Tax-free TSP distribution?


Q. What agency would I need to seek remedy on requesting a TSP withdrawal with paying no federal tax and the IRS withdrawal penalty? I am a 58-year-old FERS employee with four years to go before I can retire. I can get a TSP withdrawal at age 59½ years old without paying the IRS penalty, but I need the money now due to immediate financial needs, including not paying the federal/state taxes and penalty. 

A. Since you are currently eligible to contribute to the TSP and are under age 59½, there are only two ways to remove money from your TSP account: a hardship withdrawal and a loan. If you take a loan, there will be no tax withholding or early withdrawal penalty unless you fail to repay it on time. You can learn more about loans here:

You can learn more about financial hardship withdrawals here:

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 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).

You may waive tax withholding from your financial hardship withdrawal, but the taxability of the distribution will be determined when you file your tax return for the year that includes the distribution.

I recommend that your next step should be to find and consult a CPA before you take any further action.


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 and view his blog at

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