Q. I am separating from a covered law enforcement position after age 50, but before I attain retirement eligibility. I have an outstanding TSP loan that will become an early distribution. My understanding is that I will not be subject to the 10 percent penalty, but will pay income taxes on it. Can you confirm if this is correct? Also, I have a military TSP and will continue to contribute to it. Can I assume the loan repayment using those funds to avoid the distribution?
A. TSP loans must be repaired using after-tax funds, so using funds from another tax-deferred retirement account to repay your loan is no allowed. If you are a qualified public safety employee, your declared distribution under the scenario you describe will be exempt from the early withdrawal penalty. See the list of exemptions to the “Additional 10% Penalty Tax” on page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for more information.
