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Articles | How Early Federal Retirees Can Make Penalty-Free TSP Withdrawals
How "Early" Federal Retirees Can Make Penalty-Free TSP Withdrawals
Federal employees who retire from federal service before the year they become
age 55 can make penalty-free withdrawals from their Thrift Savings Plan (TSP)
accounts using one of two methods.
Those employees who may be eligible to retire before the year they become age
55 include: (1) air traffic controllers; (2) law enforcement officers; and (3)
firefighters all of whom can retire at any age if they have 25 or more years of
such service or at age 50 if they have at least 20 years of such service. There
are employees in other job classifications with at least 25 years of federal
service who can retire at any age if their agencies have been given permission
to offer early retirement to eligible employees. Early retirement opportunities
include Voluntary Separation Incentive Payment (VSIP) and Voluntary Early
Retirement Authority (VERA).
Many employees who retire before age 55 may need to make TSP withdrawals in
order to meet their income needs. The question frequently arises as to how these
retirees can make withdrawals from their TSP accounts and not be subject to the
IRS' 10 percent early withdrawal penalty. The answer is through one of two
- by purchasing a TSP annuity; or
- through payments based on life expectancy [Internal Revenue Code (IRC)
When a TSP participant retires from federal service, the participant can at
any time purchase with all or part of his or her TSP account a fixed annuity
offered by Metropolitan Life Insurance Company. Form TSP-70 is used to purchase
a TSP annuity. With a TSP annuity, the TSP account owner is paid a monthly check
for the life of the owner. The older the TSP account owner at the time of the
annuity purchase, the higher the monthly payment.
There are different types of annuities and additional features from which to
choose. Only TSP accounts of more than $3,500 are eligible for a TSP annuity.
All TSP annuity payments are subject to federal, and in many states, state
A word of caution for potential TSP annuity purchasers: if the lifetime
annuity - which pays the maximum lifetime income - is chosen, then any funds
remaining in the TSP annuity account at the time of the TSP annuity owner's
death will be kept by Metropolitan Life Insurance Company.
The second method of making penalty-free pre-age 55 withdrawals from the TSP
is through monthly payments based on life expectancy, as described in IRC
Section 72(t). Form TSP-70 is used to request monthly payments based on life
expectancy. Under this method, the TSP owner's initial payment will be
based on the owner's account balance shortly before the time of the first
payment and the owner's life expectancy at the time of the first payment. The
TSP will recalculate the amount of the TSP owner's monthly payments every year,
based on the account balance at the end of the current year and the TSP owner's
recomputed life expectancy during the next calendar year.
The following are the rules for the life expectancy withdrawal method: (1)
there are no age restrictions - a TSP owner could be as young as age 18 and as
old as 89 and start receiving payments based on life expectancy; (2) the
payments will be recalculated each year based on the participant's account
balance as of the previous December 31 and the participant's life expectancy (or
over a joint life expectancy if there is a beneficiary); (3) payments must
continue for the later of five years or age 59.5. If the participant
discontinues payments before the payments are suppose to stop, then an early
distribution tax penalty (10 percent) and interest charges will apply
retroactively to all payments previously received.
The following is a step-by-step description of the life expectancy payment
Step 1. Determine the life expectancy factor.
Those TSP participants who use single life expectancy will look up their ages
each year from the table below. If a participant has a beneficiary; the joint
life expectancy may be used to calculate the appropriate factor. The following
link will bring up the table of joint life expectancy factors found in IRS
Publication 590 (page 91): http://www.irs.gov/pub/irs-pdf/p590.pdf#page=91.
Step 2. Determine the account balance.
TSP participants must use their TSP account balance that is available. The
IRS guidelines require that the account balance that is used to calculate the
first year payments must be determined in a reasonable manner. According to the
IRS, it is reasonable to use the account balance for any date "within a
reasonable period before the first distribution". For example, if a participant
wants to make a first distribution on Nov. 15, 2010, then the IRS guidelines
state it would be reasonable to choose an account balance as of any day between
Dec. 31, 2009 and Oct. 31, 2010.
Step 3. Divide the account balance by the factor determined in Step
The result is the amount that must be distributed during the first year. For
the second year, the TSP participant will follow a similar procedure, using the
account balance as of December 31 of the first distribution year.
The following example illustrates:
Jessica, age 46, retires from federal service after 25 years as an air
traffic controller (ATC). When she retired on Oct. 31, 2010, the value of
Jessica's TSP account was $387,450.00. As of Dec. 31, 2009, the fair market
value of Jessica's TSP account was $310,200. On Nov. 10, 2010, Jessica elects to
start receiving TSP payments based on the life expectancy method. Her monthly
payments will begin on Jan. 1, 2011. The following is a summary of what Jessica
Year 1 - 12 payments starting Jan. 1, 2011 and ending Dec. 31,
Jessica uses a single life expectancy factor from the life expectancy
table above. Jessica will be 47 during the year she starts the monthly
distribution from her TSP account. The single life expectancy for a 47 year old
is 37.0 years.
Jessica's account balance as of Dec. 31, 2009 was $310,200.
Starting Jan. 1, 2011 and ending Dec. 31, 2011, Jessica will receive a
total of $310,200/37.0 or $8,383.78, or $698.65 per month for 12
Year 2 - Assume that Jessica's TSP account balance as of Dec. 31, 2010
will be $391,400. She follows these steps for computing her monthly payments
starting Jan. 1, 2012 and ending Dec. 31, 2012:
Jessica becomes age 48 during 2012. Her life expectancy factor will be
36.0 as shown in the life expectancy table.
Her TSP account balance as of Dec. 31, 2010 is $391,400. Jessica's total
distribution between Jan. 1, 2012 and Dec. 31, 2012 is $391,400/36.0 or
$10,872.22 or $906.02 per month.
Subsequent annual/monthly payments will be computed in the same manner.
Jessica must continue these payments until she is at least age 59.5.
Additional guidance on the method "payments based on life expectancy":
• Payments must continue for the later of five years or age 59.5. If payments
stop for any reason, then all previously received payments will be subject
retroactively to a 10 percent early withdrawal penalty and interest charges
imposed by the IRS.
• Monthly payments made to the TSP account owner are subject to automatic 20
percent federal income tax withholding. TSP participants are responsible for
paying any state income taxes due if they reside in a state that taxes TSP
• Each January following the year that the TSP account owner receives TSP
monthly payments, the TSP will send the account owner Form 1099-R, Distribution
from Pensions, Annuities and Retirement Plans. The 1099-R will show the gross
and taxable distribution for the year as well as the amount of federal income
taxes withheld. If the TSP account owner is younger than age 59.5, the 1099-R
will be coded so that the taxable distribution will not be subject to an early
withdrawal penalty. The taxable distribution will be reported as income on the
TSP account owner's tax return as pension income.
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