An employee who is participating in the Thrift Savings Plan has the opportunity to take in-service withdrawals for two reasons: 1) financial hardship; and 2) reaching the age of 59 ½. This article will look at the financial hardship withdrawals, while a future one will look at the age 59 ½ “age-based” withdrawals.
There are four major financial hardships that are considered acceptable reasons for making a financial hardship withdrawal, they are:
- Negative monthly cash flow;
- Medical expenses that you have not paid and that are not covered by insurance;
- Personal casualty losses that you have suffered and that are not covered by insurance; and
- Legal expenses that you have not yet paid that were incurred for separation and divorce from your spouse.
More detailed information about these hardships is available in the TSP booklet In-Service Withdrawals, which was most recently revised in May of 2012, and in form TSP-76, Financial Hardship In-Service Withdrawal Request, from August of 2015. The TSP does not require that you submit documentation in support of the hardship(s), but suggests that you retain the information that you have. They also require you to certify, under penalty of perjury, that you have a genuine financial hardship as you described in your application for the withdrawal.
The size of your withdrawal is limited by whichever is smaller – your demonstrated hardship or the amount of your TSP account that is due to your contributions and earnings on those contributions. Even if you have the mother of all hardships, you cannot withdraw any more from the TSP than what you have contributed and earnings on those amounts.
You will be prohibited from contributing to the TSP for 6 months from the time your hardship withdrawal is processed. As you will not be contributing, you will also not receive any matching contributions from Uncle Sam.
The TSP tries hard to discourage employees from taking financial hardship withdrawals. They are quick to point out that, unlike a loan, a financial hardship withdrawal will permanently deplete your TSP account. Even if you were to win Powerball the day after you took out the money, you could not get it back into the TSP, nor would you be able to contribute to the TSP for six months. Of course, if you won Powerball, you wouldn’t care about a small item such as a hardship withdrawal.
I do tend to agree with the TSP folks that a loan would be a better solution for a financial hardship in certain situations. A loan would be a better choice if:
- Your financial hardship was $50,000 or less;
- You could afford the loan payments; and
You could pay off the loan within the five year period allowed for a general purpose loan.