[VIDEO] TSP Financial Hardship Withdrawals
As you are probably aware, there are 2 ways to get money from your tsp while employed. One is an age based in-service withdrawal, where you have the ability to make a withdrawal once you have attained age 59 1/2…and the other is a financial hardship withdrawal. The focus of this video will be on the ins-and-outs of financial hardship withdrawals.
The financial hardship withdrawal option did not undergo any major changes with the rollout of the TSP modernization act – which went into effect September 15th 2019. That being said, the one change they did make was that the TSP will now eliminate the 6-month suspension of TSP contributions for participants who have taken a financial hardship withdrawal. That means taking a financial hardship withdrawal will now have no effect on a participants’ contributions, like it did with the old rule.
So, who qualifies for a financial hardship withdrawal? All current federal civilian employees and members of the uniformed services are able to request a financial hardship in-service withdrawal from their TSP account, and when it comes to taking the withdrawal, participants can choose whether the money comes from their traditional account, their Roth account, or pro-rata from both.
Starting the process is actually pretty simple and needs to be completed on form TSP 76 which can be found at TSP.gov, and once there, participants can use the online tool on the website to initiate the financial hardship withdrawal request. Depending on your particular circumstances, the request may be completed entirely online, and if signatures or additional information are required, the participant will need to print out the form and gather the necessary notarized signatures, and then send them over to TSP.
Unlike taking a loan against your TSP, when you take a financial hardship withdrawal, you don’t have to pay the money back, but your TSP balance drops by the amount of the withdrawal.
With a financial hardship, withdrawal proof is required, so let’s discuss some of the requirements. To qualify for financial hardship withdrawal the participant must have a significant and immediate financial need that necessitates a distribution from his or her TSP account.
The need for a hardship withdrawal must qualify by one or more of these ways: 1 – A recurring negative monthly cash flow situation, 2 – Medical expenses that you have not already paid and are not covered by insurance, 3 – Legal expenses such as attorney’s fees and court costs for separation or divorce, or 4 – Personal casualty losses.
A couple of other things you should know…the participant’s TSP account must have at least $1,000 of their own contributions and earnings and the participant must not have received a financial hardship in-service withdrawal from the same account within the previous 6 months.
Now that we took some time to go over what’s involved with taking a hardship withdrawal, let me take a brief moment and talk about some tax considerations. When taking a hardship withdrawal, the withdrawal is subject to federal income tax and in some cases state income tax, and if you’re younger than 59 1/2 you may have to pay an early tax penalty of 10%. Any tax exempt or Roth contributions included in your withdrawal are not subject to federal income tax. When considering a financial hardship withdrawal, I highly recommend you speak with your tax advisor to better understand the impact these decisions can have on your tax situation.
Okay, here’s the deal…in my opinion, tapping into your TSP retirement funds – or any retirement funds for that matter – and taking money out early for any reason is the last thing you should do, except in the most dire of situations. however, if your financial circumstance calls for it, it’s good no know what you can, and cannot do.
