Episode 55 TSP Withdrawal at 55

Hello and welcome to the 55th Episode of the Money Pilot Financial Advisor Podcast. For those of you who have stuck with the podcast to middle age, Thank You! I love speaking with you each week and bringing you info on money and finance that you can use to live your best life. In celebration of Episode 55, today we’re talking about you turning 55 and your Thrift Savings Plan (TSP). TSP is very similar to a workplace 401k. But there are a few differences and today’s discussion is about one, TSP and being age 55.

You have probably heard that you can’t withdraw money from your TSP before age 59 ½ without paying a 10% tax penalty. But if you separate from service in the year you turn 55 years old or later, you can withdraw any or all of your TSP without paying the 10 % penalty. You will still have to pay tax on Traditional TSP withdrawals, but you won’t face a penalty. 

Now, if you are a federal employee under the special retirement provision for law enforcement, firefighting, and air traffic control personnel who reach retirement eligibility earlier than other federal employees, you can make penalty-free withdrawals from TSP when you separate from service at age 50 or later.

This penalty-free withdrawal is only available if you separate from service when you are age 55 or older. This applies to both military and civilians. In practice, few military will be able to serve until age 55, even if you wanted to. But if you do, you can take advantage of this penalty-free withdrawal just like the civilians. If you separate or retire before that, you won’t be able to take advantage of this when you turn 55. You must separate at 55 or later. Or if you are under the civilian special retirement provision age 50 or later.

Just because you can tap your TSP early without penalty, it doesn’t necessarily mean it is a good idea. You could be living in retirement for 40 more years. TSP makes up a key component of Federal Employee Retirement System (FERS) and military Blended Retirement System (BRS) retirements. Leaving TSP to grow can help offset higher costs of living later in life because of inflation and higher need, like more healthcare as you age. But if you need it, maybe for a gap in income or a one- time expense, you can takea TSP distribution without a penalty if you separate at 55 or later. 

For example, minimum retirement age for most FERS employees is between 55 and 57 years old. But you can only begin receiving retirement benefits at that MRA if you have 30 years of service. If you have at least 20 years of service you can receive your full retirement pay starting at age 60. This is a good example of a situation where you might need or want to tap TSP early. If your federal MRA is age 56 and you call it quits at age 58 with 26 years of service. You’ll eligible for your full retirement at age 60. But still that’s 2 years away. You may have saved enough to tide you over to 60, or take up another job outside of government service. But if you still have a gap and need a source of income for those 2 years before your pension starts, this rule could be a solution. 

To wrap up, anyone can begin withdrawals from your TSP any time after you reach age 59 ½ without penalty. But if you separate from service when you are age 55 or older, you can begin distributions from TSP without paying the 10% penalty anytime. Just remember you will still owe income tax on distributions from Traditional TSP. But if you meet the 55-year-old rule, you won’t have to pay the additional 10% early withdrawal penalty. And lastly if you  under special retirement provisions, the rule is 50 or older for you.

I hope you’ve enjoyed today’s podcast and keep your questions coming. I specialize in helping military and federal employees navigate transitions and gaps. If you’d like help with your financial decision making, reach out, I’m here for you.

Transcript

Announcer: 0:14

Welcome to the Money Pilot Financial Advisor Podcast, where you team up with Money Pilot founfer, former Army helicopter pilot and your host Katie Cannon, to put your money where your heart is. Together, we'll tackle issues big and small so you can take charge and lead your financial life.

Kathleen Cannon: 0:53

Hello, and welcome back to the 55th episode of the Money Pilot Financial Advisor podcast. For those of you who have stuck with the podcast to middle age, thank you. I love speaking with you each week, and bring you info on money and finance that you can use to live your best life and celebration of Episode 55. Today, we're talking about you turning 55 and your Thrift Savings Plan or TSP. For any new listeners, that Thrift Savings Plan is a retirement savings plan available only to military service members and federal government civilian employees. It's very similar to workplace 401k. But there are a few differences. And today's discussion is about one TSP and being aged 55. My military and federal employees out there have probably heard that you can't withdraw money from your TSP before age 59 and a half without paying a 10% penalty. Yeah, I don't know who dreamed up that and a half thing either. But except for a few circumstances wrote withdraw before you're 59 and a half and it will cost you. But if you separate from service in the year you turn 55 years old or later, you can withdraw at any or all of your TSP without paying the 10% penalty, you will still have to pay income tax on traditional TSP withdrawals, but you won't face a penalty. Now if you're a federal employee under the special retirement provisions for law enforcement, firefighting and air traffic control personnel, you reach retirement eligibility earlier than other federal employees. And you can also make penalty free withdrawals from TSP when you separate from service at age 50. or later. This penalty free withdrawal is only available if you separate from service when you're age 55 or older. This applies to both military and civilians. In practice, to military we'll be able to serve until age 55, even if you wanted to. But if you do, you can take advantage of this penalty free withdrawal just like the civilians. If you separate or retire before that, you won't be able to take advantage of this when you do turn 55 You must separate at 55 or later. Or again if you're under the civilian special retirement provision, age 50 or later. Now, just because you can tap your TSP without penalty, it doesn't necessarily mean it's a good idea. I mean, if you retire at age 55, you really could be looking at living 40 or more years in retirement. TSP makes up a key component of the Federal Employee Retirement System or FERS, and the military's Blended Retirement System BRS in retirement, tapping TSP too hard too early, could be like eating your seed corn. Leaving TSP to grow can help offset higher costs of living later in life because of inflation and higher need, like more health care as you age. Left alone, TSP will grow through the beauty of compounding interest, which is your investment growing bigger, faster, like a rolling snowball. But if you need it, maybe for a gap in income or a one time expense, you can take a TSP distribution without penalty if you separate at 55 or later. I mentioned that you military will meet the requirement. But for civilian employees it's much more common. For example, minimum return My age for FERS employees is between 55 and 57 years old. But you can only begin receiving your retirement pay at your minimum retirement age. If you have 30 years of federal service. If you have at least 20 years of service, you can receive your full retirement age starting at age 60. This is a good example of a situation where you might need or want to tap TSP early. Let's say your federal minimum retirement age is age 56. And you call it quits at age 58. With 26 years of federal service, you'll be eligible for your full retirement at age 60. But that's still two years away, you may have saved enough to tide you over to 60, which is great. Or you might take up another job outside government service. But if you still have a gap and need a source of income for those two years before your pension starts, this rule could be a solution. Normally, you wouldn't be able to take those distributions from your TSP until you're 59 and a half, leaving you with a one and a half year gap in income. But because you separated from federal service when you are 55 or older, you're eligible to begin taking TSP withdrawals penalty free right away if you need to. Alright, to wrap things up. If you're a military service member or a federal civilian employee, you can begin making withdrawals from your TSP anytime after you reach 59 and a half years old without penalty. But if you separate from service when you're age 55 or older, you can begin withdrawing distributions from TSP without paying the 10% penalty anytime. Just remember, penalty free isn't the same as tax free, you will still owe income tax on distributions from your traditional TSP. But if you meet the 55 year old rule, you won't have to pay the additional 10% early withdrawal penalty. And lastly, if you're a federal law enforcement officer, firefighter or air traffic controller under special retirement provisions, this rule is 50 or older for you. I hope you've enjoyed today's podcast and keep your questions coming. I specialize in helping military and federal employees navigate transitions and gaps. If you'd like help with your financial decision making, reach out, I'm here for you.

Announcer: 7:54

Thank you for joining today's podcast. Like to find out more, visit us at www.moneypilotadvisor.com Let's team up and land your financial life.