As you know, if you take an in-service withdrawal from your Thrift Savings Plan (TSP) when you’re younger than 59½, you’re subject to an IRS 10% penalty. This is in a addition to the regular income taxes you’ll owe on the tax-deferred portion of the withdrawal. But what if you’re eligible to retire at age 55 to 57 under the FERS Minimum Retirement Age (MRA)? That’s when the Rule of 55 kicks in.
Understanding The Rule Of 55
The Rule of 55 enables you to start taking penalty-free TSP distributions when you retire in the year you turn age 55. And, contrary to rumors, there’s no years-of-service requirement. It also applies to a 401(k) your spouse may have through their current employer.
Of course, any distributions you take from tax-deferred retirement accounts like the traditional TSP will be subject to federal income taxes. But you won’t have to worry about the 10% IRS penalty when you separate from service at age 55 or after.
“Unfortunately, the IRS does not allow penalty-free distributions from traditional or Roth IRAs.”
When The Rule Of 55 Does Not Apply
If you’re retiring from federal service but you have a 401(k) from a previous employer, you’re not allowed to take a penalty-free withdrawal from that account before age 59½. However, you can transfer funds from a previous 401(k) into your TSP to get penalty-free access to the money at age 55 or older. Unfortunately, the IRS does not allow penalty-free distributions from traditional or Roth IRAs.
LEOs & SCEs Can Take Penalty-Free Withdrawals At Age 50
Thanks to the “Protecting Public Safety Employees Timely Retirement Act” that went into effect in 2023, eligible LEOs and SCEs have two options for taking early TSP withdrawals: when they have 25 years of service or when they turn age 50, whichever is earlier. Prior to the new law, LEOs and SCEs who retired before 50 were subject to the 10% early withdrawal penalty. Now, if they retire younger than 50 with 25 years of service, their TSP withdrawals are penalty-free.
Transferring Money From The TSP To Another Account
When you retire, you may want to consider transferring money from your TSP instead of making a withdrawal. Under TSP rules, you can move money into a qualified trust or an eligible retirement plan like an IRA or a 401(k). A transfer is different than a rollover because funds are sent directly to the trust or account not the TSP account owner. Before you make a decision, touch base with an FRC® trained advisor to discuss the best TSP strategy for your financial situation.
Sources:
https://www.tsp.gov/in-service-withdrawal-basics/financial-hardship/
https://www.congress.gov/bill/117th-congress/senate-bill/4314?s=1&r=34
