Q: A few years ago, I applied for an early withdrawal from my SP, specifically a hardship loan. Ten percent was taken right off the top, and I reported the early withdrawal on that year’s taxes. Two years later, the IRS says I owe them another 10 percent, plus a $1,000 penalty plus interest. If I had that kind of money, I wouldn’t have asked for a hardship. Does it even matter that I borrowed against my TSP for hardship reasons? Is there another way to borrow against your TSP (early) without going broke?
A: You took a hardship withdrawal, not a loan. Unless you meet one of the exceptions listed on Page 4 of the notice at https://www.tsp.gov/PDF/formspubs/octax92-32.pdf, which do not include general financial hardship, you’ll owe the penalty. Whether the IRS demand is incorrect or disputable, I can’t say, but you could have elected to take a loan, rather than a withdrawal, to avoid the penalty. Of course, you would have had to repay the loan to avoid a subsequent distribution.
