ProFeds Founder, Chris Kowalik, reviews the IRS rules which allow federal employees to take from their TSP at various ages if they are RIF’ed.
Key takeaways:
- How do employees access TSP after they have separated (resigned or retired)
- How long employees have to wait take withdrawals from TSP
- What penalties may apply to withdrawals prior to age 59 ½
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Transcript of this episode coming soon:
Originally released on 3/7/2025
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Most federal employees have spent their entire career contributing to the Thrift Savings Plan. And so it’s no wonder that they ask themselves, “What happens to this account when I leave government service?” Whether it’s in a regular environment or in a reduction in force environment, where early-outs, discontinued service, severance packages, cash buyouts, all of that is happening. How does it change the access that you have to the TSP?
Hi, I’m Chris Kowalik of ProFeds, and welcome to the FedImpact Podcast where we offer candid insights on your federal retirement.
Reduction in Force – How Can I Access My Thrift Savings Plan (TSP)?
I know TSP is a huge piece for so many of you. And frankly, it’s the part of your retirement that you have a whole lot of control over with respect to how much you’re contributing, how it’s going to be taxed, on the way in and on the way out, and how it’s performing based on where you have it invested. So TSP is a huge part of your retirement plan, and so we want to make sure that you have access to that.
After you have separated from government service, regardless how you separate, the TSP doesn’t care. They don’t delineate between you retiring, you quitting, you being fired, resigned. Whatever you want to call it, TSP doesn’t care. You’re either employed or you’re not.
Once you’re not, you have a 30-day waiting period. And this period is designed for your agency to be able to notify the Office of Personnel Management that you are, in fact, in a retirement status or in a separated status. And that way TSP knows to unlock some of the access opportunity that you have for your account.
There are some things that you’re allowed to do while you’re still employed, and other things that you have to wait for until you’ve actually separated from service. And so that 30-day window is designed for your agency to be able to have the time to let TSP know.
Why it takes 30 days these days, I’m not really sure. And frankly, I’ve seen withdrawals be able to happen within that 30 days. It’s all a matter of you going through all the effort to initiate a withdrawal and it getting kicked back from TSP because you put it in a little too soon and they hadn’t quite received the notice from your agency.
Access and Rules to the TSP
Lots of different ways that you can access the TSP. I’m not going to bore you with those details. You can take monthly payments, quarterly. You can take all of it at one time. You can take a little bit here and there, all sorts of ways that you can access your TSP. But here’s the thing I want to talk about today, and that is penalties.
Let’s start with the normal rule that the IRS has for accounts like this. The IRS wants you to leave accounts like this alone until you’ve reached the age of 59½. Once you are separated from service, which is the nature of this episode, you have separated from service, and now the question is, “Can you access the TSP?” The answer is, “Yes”. But there very well may be a penalty based on this IRS rule.
There are some special rules assigned to 401k plans like the Thrift Savings Plan. In this case, the government says, or really the IRS says, “As long as you separate or retire from government service in the calendar year in which you turn 55 or older, you are allowed to access your TSP and not have any penalty.” If you do have a penalty, it’ll be a 10% early withdrawal penalty. Which means all the money that you take out of the TSP, you’ll pay an extra 10% on top of that that you don’t ever get back.
And so the way to avoid it, with respect to being a federal employee is, you reaching the calendar year in which you turn 55 or older, or you separating from service. Not taking the money, separating from service. That is what unlocks that special rule with the IRS. Otherwise, if you leave at 52, you are going to have a penalty on everything you take from your TSP all the way to 59½. That’s the way that penalty works. Very important that we understand how that works and how it doesn’t work.
Now, there are many of you listening who are part of a special category of employees. These are our law enforcement officers, firefighters, and air traffic controllers. You know you have some special rules to access the TSP. Essentially, as long as you are eligible to retire under one of those special categories, you are eligible to draw money from the TSP without penalty.
For instance, a law enforcement officer who is 50 with 20 years of service, they are eligible to retire under a law enforcement pension that automatically makes them eligible to draw from the TSP without penalty. So great opportunity. Of course, we want to make sure we’re not dwindling that account away too quickly, but great opportunity for those special categories of people.
There are other ways to avoid the penalties and someone’s going to comment on this, I promise. We’re going to link in the show notes to the other ways to avoid the penalty. It gets more into the details of the rules of all of this that aren’t necessarily appropriate for this particular video. But I definitely want to make sure that the access to that list is available for anybody who’s curious, and make sure that you know the ways to be able to avoid those penalties.
Can I Move the TSP?
Then the question is, “Can I move the TSP?” The answer is, “Yes.” You’re allowed to move that account if that’s what you wish to do. There might be some advantages and disadvantages to doing so. It’s super important that you’re talking with a financial professional who actually understands how these things work so you don’t make a silly mistake and cost yourself a lot in taxes. Please, seek some help.
If you’re curious how to get that type of help, let us help you. I would be delighted to make an introduction to a financial professional who handles this type of work, and make sure that you’re making these decisions with your eyes wide open.
Can I Leave it in the TSP?
Next, “Can I leave it in the TSP?” A lot of people think, I’m not sure where they got this, but they have this idea that once they leave federal service, they have to take their TSP out. And that’s not true. Again, there might be some good reasons to get it out of the TSP, but you are not required to remove it.
In the event that you have an outstanding loan, you have the chance to be able to continue payments on that loan, even as a retiree. This was a new rule just a couple years back that changed. It used to be if you had an outstanding loan, the moment that you retired, that became a taxable distribution of any of the outstanding balance.
That is no longer the case. And so you have a chance to simply continue those payments, and as long as you do that, you will not have a taxable event in the form of that loan.
Boy, there’s so much to think about, and I’m just touching the wave tops of TSP, here. There’s so much to think about with respect to TSP in retirement or after you’ve separated from federal service.
Get Connected & Next Steps
To get the full scoop on TSP and how all the little details work, I hope you’ll get to one of our workshops. Of course, TSP is a big topic that we discuss in that workshop. We cover all of the pieces of the pension and all the insurance programs, Social Security, all the facets of your government benefits, and of course, TSP being one of them.
If you need to get to one of those workshops, you can either visit our site at fedimpact.com, or you can pull out your phone and text the word “PODCAST” to (224) 444-6144, and we will get connected. You’ll have an instant access to all of our training materials, including our in-person workshops, and be able to get the training that you need to feel really prepared to retire.
I hope this episode and this series has been helpful to you to be able to get a lot of questions answered. Of course, with a wide variety of federal employees, there are bound to be additional questions. I hope that this puts you in the right direction to get you exactly what you needed today.
Be sure to subscribe to this podcast wherever you might listen to podcasts, and that way more of the content that we’re producing on a regular basis for federal employees shows up on your feed.
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