There are two types of in-service withdrawals, ones for financial hardship, and one for age-based in-service withdrawals. You must be at least age 59 1/2 to make an age-based withdrawal. You can make up to four age-based in-service withdrawals a year for any reason. Withdrawals from a ROTH TSP will be tax free. But you will have to pay federal income tax, and maybe state income tax on money withdrawn from a Traditional TSP. The TSP must withhold 20% of your draw for taxes. What you owe at the end of the year may be more or less than that, so plan ahead.
If you are under 59 ½ and still serving you may be able to make a financial hardship withdrawal for genuine financial need. TSP defines acceptable reasons for making a hardship withdrawal. The first reason is a continuing negative cashflow which is when your net income is less than your expenses. Tsp.gov has a worksheet to help you determine this amount. But before you drain your TSP seek help. For our military, your on-base financial counselors are an excellent resource and free. You can also get help online at militaryonesource.mil or call 1-800- 342-9647.
The second type of inancial hardship withdrawal is for extraordinary expenses that you have not yet paid and you will not be reimbursed for, including eligible medical expenses, personal casualty losses like from an earthquake or fire, theft and accidents., and eligible legal expenses. There are a lot of rules and fine print with these hardship withdrawals. . The TSP booklet on In-service Withdrawals found on tsp.gov and is a must read before you apply.
Hardship withdrawals are also taxed. TSP will withhold 10% of the taxable portion of your withdrawal for federal income taxes. The total amount you will actually owe at tax time could be more. And you may have to pay an additional IRS early withdrawal penalty of 10% if you are under the age of 59 ½.
You may want to consider the loan option. When you take out a TSP loan, it is not considered taxable income as long as you pay it back according to the rules. You borrow from your own TSP account plus interest. While you have the loan out, you will be paying interest on that amount instead of earning and growing your investment. There are also two types of TSP loans. You can take a general-purpose loan for any reason which must be repaid in 1 to 5 years. The residential loan can only be used to purchase a home which will be your primary residence and have a repayment period of 1 to 15 years. You can’t use a TSP residential loan to repay an existing mortgage, or for repairs or renovation, buying out someone else’s share of your home, or for buying just land.
If you take out a TSP loan, you will be required to make regular, scheduled loan payments through payroll deduction. You can shorten or lengthen the term of your loan, as long as you don’t go over the term limits. But you cannot stop making loan payments befroe loan is paid off with interest. If you default TSP will declare the entire unpaid balance and interest as a taxable distribution and if your under 59 ½ a 10% tax penalty. TSP also has a booklet titled Loans available online at tsp.gov. There are a lot of important details and you definitely need to read through it carefully if you are considering a loan.
Taking ot an in-service withdrawal or loan from your TSP is no small matter and comes with costs. Check out the resourcesat tsp.gov. Talk to a financial counselor at no cost on base or through militaryonesource.mil, or speak with professional financial planner like me. If you have any questions send me an email to katie@moneypilotadvisor.com.
