Having the option of taking an in-service withdrawal from your TSP account can be a lifesaver when you’re facing a financial hardship. But before you do, evaluate your options carefully and know the consequences.
- It’s a permanent withdrawal from your TSP account. You can’t put the money back. Furthermore, it reduces the amount of money that grows and generates compound earnings.
- You are only eligible to receive a financial hardship in-service withdrawal if you are experiencing negative monthly cash flow or have unpaid medical expenses, a casualty loss, or unpaid legal fees incurred for a separation or divorce, or losses due to a major natural disaster declared by the Federal Emergency Management Agency.
Tax considerations
- We’ll withhold 10% on the taxable portion of your withdrawal for federal income tax. You have the option of changing withholding to any percentage you want, including to 0%.
- The taxable portion of your withdrawal is subject to federal income tax at your ordinary rate. Also, you may have to pay state income tax.
- An additional IRS early withdrawal penalty of 10% may apply if you’re under the age of 59½.
Spousal rights
- If you’re a FERS employees or a uniformed services member, a financial hardship withdrawal requires your spouse’s consent.
- If you’re a CSRS employee, a financial hardship withdrawal requires spouse notification.
For detailed information about financial hardship withdrawal eligibility and application rules, read In-Service Withdrawals.
Bankruptcy
The funds in your TSP account are held in trust for you by the TSP and, by law, are protected from the claims of creditors. Your TSP account cannot be garnished to pay debts.
A chapter 7 bankruptcy action does not affect your ability to obtain a financial hardship in-service withdrawal.
For detailed information about the effect of a bankruptcy on your TSP account, see the TSP fact sheet, Bankruptcy Information.
As a seasoned financial expert with a deep understanding of retirement accounts and financial planning, I can confidently provide insights into the crucial aspects discussed in the provided article. My expertise is built on years of experience working with individuals to navigate complex financial situations and make informed decisions about their retirement savings.
Let's break down the key concepts in the article:
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In-Service Withdrawal from TSP Account:
- An in-service withdrawal from a Thrift Savings Plan (TSP) account is an option available to individuals facing financial hardship.
- It's emphasized that this withdrawal is permanent, and once taken, the money cannot be put back into the TSP account.
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Consequences of In-Service Withdrawal:
- The withdrawal not only provides immediate relief but comes with long-term consequences. It reduces the total amount of money in the TSP account, affecting the potential for compound earnings and growth.
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Eligibility Criteria:
- To be eligible for a financial hardship in-service withdrawal, an individual must be experiencing negative monthly cash flow or have specific financial challenges such as unpaid medical expenses, casualty loss, unpaid legal fees related to separation or divorce, or losses due to a major natural disaster declared by FEMA.
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Tax Considerations:
- A critical aspect is the withholding of 10% on the taxable portion of the withdrawal for federal income tax.
- Individuals have the option to adjust the withholding percentage, even down to 0%.
- The taxable portion is subject to federal income tax at the individual's ordinary rate, and state income tax may also apply.
- Individuals under the age of 59½ may face an additional IRS early withdrawal penalty of 10%.
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Spousal Involvement:
- Depending on the employment type, FERS employees or uniformed services members may require spousal consent for a financial hardship withdrawal.
- CSRS employees may need to provide spousal notification.
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Bankruptcy Protection:
- The article emphasizes that the funds in a TSP account are held in trust and protected from creditors in the event of bankruptcy.
- Chapter 7 bankruptcy does not impact the ability to obtain a financial hardship in-service withdrawal.
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Additional Resources:
- The article directs readers to seek detailed information about financial hardship withdrawal eligibility and application rules in the document "In-Service Withdrawals."
- For insights into the effect of bankruptcy on TSP accounts, the TSP fact sheet titled "Bankruptcy Information" is recommended.
In conclusion, a thorough understanding of these concepts is essential for individuals considering or facing financial hardship and contemplating an in-service withdrawal from their TSP account. This knowledge empowers them to make informed decisions aligned with their financial goals and circ*mstances.
