Retirement & Financial Planning Report

Late-career employees who find themselves in need of a lump-sum of money—to pay off a mortgage, buy an investment property, clear off debts for a child’s education, renovate a disabled parent’s home or for a variety of other reasons arising at that age—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. The reason for that age cutoff is that that is the age after which, under the tax code, withdrawals from tax-favored savings plans such as the TSP are no longer subject the 10 percent early withdrawal penalty.

You may make only one age-based withdrawal, 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 can affect your withdrawal options after you separate. If you choose one, you will not be allowed to make a partial post-separation withdrawal, which will become available under the TSP’s new computer system when it is launched.

Age-based withdrawals 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. You also can postpone taxation even if you receive the money directly, by rolling it over into an IRA or other eligible plan within 60 days of receiving it, but you will have to pay tax, including a potential early withdrawal penalty, on the amount that was withheld for federal income tax—even if you roll over the entire amount you received—unless you also deposit personal funds equal to the amount withheld within the 60 days. A transfer or rollover 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.

If you do not transfer or roll over any or part of your distribution, you may be able to lower the income tax you pay on an in-service withdrawal by income averaging. However, this is available only if your entire account balance is paid to you in one tax year.

Money transferred or rolled over under these withdrawals is taxable when drawn out of the IRA or other retirement plan.

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.