TSP withdrawal and tax exemption


Q. I am a 51-year-old retired federal employee with 27 years of service. I retired on 12/31/18. I served 25 years in a covered federal law enforcement officer position, then transferred to a non-covered LEO position with another agency for the remaining two years. I do receive the LEO FERS retirement.
My issue is with the TSP withdrawal options. According to the Defending Public Safety Employees Retirement Act, effective 01/01/16, any federal public safety official, such as LEO, who separate from service at age 50 or older could make penalty-free TSP withdrawals if they retire after 12/31/15. In order for TSP to waive the 10 percent early withdrawal fee, the retiring agency must submit a “P” code on the separation paperwork to TSP. The agency I retired from did not since I was not in a LEO position with them. I was told before I retired that I would qualify for the exemption, but I can not find it anywhere that specifically applies to my situation so that I can provide it to my HR. Do you know where I can get this information or are you able to provide a statue?

A. If you feel that your separation paperwork is incorrect, you’ll need to take this up with your agency and OPM. Whether or not you qualify for an exception to the early withdrawal penalty is between you, your CPA and the IRS. Neither your agency, OPM nor the TSP can make this determination.
Here is the rule and a code citation:
If you receive a TSP distribution before you reach age  59 ½, 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 section 72(t)(10)(B)(ii) of the Internal Revenue Code);
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; or
Paid as substantially equal payments over your life expectancy.

This penalty never applies to contributions you made to your Roth balance or to qualified distributions of Roth earnings. It may apply to nonqualified Roth distributions.
The penalty tax does not apply to any portion of a TSP distribution (including a loan) that represents tax-exempt contributions from pay earned in a combat zone. If you are a reservist called to duty for more than 179 days, you may be eligible for relief from the 10 percent early withdrawal penalty, provided that you received your TSP distribution between the date of the order or call and the close of the active duty period. You may also be eligible to repay the distribution to an IRA (not to the TSP).


About Author

Mike Miles is a Certified Financial Planner licensee and principal adviser for Variplan LLC, an independent fiduciary in Vienna, Virginia. Email your financial questions to fedexperts@federaltimes.com and view his blog at money.federaltimes.com.

Leave A Reply