Can you touch your TSP money before 59.5

Most of you here are ATC and work for the Federal Government. If you are a federal employee and are Fire, Police, ATC, or a safety position we can retire early, and at age 55 and 20 years of service, you can withdrawal your money and just pay taxes on the money based on whatever tax bracket you are in. If want to touch that money between 50 and 55 you are forced to do a 72-T until the age of 59.5 or the IRS will hit you with a 10% penalty.

If you also decide that you want to close your TSP account and roll it over into an IRA account, you lose your special rule protection and you will get a 10% penalty if you decide to you want to use your money.

Most retirement plan distributions are subject to income tax and may be subject to an additional 10% tax.

Generally, the amounts an individual withdraws from an IRA or retirement plan before reaching age 59½ are called ”early” or ”premature” distributions. Individuals must pay an additional 10% early withdrawal tax unless an exception applies.

I was forced to retire at 56 and I know I able to use my money penalty free from day one that I retired as long as I left my money in the TSP. If I withdrew it or transferred it to TD Ameritrade, I would lose those protections and I could no longer use my money unless I paid a 10% penalty. Are you still being told that inside the FAA? Is the Union briefing you on the new rules? Do you know the new rules?

On June 29, 2015, this law was passed. January 1, 2016, this went into effect. I was still working until June 2017. No one briefed me and I never heard one person mention this law. If you are still working and have never heard of this law, I want you to go into work, find a representative and ask why?


Here is the IRS link

**Qualified public safety employees

Effective for distributions after December 31, 2015, the exception for public safety employees who are age 50 or over is expanded to include specified federal law enforcement officers, customs and border protection officers, federal firefighters, and air traffic controllers. Also, the restriction that only defined benefit plans qualify for the exemption is eliminated. Thus, an exemption is allowed for distributions from defined contribution plans or other types of governmental plans, such as the TSP. See IRC Section 72(t)(10), as amended by the Defending Public Safety Employees Retirement Act, P.L. 114-26.

Ok so what does all this mean?

1). As a safety employee you will never have to use the 72-T option from 50-55

2) You can withdraw money with no penalty. No 10% early withdrawal penalty.

3) You can close your account and open standard IRA account and you will not have to pay penalties.

That is a game changer for all retirees no matter what age you decide to go. You still have the same 50 years of age or 20 years, but after the age of 50, no penalties.

I have a few more personal issues dealing with the organization and some of them you really do not think about until you retire. If you are married and want to change your monthly allotment payments, you cannot use the online quick automation. Nope, you have to fill out forms and have them notarized. Ok, that is annoying, but here is copy and paste of a situation that none of us ever think about.

While this probably is not a big deal when relatively young, I see it being a huge hassle when older. My dad was wheelchair bound in his later years. If he had to go to a notary with my mother every time he wanted to execute a change in withdrawals, it would have been a nightmare. With an IRA, this issue disappears (after getting spousal consent for the initial rollover). All transactions can be executed with simply a mouse click or a phone call. [Note: This is due to an IRS rule that also applies to 401(k) plans requiring a participant to obtain spousal consent for any withdrawal other than an annuity that provides a life annuity to the participant and a survivor annuity for the spouse’s life following the participant’s death. The survivor annuity must be no greater than 100% and no less than 50% of the annuity paid during the participant’s life.]

The next one I did not even research and I had no idea about. If you are married and you die and the beneficiary is your spouse, all is good. But what if you both die at the same time or the spouse dies after your death?

The problem arises upon the death of the spouse who owns the beneficiary participant account. There is no option to continue in the TSP and there is no option to roll over the account to an inherited IRA. This is a huge problem because of the resulting tax issue. That lump sum distribution will be taxed in full in the year of distribution. So, as an example, suppose a participant has a $1 million TSP balance at the time of his/her passing, with a surviving spouse and two children. The surviving spouse leaves the money in the TSP beneficiary participant account and dies with the balance still around $1 million. Each child will get a $500K distribution taxed in full in the year of distribution. A solution to this problem is for the spouse to do a partial withdrawal into an IRA that can be used without penalty after age 59 ½. If they are under age 59 ½ at the time of their spouse’s death, they can calculate what is needed to cover her expenses until age 59 ½ and leave that sum in the TSP.

My reason for sharing all this information with you guys is so you are informed. I am not a TAX EXCPERT and if you have any questions, you should ask the TSP folks and seek out a Tax Advisor. The 72-T thing is big for those still working and planning to retire at 50. Being able to close your TSP account if you want more options or control, is big. Here are a few more things that are annoying about the TSP.

  • The inability to withdraw from specific funds, such as taking payments only from the G Fund while allowing the money in the other funds to continue to be invested.
  • Limited investment choices: There are only five core TSP funds: C, S, F, S, and I.
  • The inability to contribute to the plan after government service ends.
  • Delays in receiving funds after making a withdrawal request. These can be due to lengthy processing times but also are often caused by participants’ mistakes in filing request forms. According to the TSP, it generally takes seven to 10 business days to process a request once it’s properly completed and submitted.

If I missed my briefing on these rules and laws while I was working, then it’s on me. I found out about these rules while camping in an RV and ran into a retired Air Traffic Controller from Minnesota and he briefed me. His facility briefed their employees and they had several controllers retire early because of it. Is this the real reason that did not brief us on the East Coast? They did want the retirements to accelerate?

Either way, research the rules and ask questions at work and be informed.


2 Replies to “Can you touch your TSP money before 59.5”

  1. Mark, I went to a FAA retirement Seminar late 2019 and actually asked about TSP transfers to an IRA and they never mentioned the new law (4 yrs old) and said you were subject to 10% penalty until 59.5.

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