When Can You Withdraw Money From a Thrift Savings Plan (TSP) With No Penalty?

A thrift savings plan, or TSP, is a retirement savings plan for federal employees. If you happen to work for Uncle Sam, contributions you make will not be taxed until the money is withdrawn. At the time of withdrawal, you will be required to pay federal income taxes on the account. If you choose to withdraw before you are eligible to retire, you might also be subject to an IRS tax penalty of 10 percent. In some cases, you can avoid the penalty.

Federal employees can withdraw TSP funds at any time. However, withdrawing funds before age 59 1/2 can result in the 10 percent IRS penalty on funds in addition to the federal income taxes. If you are still employed after reaching age 59 1/2, you are entitled to a one-time withdrawal of any or all of your funds without penalty. If you retire at 59 1/2, you are eligible to withdraw from the account at any time.

Keep in mind, since the funds must be reported as income, electing a large lump sum could place you in a higher tax bracket. To avoid this, you can make a partial withdrawal or request a series of monthly payments. If you are no longer a federal employee or are retired, you can roll the funds into an annuity or Roth IRA to keep the funds in a tax-deferred account. If you continue employment outside federal government, you can also roll the TSP into a 401(k) plan, traditional IRA or annuity.

Some employees are eligible to retire early and withdraw from the TSP without IRS penalty. For example, air traffic controllers, federal firefighters and federal law enforcement officers can retire at any age, provided they have at least 25 years of service. For those with 20 years of experience, retirement age is 50. Additional job classifications let employees retire at any age with 25 years of experience, provided the agency gives permission.

The early withdrawal penalty can be avoided by purchasing a TSP fixed annuity. The annuity disburses the funds on a monthly basis for the retiree's lifetime. Another way to avoid the penalty is to request monthly payments based on your life expectancy, using IRS Form TSP-70. The payment amount is calculated based on your current age, life expectancy and TSP balance. If you choose to stop the payments to receive the remaining balance in a lump sum, the 10 percent penalty will be assessed.

With the TSP Loan Program, employees can borrow money from their own accounts, but the loan amount cannot exceed the amount you contributed. Employer contributions cannot be borrowed. A general purpose loan can be used for anything, and no documentation is required. Funds must be repaid within one to five years.

A residential loan lets you borrow funds toward the purchase or construction of your primary home. This type of loan has a repayment term of up to 15 years. Interest is charged on all funds borrowed and payments are deducted automatically from your paycheck. All payments are deposited backed into your TSP, along with the interest.

An employee can take a penalty-free hardship withdrawal if a physician determines the employee is disabled. The disability can be a physical or mental condition that is expected to continue indefinitely, permanently, or result in death. You can also withdraw funds to pay medical expenses that exceed 7.5 percent of your adjusted gross monthly income. If you withdraw from your TSP to pay higher education expenses for yourself, spouse, child or grandchild, the early penalty will not be charged.