In an IRA, one must be 59 ½ or older in order to not be penalized for an early withdrawal. Within the TSP, one will avoid the penalty if they separate from federal service in the year in which they turn the age of 55. Those who occupy certain positions (i.e., Law Enforcement Officers, Firefighters, Air Traffic Controllers, Nuclear Materials Couriers, Customs and Border Protection Officers, Supreme Court and Capitol Police, and DSS Agents with the Department of State) avoid the penalty if they separate in the year in which they turn 50.
The second difference is what exemptions are allowed from the early withdrawal penalty. In an IRA, but not in the TSP, higher education expenses, first time homebuyer expenses and health insurance expenses (if unemployed) allow an exemption from the penalty. In the TSP, but not in an IRA, divorce allows an exemption. Both the TSP and IRAs, allow exemptions for death, disability, life expectancy based payments (under IRS rule 72(t)), medical expenses and IRS levys.
Another penalty is the 50% penalty for not taking required minimum distributions (RMDs) after reaching the age of 70 ½. With a traditional IRA, an individual must begin taking these distributions whether they are working or not. On the other hand, the TSP has a “still working” exception; if a participant is still working at their federal job at 70 ½, they are not required to take RMDs. Another big difference is that no RMDs are required from a Roth IRA, regardless of the age or employment status of the account holder, while one must take RMDs from the Roth balance of their TSP at 70 ½ and later unless they meet the “still working” exception.
All too often, people confuse the rules of the Thrift Savings Plan with the rules that apply to Individual Retirement Arrangements, ending up paying penalties that they could have avoided had they paid better attention. If you’re concerned about whether or not a penalty might apply to you, do some research. IRA rules can be found in IRS Publication 590-B, Withdrawals from Individual Retirement Arrangements. TSP rules can be found in the TSP publications Withdrawing Your TSP Account After Leaving Federal Service and Tax Information: Payments From Your TSP Account.
Learn more about TSP loans and in-service withdrawals at ask.FEDweek.com