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The amount that can be withdrawn from the employee's account will be limited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 href="http://www.tsp.gov">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.