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The Internal Revenue Code provides for penalties under certain circumstances and one of those circumstances is a 10% penalty that applies when you withdraw money from a retirement account too early. What’s too early? It depends. We’ll take a look at what age you need to be to avoid this penalty in the rest of this article.

The penalty originated back in 1974 when Individual Retirement Arrangements (IRAs) were first introduced. Those who withdrew money from their IRA at the age of 59 ½ or older were exempt from the penalty; those who took out money prior to attaining 59 ½ had to pay the penalty along with taxes on the money that was withdrawn. The age 59 ½ in the penalty refers to the specific date that you turn 59 ½. Up until 1987, all money in an IRA was pre-tax – one contributed out of pre-tax dollars and the account grew tax deferred.

When the Roth IRA was introduced in 1997 the early withdrawal penalty was applied to any earnings (i.e., money that has not yet been taxed) withdrawn prior to 59 ½. There is no early withdrawal penalty for either contributions or conversions (i.e., money that has already been taxed) that are withdrawn prior to that age. In Roth IRAs withdrawals are treated as first coming from contributions, next from conversions, and last from earnings. This is not true in the Roth TSP (discussed below); in the Roth TSP your withdrawals come proportionally from contributions and earnings.

The TSP came into being in 1987 and, like a traditional IRA, allowed contributions from pre-tax dollars and had tax deferred earnings. It also had a 10% early withdrawal penalty, but the penalty didn’t necessarily apply up to the age of 59 ½. As long as you separated from your federal job in the year in which you turned 55 (or later), you were exempt from the penalty. Note that this exemption from the penalty was gained in the year in which you reached 55, not on the day you attained that age. If you separated in a year before the year in which you reached 55, the 10% penalty would apply all the way up until (the date) you reached 59 ½. If you are a special category employee (e.g., a Law Enforcement Officer, a Firefighter, etc.), you become exempt from the penalty in the year you turn 50. This is also true regarding withdrawals from a Roth TSP.

But don’t think you’ll be paying no taxes on withdrawals from your Roth TSP if you separate between 55 (or 50) and 59 ½. There are two portions to a Roth TSP account: the contributions you made and the earnings on those contributions. You paid taxes on the contributions when you made them, but the earnings portion is only considered tax free if your withdrawals are made five years or more after opening the Roth and you are at least 59 ½. Beware of this “Roth Tax Trap!” If you have both traditional and Roth balances in your TSP, separate before 59 ½, and begin withdrawing from your TSP, your withdrawal will be considered as coming proportionally from your traditional and Roth balances, and you will have to pay taxes on the portion of your withdrawal that comes from the earnings portion of your Roth until you reach 59 ½ . You have the ability to choose the part of your TSP from which your distributions come (i.e., traditional and Roth), so, if you’re withdrawing from your TSP prior to 59 ½, it’s wise to have your withdrawals come from only the traditional part of your TSP.

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