There comes a time when we’re all faced with the temptation of withdrawing money from the TSP before reaching retirement age. Be it life’s unexpected expenses, or desires, there always seems to be something that comes up to test our dedication to those coveted retirement funds. Seeing as how the bulk of assets tend to be tied up in a house or a retirement account, it’s a logical place to turn in search for money. The unfortunate twist is that these two assets are also a couple of the most inaccessible. Taking an In-Service withdrawal, a withdrawal made from the TSP while still actively employed by the government, is understandably tempting, but it should be approached with caution. The TSP is a retirement account, and is therefore designed with barriers in place to discourage such withdrawals before reaching retirement. After all, draining the resources needed to fund retirement does in fact come with varying results. Nevertheless, your TSP is still your money. It can be tapped for its value at any time, but understand that it may not be as pain free as selling off some stocks or visiting an ATM.

Two Types of In-Service Withdrawals

1. Financial Hardship: If a “genuine financial need” exists, a financial hardship withdrawal is permitted. For a genuine financial need to be established, one or more of the following four conditions must be met:

   Negative Monthly Cash Flow: Negative monthly cash flow is what we aim to avoid at all costs in our personal finances—spending more than is being earned. This can be determined by tracking expenses on a monthly basis and comparing it to your income for the month. If you need assistance in doing so, the TSP provides a worksheet on their website that provides guidance.
   Eligible Medical Expenses: Generally, the medical expenses that the IRS considers eligible for deduction on your tax return are considered eligible for a financial hardship withdrawal. The IRS describes medical expenses in publication 502 as, “the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.” Expenses can be incurred by you, a spouse or dependents, and must not have been paid yet.
   Personal Casualty Loss: Casualty losses are pretty much a fancier way of saying damage, destruction or theft to personal property. Typically, these losses are the result of events such as natural disasters, vandalism or accidents wherein your actions weren’t negligent.
   Legal Expenses: The TSP limits the definition of legal expenses to those involving unpaid attorney’s fees and court costs that are in relation to a divorce or separation from a spouse. Alimony and child support are not eligible legal expenses, but can be included in the calculation of negative monthly cash flow.

2. Age-Based: If you are at least 59 ½ years old and still employed by the government, you are permitted a one-time withdrawal from the TSP. This is referred to as an age-based in-service withdrawal. This withdrawal is treated essentially the same as making an eligible withdrawal in retirement. There will not be a penalty, and the withdrawal will be taxable unless eligibly rolled over into an IRA or other employer plan. The biggest caveat with an age-based withdrawal is that once completed, the option to perform the partial withdrawal upon separating from the government is forfeited.

Consequences of In-Service Withdrawals

Removing funds from an employer sponsored retirement plan such as the TSP rarely comes without some sort of adverse effect. Age-based withdrawals function like an eligible retirement withdrawal though, so there aren’t many negative consequences with those. As with any TSP withdrawal that isn’t an eligible transfer, applicable taxes must be paid on an age-based withdrawal, but there are no extraneous penalties. Additionally, both types of in-service withdrawals remove the option for a partial withdrawal upon separation from service at a later date. Financial hardship withdrawals on the other hand, come with their own set of unfavorable repercussions:

• You may have to pay the 10% early withdrawal penalty. Losing an automatic 10% of your withdrawal is never ideal.
• You won’t be able to make contributions or receive matching contributions for 6 months, but 1% agency contributions will still be made. Contributions to your TSP will essentially stall for half of a year. This could lead to lower contributions for the year, and if markets are doing well, missed growth of the funds that would have been otherwise invested.
• The withdrawal amount is permanently removed from the TSP. Similar to the above situation, when funds are removed from an investment account, they can no longer work and grow for you. If the markets happen to be in an upswing when the funds are removed, the gains that could have been had will be forever gone.

As long as the TSP remains one of our largest personal assets, in-service withdrawals will always be a temptation facing federal employees. To avoid potentially crippling one of the most important three legs of your FERS retirement, it’s usually best to find alternatives. Keeping sufficient cash on hand whenever possible is always a great buffer in dealing with the unexpectedness of life. However, if no other viable options exist and the TSP must be tapped, taking a TSP loan is almost always more advantageous than taking an in-service withdrawal.