robo
03-16-2008, 12:13 PM
It looks like 55 if your are retired. Comments on this are appreciated since my plan is to retire at age 56.
Tax details on TSP withdrawals at age 55 July 13, 2007, 10:01 PM
A few weeks ago, a FederalSoup “Questions and Answers” forum reader asked a question concerning how old a TSP participant who retires or separates from federal service has to be in order to make penalty-free (no 10 percent penalty) TSP withdrawals. This question is very relevant and timely given that many federal employees retire before age 59.5. Some employees (such as air traffic controllers, firefighters and law enforcement officials) can retire at any age with at least 25 years of such service (some have retired as early as age 43). There are also other federal employees who are being offered early retirement (before they are age 55) as a result of agency budget problems or the BRAC.
My initial answer to this question (after reading the TSP Tax Notice “Important Tax Information About Payments From Your TSP Account “) was that the TSP participant has to be age 55 at the time of retirement or separation in order to avoid the 10 percent penalty when he or she begins to make TSP withdrawals. Otherwise, the participant has to wait to age 59.5 to avoid the penalty. The notice specifically says that to avoid the penalty, the TSP withdrawals must be “paid after you separate from service during or after the year you reach age 55”.
Several FederalSoup readers wrote in and stated that my answer was wrong. Some readers called the IRS to get an answer; another reader contacted the TSP to get an answer to this question. Among these readers, the common answer to the question was as long as the TSP participant was 55 or older in the “year” he or she retired or separated from federal service, there would be no early withdrawal penalty for TSP withdrawals made after the participant’s 55th birthday. The confusion here is with respect to what is meant by “separation from service during or after the year you reach age 55”.
I contacted the TSP myself to get a definitive answer. The answer is that as long as the TSP participant who retires or separates from service achieves age 55 in the same calendar year of retirement or separation, he or she can make penalty-free withdrawals any time after his or her 55th birthday.
Readers should please note that this rule does not apply to qualified retirement plans (such as 401(k) plans). With 401(k) plans, a participant has to be age 55 or older at the time of retirement or separation in order to avoid the 10 percent penalty if he or she decides to make 401(k) plan withdrawals. However, the TSP is not a qualified retirement plan. While the TSP has adopted some of the rules associated with qualified retirement plans, the “age 55” rule as stated here is not of them.
The following two examples will illustrate the “age 55 “rule as adopted by the TSP.
Example 1. Joe, age 54, retired from federal service on June 30, 2007 after a 20 year career as a law enforcement official. Joe will become age 55 on November 15, 2007. Starting November 15, 2007, Joe can make penalty-free withdrawals from his TSP account.
Example 2. Sarah is age 54 and has worked for the federal government for 31 years. Sarah’s agency is going through a restructuring and Sarah is offered early retirement. Sarah must decide by September 30, 2007 if she wants to accept early retirement. Sarah could retire under the normal retirement rules on March 1, 2008 when she becomes age 55. But she decides to retire on July 31, 2007. As a result of her turning age 55 in the next calendar year, Sarah will have to wait until age 59.5 to make penalty-free TSP withdrawals.
Readers should also note that TSP participants who are not eligible for regular penalty-free TSP withdrawals because they retired or separated from federal service before the calendar year they became age 55 can make penalty-free withdrawals through either: (1) A TSP annuity (payments will continue through the life of the TSP annuitant); and/or (2) monthly payments computed based on the participant’s life expectancy (which must continue for the longer of 5 years or when the participant becomes age 59.5).
I hope this clears up any confusion and misunderstanding concerning this issue. I apologize to any of our readers that I may have misled and given erroneous information to. I look forward to answering your future questions in the FederalSoup “Questions and Answers” forum.
Ed Zurndorfer, EA, CFP, CLU, ChFC
Tax details on TSP withdrawals at age 55 July 13, 2007, 10:01 PM
A few weeks ago, a FederalSoup “Questions and Answers” forum reader asked a question concerning how old a TSP participant who retires or separates from federal service has to be in order to make penalty-free (no 10 percent penalty) TSP withdrawals. This question is very relevant and timely given that many federal employees retire before age 59.5. Some employees (such as air traffic controllers, firefighters and law enforcement officials) can retire at any age with at least 25 years of such service (some have retired as early as age 43). There are also other federal employees who are being offered early retirement (before they are age 55) as a result of agency budget problems or the BRAC.
My initial answer to this question (after reading the TSP Tax Notice “Important Tax Information About Payments From Your TSP Account “) was that the TSP participant has to be age 55 at the time of retirement or separation in order to avoid the 10 percent penalty when he or she begins to make TSP withdrawals. Otherwise, the participant has to wait to age 59.5 to avoid the penalty. The notice specifically says that to avoid the penalty, the TSP withdrawals must be “paid after you separate from service during or after the year you reach age 55”.
Several FederalSoup readers wrote in and stated that my answer was wrong. Some readers called the IRS to get an answer; another reader contacted the TSP to get an answer to this question. Among these readers, the common answer to the question was as long as the TSP participant was 55 or older in the “year” he or she retired or separated from federal service, there would be no early withdrawal penalty for TSP withdrawals made after the participant’s 55th birthday. The confusion here is with respect to what is meant by “separation from service during or after the year you reach age 55”.
I contacted the TSP myself to get a definitive answer. The answer is that as long as the TSP participant who retires or separates from service achieves age 55 in the same calendar year of retirement or separation, he or she can make penalty-free withdrawals any time after his or her 55th birthday.
Readers should please note that this rule does not apply to qualified retirement plans (such as 401(k) plans). With 401(k) plans, a participant has to be age 55 or older at the time of retirement or separation in order to avoid the 10 percent penalty if he or she decides to make 401(k) plan withdrawals. However, the TSP is not a qualified retirement plan. While the TSP has adopted some of the rules associated with qualified retirement plans, the “age 55” rule as stated here is not of them.
The following two examples will illustrate the “age 55 “rule as adopted by the TSP.
Example 1. Joe, age 54, retired from federal service on June 30, 2007 after a 20 year career as a law enforcement official. Joe will become age 55 on November 15, 2007. Starting November 15, 2007, Joe can make penalty-free withdrawals from his TSP account.
Example 2. Sarah is age 54 and has worked for the federal government for 31 years. Sarah’s agency is going through a restructuring and Sarah is offered early retirement. Sarah must decide by September 30, 2007 if she wants to accept early retirement. Sarah could retire under the normal retirement rules on March 1, 2008 when she becomes age 55. But she decides to retire on July 31, 2007. As a result of her turning age 55 in the next calendar year, Sarah will have to wait until age 59.5 to make penalty-free TSP withdrawals.
Readers should also note that TSP participants who are not eligible for regular penalty-free TSP withdrawals because they retired or separated from federal service before the calendar year they became age 55 can make penalty-free withdrawals through either: (1) A TSP annuity (payments will continue through the life of the TSP annuitant); and/or (2) monthly payments computed based on the participant’s life expectancy (which must continue for the longer of 5 years or when the participant becomes age 59.5).
I hope this clears up any confusion and misunderstanding concerning this issue. I apologize to any of our readers that I may have misled and given erroneous information to. I look forward to answering your future questions in the FederalSoup “Questions and Answers” forum.
Ed Zurndorfer, EA, CFP, CLU, ChFC