Late-career employees who find themselves in need of a lump-sum of money–such as to pay off a mortgage, buy an investment property, clear off debts for a child’s education, or other reasons–may want to investigate a little-known and even less-used feature of the Thrift Savings Plan, the age-based withdrawal.
TSP’s much more popular loan program can be used for many of the same purposes, but in the loan program, the money must be paid back through payroll withholding. With an in-service withdrawal, the money is not paid back.
The key feature of the age-based withdrawal is that it is allowed only for those age 59 1/2 and older.
Currently, you may make only one age-based withdrawal–proposals are pending in Congress to remove that limit–and it can be for all or part of your account balance. Taking such a withdrawal does not affect your eligibility for a later TSP loan or a financial hardship in-service withdrawal. However, it does affect your withdrawal options after you separate. If you choose one, you will not be allowed to make a partial post-separation withdrawal; the pending proposal also would remove that limit.
Age-based withdrawals based on “traditional” investments are subject to income tax in the year they are received, although you can postpone taxation by having it transferred directly to an individual retirement account or other “qualified” retirement savings plan. A transfer might be desirable for those who want to move some of the money out of the TSP and into an investment vehicle–such as a mutual fund–not available through that program.
Investments made on an after-tax Roth basis are not taxable on withdrawal, nor are their associated earnings if certain conditions are met. If you have both traditional and Roth balances in your account, the withdrawal will be taken proportionately from each.
If you are a married FERS participant, you must obtain the consent of your spouse before you can receive a TSP in-service withdrawal, regardless of the amount. If you are a married CSRS participant, the TSP must notify your spouse before your withdrawal is approved.