Would You Take Advantage of a TSP Hardship Withdrawal Option?

Federal Employee Articles

Would You Take Advantage of a TSP Hardship Withdrawal Option?

Posted by Benchmark Financial Group, LLC
2 weeks ago | March 16, 2020

Sometimes life throws us curveballs, and we need access to emergency cash. To this end, the Federal Retirement Thrift Investment Board has proposed a change that would allow greater access to hardship withdrawals from Thrift Savings Plans.

Currently, hardship withdrawals fall under four categories based on the type of hardship faced by a federal employee:

  • Negative monthly cash flow
  • Certain types of medical expenses (for either the employee or his/her dependents)
  • Repairs or replacement of property due to personal casualty losses
  • Attorney fees or court costs related to the employee’s divorce

Under the new proposal, federal employees could also take hardship withdrawals to cover expenses and losses due to natural disasters.

These withdrawals have technically been allowed in the past as well. However, TSP participants relied upon the IRS to make a disaster relief announcement which allowed private sector employees to make hardship withdrawals from equivalent retirement accounts (such as a 401k).

Recently, the IRS announced that they would end the practice of disaster relief announcements, and is now delegating that responsibility to FEMA. In other words, if FEMA declares a natural disaster in the zone of a 401k participant’s primary home, then a hardship withdrawal would be allowed.

The Federal Retirement Thrift Investment Board simply proposes to make the same change, relying upon FEMA to make the determination rather than the IRS.

The difference is slight, but one that TSP participants should follow anyway. Should the change take place, it might impact your ability to take hardship withdrawals.

In the meantime, preparing for an emergency is usually the better way to go. By keeping some cash in a simple savings account, you can prevent the need for TSP hardship withdrawals in the event of an emergency. It’s almost always a good idea to leave your retirement savings in the account, where they can continue to earn compounding interest.

We’re here to answer any questions you might have about your TSP, or financial planning in general. Just give us a call, and we can help you prepare for life’s curveballs.

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