Q. OPM approved my disability retirement case in 2015 (after 31 years of service with the federal government), and I “officially” retired on disability at age 54 of that year. I was denied Social Security disability benefits.
I am now receiving the 40 percent disability retirement annuity and am having a difficult time making financial ends meet each month. Therefore, I am looking at the possibility of withdrawing fixed monthly payments from my TSP account to provide additional income until I turn 62, when my disability retirement annuity is converted to a regular retirement annuity. I currently have $323,000 in my TSP account.
I’ve reviewed the various withdrawal and annuity options in TSP’s publication, “Withdrawing Your TSP Account After Leaving Federal Service,” but I’m still very unsure of the best option for my situation, which is: I only want to receive TSP monthly payments until age 62.
Can I withdraw only what I will need between now and 62? I really don’t want to withdraw all of the funds in my TSP account. Also, would I be subject to an early withdrawal tax penalty?
A. If you want to take monthly payments until you reach age 62 and then keep your TSP account open after that, the best you can do is to reduce your fixed monthly payments to the $25 minimum when the time comes. This is as close to stopping them as you can get without closing your account. Once they have begun, you may change the amount of your fixed monthly payments once each year, starting in January.
If you receive a TSP distribution before you reach age 59½, in addition to the regular income tax, you may have to pay an early withdrawal penalty tax equal to 10 percent of any taxable portion of the distribution not transferred or rolled over. The additional 10 percent tax generally does not apply to payments that are either:
- Paid after you separate from service during or after the year you reach age 55 (or the year you reach age 50 if you are a public safety employee as defined in IRC section 72(t)(10)(B)(ii)).
- Annuity payments.
- Automatic enrollment refunds.
- Made as a result of total and permanent disability.
- Made because of death.
- Made from a beneficiary participant account.
- Made in a year you have deductible medical expenses that exceed 10 percent of your adjusted gross income (7.5 percent if you or your spouse is 65 or over).
- Ordered by a domestic relations court.
- Paid as substantially equal payments over your life expectancy.
The penalty tax does not apply to any portion of a TSP distribution (including a loan), which represents tax-exempt contributions from pay earned in a combat zone.
Relief from the 10 percent early withdrawal penalty is available to eligible Reservists called to duty for more than 179 days. The Reservist must have been activated after Sept. 11, 2001, and must have received his or her TSP distribution between the date of the order or call and the close of the active-duty period. The Reservist may also be eligible to repay the distribution to an IRA (not the TSP). Participants should consult with their tax advisers, legal assistance officers or the IRS regarding this relief.
See the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for more information about the taxation of TSP distributions.