Q: How much money can you take out for your one-time withdrawal without tax penalties? I am retiring under 6c, federal law enforcement retirement, at age 50.
A: Unless you meet one of the special exceptions to the early withdrawal penalty, the amount will depend upon your life expectancy and the calculation method you choose. This excerpt from my July 23, 2007, Money Matters column should help:
“Another exception to the early withdrawal penalty — one that is available to anyone — is to take distributions before reaching age 59 1/2 as a series of so-called substantially equal periodic payments (SEPP). By agreeing to begin converting your account balance to a stream of income designed to last for life, you avoid the penalty. There are three methods of computing the amount of each distribution, including one that produces a varying stream of annual income and two that produce fixed streams. What they all have in common is the distributions must continue uninterrupted for at least five years or until you reach 59 1/2, whichever period is longer. The SEPP exception requires only that the exact amount of the computed withdrawal be taken by Dec. 31 each year, so the number and timing of the distributions during each year are up to you.
“[The Thrift Savings Plan’s] withdrawal limitations will require a monthly payment schedule, but the SEPP exception applies to IRA distributions, so you could roll your TSP balance over to an IRA to gain more withdrawal flexibility. While your SEPP plan must be designed to provide income over a lifetime, it doesn’t actually have to do so. Once you’re 59 1/2 and the payments have continued for at least five years, you may terminate the payments and begin withdrawing money according to your needs, without penalty.
“An important fact to remember when considering using a SEPP series to extract money from your account without penalty: The calculations and rules that govern this exception are complex, and the penalty for mistakes can be high. So make sure that you, or someone you trust to guide you, have a thorough understanding of the requirements before proceeding down this path.
“One of the attractive aspects of the SEPP exception is that it allows you to retain ownership and control of your savings, while providing penalty-free income before age 59½. Alternately, you can avoid the penalty by using part or all of your TSP balance to purchase an immediate life annuity after separating from service. This produces a regular stream on income that is guaranteed to last, at least, for life, but in exchange, you forfeit ownership and control of the principal used to purchase the annuity. I wouldn’t suggest using an annuity only to avoid the early withdrawal penalty for a few years, but if it’s something you would consider anyway, it’s useful to know that it can begin at any age without being subject to the penalty.
“Other exceptions to the early withdrawal penalty are available for total and permanent disability, death, certain court-ordered payments and qualifying medical expenses. These exceptions are based on circumstances that are largely outside the control of the plan participant and available only in a minority of cases.
“You can learn more about all of the exceptions to the early withdrawal penalty by reading IRS Publication 590, at www.irs.gov; and TSP Tax Notices, under ‘Publications’ at www.tsp.gov.”
