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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The amount that can be withdrawn from the employee's account will be limited to the employee's financial need.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, 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.