In-Service TSP Withdrawal Or TSP Loan?

Despite our best efforts, we sometimes find ourselves in a position where we need a bit of extra cash to help cover life’s unexpected events. Actively employed feds have the option to take an in-service TSP withdrawal or a TSP loan. 

In-Service TSP Withdrawals

There are two types of in-service withdrawals: age 59-1/2 withdrawals and hardship withdrawals. Both types are permanent withdrawals from your TSP account that can’t be replaced and reduce the amount of savings available to generate compound interest.

Age 59-1/2 Withdrawals

As the name implies, you must be at least 59-½ to make this withdrawal. You can only withdraw funds in which you are vested and the amount must be at least $1,000 or your entire vested balance if it’s less than $1,000. The amount you withdraw is immediately subject to federal income taxes and may be subject to state income taxes depending on state tax laws. You can make up to four age 59-½ withdrawals per calendar year.

Financial Hardship Withdrawals

Financial hardship withdrawals are intended to help employees experiencing severe financial need.  Reasons include negative cash flow, extraordinary expenses, and major disasters. When making a financial hardship withdrawal you cannot request less than $1,000. The money can be taken only from your contributions and the money you have earned on those contributions. The amount withdrawn is immediately subject to federal income taxes and may be subject to state income taxes depending on state tax laws. You’ll also have to pay a 10% early withdrawal penalty tax if you’re younger than 59-1/2. For complete rules on eligible hardship withdrawals download: In-Service Withdrawals.  

TSP Loans

If you have at least $1,000 of your own contributions and earnings in your TSP, you might consider a TSP loan. Your payments are automatically deposited back into your TSP account which means you will accrue earnings on the money you borrowed as you pay it back. Another benefit is that the interest rate is typically lower than commercial lenders and the loan amount is not considered taxable income. There are two types of TSP loans:

• A General Purpose loan can be used for any reason and, since you’re not obligated to explain why you’re taking the loan, there’s no documentation required.
• A Primary Residence loan requires supporting documentation to show the costs required to purchase your primary home or start construction on your primary residence. It can’t be used for a vacation home or investment property.

For both types, the loan is capped at half of your vested balance or $50,000, whichever is less. Remember, if you carry a TSP loan into retirement you have 90 days to pay the balance or it will be taxed as a TSP distribution.

For more information, contact an FRC who understands your unique federal benefits.