account, you can withdraw only from the account associated with your active employment at the time of the withdrawal. If both accounts are active, you can withdraw separately from each account.

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Process for Requesting Financial Hardship Withdrawals

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1. Documentation: Collect evidence of financial hardship. This can include medical bills, eviction notices, or funeral expense receipts.
2. Application: Fill out and submit Form TSP-76 for a financial hardship withdrawal. You can submit this form online through the TSP website or mail it to the address listed on the form.
3. Await Approval: The TSP will review your application and process the withdrawal if all the requirements are met.

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2. Age-59½ In-Service Withdrawals

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If you are age 59½ or older, you are eligible for in-service withdrawals without demonstrating financial hardship. This option is particularly beneficial for participants nearing retirement who need access to their funds.

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Key Rules for Age-59½ Withdrawals

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• You can only withdraw funds in which you are vested. Vesting typically depends on your years of service.
• The minimum withdrawal amount is $1,000 unless you choose to withdraw your entire vested balance (even if it’s less than $1,000).
• You are allowed up to four age-59½ withdrawals per calendar year.

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Process for Requesting Age-59½ Withdrawals

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1. Verify Eligibility: Ensure you meet the age requirement of 59½.
2. Submit Your Request: Complete Form TSP-75 for age-based withdrawals. This form can be submitted online or via mail.
3. Provide Necessary Documentation: Attach proof of age, such as a copy of your government-issued ID.
4. Receive Funds: Once approved, the funds will be disbursed according to your preference (e.g., direct deposit or check).

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Important Considerations Before Making a Withdrawal

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While in-service withdrawals provide flexibility, there are significant factors to consider:

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1. Tax Implications

• Withdrawals from your TSP are subject to federal income tax.
• If you are under age 59½ and do not meet the requirements for an exception, a 10% early withdrawal penalty may apply to financial hardship withdrawals.
• Consider consulting a tax advisor to understand how the withdrawal will affect your tax situation.

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2. Impact on Retirement Savings

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Withdrawing money from your TSP reduces your account balance and the potential for future growth through compounding. Over time, this could significantly impact your retirement savings.

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3. Alternatives to In-Service Withdrawals

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Before opting for an in-service withdrawal, explore these alternatives:

• TSP Loans: Borrow against your TSP balance and repay the loan with interest. This option allows you to access funds without permanently reducing your retirement savings.
• Personal Loans: Seek financial assistance from external sources to preserve your TSP account balance.

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How to Make a Withdrawal

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The process for in-service withdrawals is straightforward:

1. Log in to Your TSP Account: Visit the official TSP website and log in using your credentials.
2. Navigate to the Withdrawal Section: Select the type of withdrawal you wish to make (financial hardship or age-based).
3. Complete the Application: Fill out the required form (TSP-76 or TSP-75) and attach supporting documentation.
4. Submit the Request: Submit your application online or by mail. Double-check all information to avoid delays.
5. Monitor Your Application: Keep track of your application status through your TSP account or by contacting the Thrift Line.

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TSP Calculator

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As a convenience, we have also provided a TSP Calculator on our website that can help you project future TSP balances, calculate possible penalties, and see how your withdrawals might affect your overall retirement plan. Be sure to use this resource to make more informed decisions regarding your TSP withdrawals.

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Alternatives to Consider

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If you’re unsure about making a withdrawal, here are some options that might suit your situation:

• TSP Loan Program: Allows you to borrow against your balance for general purposes or residential purchases. Loans must be repaid with interest, but the interest is credited back to your TSP account.
• Emergency Savings: Tap into other savings accounts to address financial needs without affecting your retirement savings.
• Financial Counseling: Consult with a financial advisor to explore options tailored to your circumstances.

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Conclusion

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Withdrawing from your TSP account while you are still in service may be necessary for much-needed relief or flexibility in finances. You must, however, be aware of the requirements, processes, and implications surrounding such withdrawals. Qualifying for either financial hardship withdrawals or age-59½ in-service withdrawals means carefully weighing options that align with long-term financial goals.

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For expert advice on TSP withdrawal and other retirement planning, you can contact Federal Pension Advisors today. Our experts are here to assist you in making the best possible decisions for your financial security.

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FAQs

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What is the best way to withdraw money from TSP?

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The easiest way to access money from your TSP is through a TSP loan. You pay interest, but it goes back into your account. While in-service withdrawals are an option, they should be used cautiously due to potential tax implications and impact on retirement savings.

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Why am I not eligible to withdraw from my TSP?

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You may not be eligible to withdraw from your TSP if you are not vested in your account. For age-59½ withdrawals, you must have a vested balance of at least $1,000 or withdraw your entire vested balance, even if it’s less than $1,000.

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How much will I lose if I withdraw my TSP?

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If you withdraw from your TSP before age 59½, you may face a 10% early withdrawal penalty. Traditional TSP withdrawals are subject to federal income tax and possibly state taxes, while Roth TSP withdrawals may be tax-free if certain conditions are met.

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How do I avoid taxes on my TSP withdrawal?

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To avoid taxes on your TSP withdrawal, you can roll over your balance into a Roth IRA. While you may be taxed on the withdrawal at the time, withdrawals from the Roth IRA will be tax-free if you're 59½ or older. Additionally, Roth IRAs do not require Required Minimum Distributions (RMDs).

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