Retirement savings plans such as the TSP offer a valuable benefit by allowing access to the money without a tax penalty at age 59 ½ and older but account holders must handle that option with care, according to the Retirement Security Project at the Brookings Institution.
That feature can act as a personal safety net when income unexpectedly drops such as due to a job loss or expenses arise such as a major medical or home cost not covered by insurance. While a 10 percent tax penalty applies for hardship withdrawals before that age acts as a strong disincentive for using IRA or TSP type savings for such purposes, that is not the case after that age, raising the prospect of what is called “leakage” of retirement savings for those who typically have retirement ahead in just a few years.
“Retirement experts see these early-access provisions as a double-edged sword. On one hand, the ability to access funds during tough times makes retirement saving more attractive. Workers might not give so readily to accounts if they are strictly prohibited from accessing these funds before retirement. On the other hand, unpaid loans and hardship withdrawals represent “leakage” from retirement assets, potentially threatening well-being in later years,” it said.
Especially troubling, it said, is that drawing out retirement savings in this way is especially common among lower-income earners, who have less ability to rebuild their retirement savings.