There are currently two ways that an employee younger than age 59 ½ can get money out of the Thrift Savings Plan. They are by means of a loan or a hardship withdrawal. If an employee is 59 ½ or older, they are allowed to take what is called an “age-based withdrawal”. Only one age based withdrawal is allowed, though once the TSP Modernization Act is implemented multiple age-based withdrawals will be allowed.
When it comes to loans, a general purpose loan can be had for the asking. It requires no documentation whatsoever and can be amortized over a period of up to five years. On the other hand, a primary residence loan must be supported by documentation and can be amortized over a period of up to fifteen years. The documentation requirements can be found in the TSP’s publication on loans, which can be found at https://www.tsp.gov/forms/loans.html.
There is a limit as to how much money can be outstanding in TSP loans – $50,000. A loan also requires the signed notarized consent of your spouse (unless you are CSRS, where no consent is required). The interest on the loan is based on the G Fund’s return in the month in which the loan is approved.
And, of course, a loan must be paid back. Your TSP loan payments will be taken out of your salary until the loan is paid in full. If you leave federal service with an outstanding loan, it must be closed either by re-payment or by you taking a taxable distribution of the outstanding balance.
Unlike a loan, a hardship withdrawal does not need to be paid back – in fact, it cannot be paid back – it permanently depletes your TSP account and you are not allowed to contribute to the TSP for six months after your withdrawal is processed. The TSP identifies four financial hardships that are acceptable for making a financial hardship withdrawal, they are: 1) Negative monthly cash flow; 2) Medical expenses that you have not paid and that are not covered by insurance; 3) Personal casualty losses that you have suffered and that are not covered by insurance; and 4) 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, and in form TSP-76, Financial Hardship In-Service Withdrawal Request. You are required to certify, under penalty of perjury, that you have a genuine financial hardship.
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.
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 permanently depletes your TSP account. Even if you were to win Powerball the day after you took out the money, you could not put that money 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.
So, let’s say you have a financial need, which is better for you – a TSP loan or an in-service hardship withdrawal? The answer is “it depends”. In some situations, a loan would be a better choice; for example, if you: had a financial hardship of $50,000 or less; could afford the bi-weekly loan payments; and would be able to pay off the loan within the five year period allowed for a general purpose loan. On the other hand, if your hardship is more than $50,000 and you couldn’t afford the loan payments, then a hardship withdrawal might be what you’re looking for.
Read more on TSP Loans and Hardship Withdrawals at ask.FEDweek.com