So far in this series, we have covered the basics of the Thrift Saving Plan, employee and agency contributions, and the differences between Traditional and Roth TSP accounts. This post will look at loans, withdrawals, and refunds in your TSP account, with this post covering loans.
Loans, Withdrawals, and Refunds
Once you leave federal service, you can take money out at any time. The IRS may impose an early withdrawal penalty tax on the disbursement depending on your employment status and how you receive the funds. There are three ways to get money out of your TSP:
- Loans
- In-service withdrawal—withdrawal while still employed by the federal government
- Post-separation withdrawal—withdrawal after separation from the federal government
Loans
Loans are only available to participants who are actively employed by the federal government, in pay status and have contributed their own money. When you take a loan, you are borrowing your own contributions and earnings on those contributions. TSP also charges a processing fee for each loan, which is deducted from the amount of the loan you receive.
When you borrow from your account, you miss earnings that may have accrued on the money you borrowed. Also, if you have an outstanding loan when you leave federal service, you must pay it back within 90 days or the outstanding balance will be treated as taxable income.
There are two types of loans—general purpose and loans to purchase or build a primary residence.
General-purpose must be repaid within 5 years and primary residence loan within 15 years. You may only have one of each type of loan outstanding at any time. The amount is limited to your own contributions and earnings on those and you can’t borrow less than $1,000 or more than $50,000. You must also wait 60 days from the time you pay off one until you’re eligible to request another loan of the same type.
Repayment
Repayment is made through payroll deduction. If your agency doesn’t deduct your loan payment from your pay, you must submit payment directly to TSP because you are responsible for your own payments.
Consequences of Repayment Failure
If you fail to repay your loan according to your Loan Agreement, TSP will report it as a taxable distribution to the IRS. You will owe income taxes on the taxable amount of the outstanding balance and possibly and have an early withdrawal penalty tax as well. However, you won’t owe income tax on any part of your outstanding loan amount that consists of tax-exempt or Roth contributions. You will owe taxes on the earnings on any tax-exempt contributions that were part of your Traditional balance.
If you default on a TSP loan, you will owe taxes, for that year, on the taxable amount you did not repay, including any qualified Roth earnings. Paying taxes on qualified earnings means you must pay taxes today on an amount you would otherwise be entitled to receive tax-free at retirement.
The following apply to Roth earnings:
- If the taxable distribution is declared because you separate from service, any qualified Roth earnings won’t be subject to tax. However, Roth earnings not qualified will be.
- If the taxable distribution is declared for another reason, your Roth earnings will be taxed, even if they were already qualified (or eligible to be paid out tax-free).
- Note: If you have 2 TSP accounts, you must close any loan in the account you are moving before the accounts can be combined.
In-Service Withdrawals
These are just what they sound like; withdrawals made from your account while still employed. They are available to all active participants. While there is no fee for making an in-service withdrawal, when you make one of these withdrawals, you permanently reduce your account by the amount of the withdrawal and any future earnings you would’ve accrued on that money.
You must pay federal and sometimes state income taxes on the taxable portion of the withdrawal and you may be subject to a 10% penalty tax.
There are two types of in-service withdrawals; financial hardship and age-based.
Financial Hardship
You may be allowed to make one of these if you can certify, under penalty of perjury, you have a financial hardship because of a recurring negative cash flow, legal expenses for separation or divorce, medical expenses, or personal casualty loss. Only your contributions and the earnings on those contributions may be withdrawn.
You may request $1,000 or more, however, the amount you request can’t exceed the actual amount of the certified financial hardship. You also may not make contributions to your account, or receive matching contributions, for 6 months after the disbursement of funds. This also means that, if you’re a FERS employee, you won’t receive any Agency Matching Contributions during that time.
Age-Based
Any time after you reach age 59 ½, you may make this type of withdrawal, if you’re still a civilian federal employee or member of the uniformed service. You may withdrawal part or all your vested account balance and you can request $1,000 or more, or the entire account balance (even if it’s less than $1,000). Also, you may only make one of these types of withdrawals and if you do make one, you won’t be eligible to make a partial withdrawal from your account after you separate from service.
Taxes
You must pay federal income taxes on the taxable portion of in-service withdrawals when paid directly to you. You’ll owe taxes on the portion of your withdrawal that comes out of your Traditional balance (excluding tax-exempt contributions). You will not, however, pay federal income taxes on the portion that comes from your Roth contributions and you’ll only pay taxes on the earnings if they aren’t qualified.
Both of these types may be subject to an early withdrawal penalty tax if you are younger than age 59 ½.
Post-Separation Withdrawals
If your vested account balance is $200 or more after you leave federal service, you can leave your money in the TSP until later or withdrawal all or a portion of your account. Any withdrawal from your account will be made up of a proportional amount of Traditional and Roth money. If your vested account balance is less than $200 when you leave federal service, TSP will automatically send you a check for your account amount.
There are two types of post-separation withdrawals; partial and full.
Partial
You may take out $1,000 or more and leave the rest in your account until you decide to withdrawal, but you may only take one partial withdrawal from your account. And if you made an age-based in-service withdrawal, you aren’t eligible for a partial withdrawal.
Full
You may choose how your entire account will be distributed using one—or any combo of—the 3 options:
- Single payment
- Series of TSP monthly payments
- Life annuity purchased for you by TSP (covered in the next post)
Single Payment
A single payment allows you to withdrawal your entire TSP account at one time in one payment.
Monthly Payments
This allows you to withdraw your entire account in a series of payments, paid to you each month from your account. You can also ask for a specific dollar amount each month or have TSP calculate monthly payments based on your life expectancy. If choosing a specific dollar amount, it must be at least $25.
At any time while receiving monthly payments, you can ask TSP to stop the payments and pay you your remaining account balance in a single payment. Once a year, you also can make changes to the dollar amount of the monthly payments you are receiving. Also, once a year, you can make a one-time switch to receive monthly payments based on the dollar amount rather than monthly payments based on life expectancy.
Harris Federal Law Firm helps federal and Postal employees nationwide with Federal Disability Retirement cases. If you have an injury or illness that keeps you from performing your essential job duties, you may qualify for Federal Disability Retirement. Call today for a free consultation.
