TSP Loans & In-Service Withdrawals
We don’t mean to sound like your thrifty relative, but you do need to save for retirement and funds that are in your TSP are not meant to be thought of as a savings account for “everyday” expenses. That’s why there are rules that restrict when and how you may take money out of your account while you are still employed. Still, there are situations that arise in life that may necessitate accessing your TSP before you separate from service. So let’s explore your options for those, as well as your choices once you leave federal service. Please note that withdrawal options were expanded and changed in September, 2019 with the passage of the TSP Modernization Act so be sure you don’t confuse the new and old information.
There are three ways to get money from your TSP: a loan, an in-service withdrawal, and a post-separation withdrawal. In this article, we’ll cover TSP loans and in-service withdrawals.
For starters, to qualify for a TSP loan you must be actively employed, in pay status, and have contributed your own money. When you take a loan, you’re borrowing your own contributions and the earnings on those contributions so your balance is reduced because the loan funds are removed from your TSP account. As you repay your loan, which is done via payroll deduction, your payments and loan interest restore the funds in your account. You do have the option to make additional payments or pay off your loan early using the Loan Payment Coupon Form TSP-26. If you prefer to make extra payments through an online bill pay service from your financial institution, refer to Form TSP-26 to insure that the necessary information is included or your payment will be returned.
The interest rate on your TSP loan is the rate that the G Fund is paying at the time your loan application is processed and it is a fixed rate meaning that it never changes. The TSP also charges a $50.00 processing fee for each loan that is deducted from the amount of your loan, i.e. you forfeit $50.00 of your money to cover the processing fee.
Since you’re borrowing your own contributions, the amount of your loan cannot exceed the amount of your own contributions and their earnings. So if you’re a FERS participant you cannot borrow from any agency contributions and their earnings. The minimum amount that you can borrow is $1,000 and the maximum is $50,000.
There are two types of TSP loans – a general purpose loan and a residential loan, used for the purchase or construction of a primary residence. You can only have one of each outstanding at a time. No documentation is needed for a general purpose loan and the repayment term can be from one (1) to five (5) years. For a residential loan, documentation is required and the repayment term can be from one (1) to 15 years.
There are many things to consider before taking a TSP loan. We suggest that you fully explore the facts so that you’re making an informed decision. Full details on both types of loans, as well as eligibility rules, borrowing criteria, documentation requirements, how to apply for a loan, tax consequences if you fail to repay your loan, spousal rights, and much more is available in the TSP booklet Loans. There is also a Loan Calculator that is available for you to estimate loan payments based on the amount that you want to borrow.
Life happens…situations occur that you didn’t plan for…maybe you think an in-service TSP withdrawal would lessen your burden. If you think the TSP discourages TSP loans, they’re even more cautious about in-service withdrawals – and for good reason. When you take a TSP loan, you will repay the funds and the interest. In-service withdrawals, however, result in a permanent reduction in your TSP balance. You cannot return or repay the money you remove from your TSP outside of continuing contributions. On the bright side, the TSP doesn’t charge a fee for making a withdrawal from your TSP while you’re still employed (in-service withdrawal). Bottom line, it’s a decision that deserves careful thought.
Financial Hardship Withdrawals
To qualify for a financial hardship TSP withdrawal, you must be able to certify (under penalty of perjury – they mean business!) that you have a financial need for at least one of the following reasons:
Negative monthly cash flow
Personal casualty loss(es)
Legal expenses related to separation or divorce
These reasons are described in more detail on the TSP site under Financial Hardship In-Service Withdrawals. There is also a TSP booklet that offers easy-to-understand information called In-Service Withdrawals.
While we encourage you to thoroughly review the information on the TSP site and/or booklet, we do want to point out a few basics about hardship withdrawals. First, you may only withdraw your TSP contributions, and their earnings, with a minimum request of $1,000. Yes, you can request more; however, the amount you request cannot exceed the actual amount of your certified financial hardship. And you are limited to only one financial hardship withdrawal in a six-month period.
Another very important consideration is that you may be subject to an early withdrawal penalty of 10% if you are younger than 59 ½ when you make your withdrawal…and don’t forget that you must pay federal, and possibly state, income taxes on the taxable portion of your in-service withdrawal. In fact, since a hardship withdrawal is considered a “non-periodic payment” for Federal income tax purposes, the TSP withholds 10 percent of the taxable portion of your withdrawal unless you increase or waive the withholding. The TSP does offer supplemental tax information in the pamphlet Important Tax Information about Payments from Your TSP Account.
With the implementation of the TSP Modernization Act in September, 2019, TSP participants can take up to four (4) age-based, in-service withdrawals per calendar year. That’s much more flexibility than what was formerly available – one partial withdrawal in your lifetime! In other words, taking an age-based, in-service withdrawal no longer affects your ability to take a partial withdrawal after separating from federal service. What didn’t change is the age requirement for an age-based withdrawal, which remains at 59 ½ or older.
You do not need a specific reason to make an age-based withdrawal and you may withdraw a minimum of $1,000 or the entire amount of your vested balance, even if that is less than $1,000. If you are a CSRS employee, you are always 100% vested in your own contributions and earnings. FERS participants are immediately vested in your own contributions and Agency Matching Contributions, as well as earnings on those contributions. However, vesting in your Agency Automatic (1%) Contributions and their earnings is dependent upon your years of service. Most FERS participants are vested after completing three (3) years of service. All employees are always vested in money transferred into the TSP from IRAs and eligible employer plans, as well as their earnings.
Tax treatment of age-based withdrawals is dependent upon where the funds are coming from (traditional versus Roth TSP) and on where they are going. You can retain the tax-deferred status of the traditional portion of your age-based withdrawal by transferring it to a traditional IRA or eligible employer plan. If you do not roll it over, there is a mandatory minimum withholding of 20% for federal tax.
You will not pay income taxes on the portion of your in-service withdrawal that comes from your tax-exempt contributions, Roth contributions, and Roth earnings that are not qualified.
It’s a given that tax rules are complex so you may wish to speak with a tax advisor about the tax implications of your in-service withdrawal. There is also a TSP publication Important Tax Information About Payments From Your TSP Account that can help you.
How In-Service Withdrawals are Disbursed
If you have both traditional and Roth balances in your TSP, the Modernization Act provides you with the option to choose whether your withdrawal should come only from your Roth balance, only from your traditional balance, or a proportional mix of both. That’s good news and improved control over your withdrawal options!
TSP Spousal Rights
Did you know that if you’re a married FERs participant, you must obtain the consent of your spouse before you can obtain an in-service TSP withdrawal? The amount doesn’t matter; your spouse must sign a consent waiver for your in-service withdrawal. For married CSRS participants, the TSP must notify your spouse before the in-service withdrawal can be made. Even if you are legally separated, these spousal rights apply. BTW the TSP determines marital status by how the status is noted on the participant’s Federal income tax form.
Visit Choosing Between a TSP Loan and In-Service Withdrawal for one more look at how each affects your TSP account.
Check out the links in this article for in-depth coverage of that topic.
For more information about the TSP Modernization Act, check out the Tangerine article that explains the changes in more detail.
Publish Date: September 5, 2019 © Tangerine, Inc. All rights reserved. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular individual or circumstance. This article is not intended to be a client-specific analysis or recommendation. Do not use this article as the sole basis for any financial decisions. Consider all relevant information. Information should not be considered as tax or legal advice. You should consult with your tax advisor and/or attorney regarding your individual circumstances.