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. Obviously, after you have separated from the service, you can take withdrawals for any reason.
This article looks at the financial hardship withdrawals and discusses a major change to them due to the implementation of the TSP Modernization Act last September.
There are four financial hardships that are considered by the TSP to be 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 September of 2019, and in form TSP-76, Financial Hardship In-Service Withdrawal Request, also from September of 2019.
The TSP-76, like most TSP withdrawal forms, is an online “wizard”. 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.
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. Of course, if you won Powerball, you wouldn’t care about a small item such as a hardship withdrawal.
Until the implementation of the TSP Modernization Act, those who took a hardship withdrawal were prevented from contributing to the TSP for the six month period following the withdrawal.
When, in January of 2019, there was a spike in hardship withdrawals due to the government shutdown, many employees who were later made whole for the pay they lost during the shutdown ended up being locked out of the TSP until July.
Hardship withdrawals should be a last resort. We should all have an emergency fund that will tide us over in the event of a true financial hardship. Financial professionals suggest that one should have an amount of between three and twelve months expenses set aside “just in case”.
As federal employees, we have more job security than the average worker, so the three month amount should be sufficient. If you had $6,500 in monthly expenses, you should have $19,500 set aside.
An emergency fund should be where you can easily get ahold of it if you end up needing it. It shouldn’t be in a retirement account where you would have to pay taxes and, perhaps, penalties if you pulled it out.
You can still earn a decent return on money is savings accounts if you go online to do so. On February 15, 2020, I went to nerdwallet and bankrate.com and found online banks that offered FDIC insured accounts with interest rates as high as 1.95%. As a comparison, the TSP’s G Fund returned 1.625% in January.
If you don’t have an emergency fund – start one! Even if it means whittling back your TSP contributions; just be sure to contribute enough to get the match. If there’s an emergency, you’ll be covered; if there’s not, you’ll still have the money available.
Report: Understanding TSP Withdrawals