Q. I will be retiring with a law enforcement 1811 pension. I will still owe $30,000 on a TSP loan. I understand I will have to pay taxes on the loan as they will consider it a pay-out. My question is about the additional penalty that may be involved. I have read under the Pension Protection Act of 2006 (PPA), Section 828, which allows a retired federal law enforcement officer to withdraw funds from their TSP. When the IRS form 1099 reflects the distribution code of “early withdrawal – no known exception, the retired employee can file a form 5329 with the IRS 1040 claiming status as a Federal Public Safety Officer (PSO). This may waive the early withdrawal penalty fee.” Have you heard if this is a valid?
A. Unfortunately, the exception to the early withdrawal penalty to which you are referring does not apply to the TSP or any other defined contribution plan. It only applies to defined benefit pension plans. If you retire during or after the calendar year in which you reach age 55, however, you will qualify for a different exception to the early withdrawal penalty.