If circumstances require you to take an in-service withdrawal from your Thrift Savings Plan (TSP) before you hit 59½, you’re subject to an IRS 10% penalty. This is in addition to the regular income taxes you’ll owe on the tax-deferred portion of the withdrawal. However, there’s a rule that comes into play for those who are eligible to retire at age 55 to 57 under the FERS Minimum Retirement Age (MRA).
The Rule of 55 enables you to start taking penalty-free TSP distributions should you retire in the year you turn age 55. There is no years-of-service requirement, and the rule also applies to a 401(k) your spouse may have through their current employer.
Any distributions you take from a tax-deferred retirement account like the traditional TSP are subject to federal income taxes. But the Rule Of 55 means you’ll avoid the 10% IRS penalty when you separate from service at age 55 or older.
When The Rule Of 55 Does Not Apply
The Rule Of 55 does not apply to a 401(k) from a previous employer, you’ll need to either pay a penalty or wait until you’re 59½ to make withdrawals. A workaround for this is to transfer those funds into your TSP. The rule is also not applicable to distributions from traditional or Roth IRAs.
Penalty-Free Withdrawals At Age 50 For LEOs & SCEs
The “Protecting Public Safety Employees Timely Retirement Act” that went into effect in 2023, gave eligible LEOs and SCEs 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
Retirees might want to consider transferring money from their 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 differs from a rollover because funds are sent directly to the trust or account not the TSP account owner.
To learn more about the best TSP strategy for you, touch base with an FRC® trained advisor.