Not everyone has smooth financial sailing throughout their careers. We might face financial hardships at different times; hardships that put undue strain on our family budgets. The Thrift Savings Plan recognizes this and, in addition to the TSP loan program, it offers employed participants the ability to take in-service financial hardship withdrawals. Retired participants can, of course, take withdrawals for any reason (and after the implementation of the TSP Modernization Act in September, they can take lots of withdrawals).
It’s not just any hardship that will qualify for a financial hardship withdrawal. The TSP identifies only four major financial hardships that are considered acceptable reasons for making such a withdrawal.
The first reason is negative monthly cash flow. Clearly, if, month after month, you have more money going out than you have coming in, you’ve got a major hardship.
Medical expenses that you have not paid and that are not covered by insurance are also considered a hardship. Hopefully, with our excellent FEHB coverage, this particular hardship will not affect many of us.
Personal casualty losses that you have suffered and that are not covered by insurance are the third reason for a financial hardship withdrawal.
Legal expenses that you have not yet paid that were incurred for separation and divorce from your spouse rounds out the acceptable reasons. Legal expenses are defined as court costs and attorney’s fees; not alimony or child support.
More detailed information about these hardships is available in the TSP booklet In-Service Withdrawals and in form TSP-76, Financial Hardship In-Service Withdrawal Request. Both of these documents were most recently updated in January of 2018. You don’t have to submit documentation in support of the hardship(s), but the TSP suggests that you retain the information that you have. You are also required to certify, under penalty of perjury, that you have a genuine financial hardship as you described in your application for the withdrawal.
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. You are not allowed to withdraw any more from the TSP than what you have contributed and earnings on those amounts.
You won’t be able to contribute to the TSP for 6 months from the time your hardship withdrawal is processed. Because you will not be contributing, you will also not receive any matching contributions from Uncle Sam. You will, however, still receive the agency automatic 1% contribution.
The TSP doesn’t want you to take a financial hardship withdrawal. They 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.
Often a loan would be a better solution than a TSP withdrawal 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.
Learn more about TSP loans and in-service withdrawals at ask.FEDweek.com