TSP Financial Hardship Withdrawals: The "Real" Cost
Edward A. Zurndorfer, Certified Financial Planner
According to a recent report in USA Today, a record number of U.S.
workers made hardship withdrawals from their retirement accounts during the
second quarter of 2010.
This information was furnished by Fidelity Investment Company which
administers a number of employer-sponsored retirement plans in the U.S. Also
according to Fidelity Investment Company, the number of workers taking loans
from their retirement accounts reached a one year high. Retirement accounts
include 401(k) and 403(b) qualified retirement plans.
Federal employees are also making in-service financial hardship withdrawals
from their Thrift Savings Plan (TSP) at a greater pace during 2010 compared to
what they have done in previous years. This is not surprising, given the record
amount of credit card debt and home foreclosures occurring throughout the U.S.
To discourage federal employees from raiding their TSP accounts via a financial
hardship withdrawal, this column discusses the "real" cost and consequences of a
TSP financial hardship withdrawal.
In order to be eligible for a TSP financial hardship withdrawal, an employee
must justify a financial need. The financial need must be a result from at least
one of the following four personal events or happenings:
• Recurring negative monthly cash flow;
• Medical expenses, including household improvement needed for medical care,
that the employee has not yet paid and that are not covered by insurance;
• Personal casualty loss(es) that the employee has not yet paid and
that are not covered by insurance; and
• Legal expenses such as attorneys' fees and court costs that the employee
has not yet paid and that are being accrued as a result of separation or
divorce from the employee's spouse.
The amount that can be withdrawn from the employee's account will be limited
to the employee's financial need.
Although the employee is not required to submit documentation to the TSP to
substantiate his or her financial hardship, the employee should retain
documentation for future reference. This is because the employee must certify on
Form TSP-76, Financial Hardship In-ServiceWithdrawal Request, that the employee
has a genuine financial hardship and the reason for the financial hardship
withdrawal.
In addition to the eligibility rules, the following rules apply:
• An employee cannot withdraw less than $1,000;
• An employee may only withdraw his or her contributions (via payroll
deduction) and any earnings on those contributions that have accrued; matching
contributions in the case of FERS-covered employees may not be withdrawn;
• If an employee has two separate TSP accounts - a civilian TSP account and a
uniformed services TSP account - then the employee can make a financial hardship
withdrawal only from the account associated with the employee's active
employment at the time of withdrawal. But if both accounts are associated with
active employment, then the employee can make a financial hardship withdrawal
from each account; and
• An employee is limited to one financial hardship withdrawal in a six month
period.
Upon completing Form TSP-76, an employee will be required to certify under
penalty of perjury that the employee has a genuine hardship.
There are consequences for making a financial hardship
withdrawal.
First, a financial hardship withdrawal is subject to federal income tax and
for employees who live in states with income taxes, state income tax. Employees
who are younger than age 59.5 may also have to pay a 10 percent early withdrawal
penalty tax.
Hardship withdrawals made before an employee becomes age 59.5 are exempt from
the 10 percent penalty tax if the withdrawals are attributed to an employee's
being disabled. An individual is considered disabled if he or she can furnish
proof that he or she cannot do any substantial gainful activity because of his
or her mental or physical condition. A physician must determine that his or her
physical condition can be expected to result in death or to be of long,
continued and indefinite duration. Examples of conditions that could result in
an individual being unable to perform substantial gainful activity include the
loss of use of two limbs, total deafness that is uncorrectable by a hearing aid. A second consequence of an employee's making a TSP financial hardship
withdrawal is that the employee cannot contribute to the TSP for the six month
period following the receipt of the financial hardship withdrawal. FERS-covered
employees will also not receive any agency matching contributions during this
six month period. But agency automatic one percent of an employee's gross pay
contributions will continue during the six month period.
At the end of the six month period, employee contributions will not resume
automatically. The employee must make a new contribution election via Form TSP-1
or through the employee's agency electronic system if the agency uses such a
system. Employee contributions will be allocated to the TSP funds and/or
Life Cycle (L) funds according to the employee's most recent contribution
allocation on file, unless the employee makes a new fund allocation request.
An application for a TSP financial hardship withdrawal may be made in one of
two ways, namely:
(1) Online by logging into one's TSP account. An online request can be
started and may be completed depending on whether a spouse's signed consent is
needed and whether the money is to be received by check or by direct deposit in
a bank account; or
(2) through a paper request via Form TSP-76. This form is available for
download on the TSP website at http://www.tsp.gov, by calling the ThriftLine
at 1-877-968-3778, or from the employee's agency. Married FERS employees
who are requesting a financial hardship withdrawal must receive their spouse's
written and notarized consent. The TSP will notify the spouse of a married CSRS
employee who is requesting a financial hardship withdrawal.
Only one request for an in-service financial hardship withdrawal or a TSP
loan is permitted at a time. If an employee has a pending application for
another in-service hardship withdrawal or for a TSP loan at the time another
in-service withdrawal request is submitted, then the latest hardship withdrawal
request will not be accepted.
The financial hardship withdrawal check will be mailed to the address in the
requesting employee's TSP account record. But those employees who make a paper
withdrawal request may request to have their withdrawal payment electronically
deposited into the employee's checking or savings account.
For security reasons an online financial hardship withdrawal request cannot
be electronically deposited. If may take several weeks from the time the TSP
receives a properly completed form until it sends the funds.
A key concern is that in-service financial hardship withdrawals are
withdrawals and not loans. As such, financial hardship withdrawals can have a
significant impact on a federal employee's overall retirement savings. In
addition, not being able to contribute to the TSP and in the case of
FERS-covered employees missing out on matching contributions for the six month
period following the receipt of a hardship withdrawal can also have a
significant impact on an employee's retirement savings.
Federal employees are therefore encouraged to avoid financial hardship
withdrawals from their TSP accounts. While they should also try to avoid TSP
loans, at least with a TSP loan an employee pays back the TSP loan. In addition,
with a TSP loan the employee can continue to contribute to his or her TSP
account.
Posted on 08/30/2010
About the Author
Edward A. Zurndorfer is a Certified Financial Planner, Registered Health
Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in
Silver Spring, MD and the owner of EZ Accounting and Financial Services, an
accounting, tax preparation and financial planning firm also located in Silver
Spring, MD. He is an instructor at federal employee retirement
seminars throughout the country for the National Institute of Transition
Planning, Inc. and writes numerous columns and books on federal employee
benefits.
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