Q. I am a separated federal employee, not of age and I am on Office of Workers’ Compensation Programs federal disability. I’m going to do a TSP early withdrawal. I have a few questions that I could not find while researching my options:
1) Being on federal disability, can I even apply for financial hardship withdrawal?
2) What is the difference (if any) between financial hardship withdrawal & early partial withdrawal? Is there any benefit filing one or the other?
3) At the end of the year I know I’ll have a 1099 and there is a 10 percent penalty. I also know that being on disability there is a chance of me not being penalized. Are my chances of this penalty being forgiven because of my disability? What should I do to increase my chances?
A. A financial hardship withdrawal is a type of in-service withdrawal and is only available to in-service TSP participants. You are free to withdraw your money whenever you like, but your withdrawal may be subject to the early withdrawal penalty.
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:
• 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 (The TSP cannot certify to the IRS that you meet this exemption requirement when your taxes are reported. Therefore, you must provide the justification to the IRS when you file your taxes;
• made because of death;
• made from a beneficiary participant account;
• made in a year you have deductible medical expenses that exceed 10% of your adjusted gross income (7.5% if you or your spouse is 65 or over);4
• ordered by a domestic relations court; or
• 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 September 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 advisors, 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.
