“Thinking you can take distributions from your TSP any time you want”
Your TSP is yours so you can withdraw funds whenever you want – right? WRONG.
The TSP is very restrictive about taking distributions. While you are still working, TSP largely follows the IRS rules for all retirement plans, but once you are retired, the restrictions that TSP places on your access to your money is unique to the TSP and frustratingly at the discretion of TSP policymakers.
While you are still working, you cannot take distributions at all unless you are past age 59 ½ (we’ll talk later in this series of articles about other ways, besides distributions, to access your TSP while you are still working). Once you reach 59 ½, you can take a one-time, in-service distribution. You can spend the distribution you take, or you can roll it over to an IRA account, but you can only take one such distribution while you are still working. Not all employers offer any type of in-service distribution option so this aspect of TSP distributions is pretty good relative to other employers.
Once you retire, TSP gets really oppressive in its rules about distributions. If you have not taken an in-service distribution while you were working, you can take a one-time “lump sum” distribution for any part, or all, of your TSP balance. Once you have taken this one-time “lump sum” distribution, you can only take distributions on a regular, systematic basis, and your distribution can only be adjusted once per year.
While there are a lot of great things about the TSP – its distributions policies are not on the list. Many people roll their TSP over into an IRA to gain much greater flexibility for their distributions while maintaining the same tax deferral that they had with the TSP.
Hardship withdrawals Vs. Loans
Regardless of how you feel about loans from the TSP, you are better off taking a loan than you are taking a hardship withdrawal. A hardship withdrawal is a permanent withdrawal from your TSP which cannot be repaid or put back into the account in any way – it permanently reduces your TSP balance. A loan, on the other hand, can be repaid, which makes it a temporary reduction in your TSP account. Unfortunately, I regularly see people take hardship withdrawals when they could have taken a loan.
If you ever consider tapping your TSP for current needs, focus on a loan rather than a hardship withdrawal. Give yourself the opportunity to put the money back into your TSP account in the form of payroll deduction loan payments.
And, if you ever go this route, take advantage of the fact that you’ve learned to live on less while you were making the loan repayments, and when you finish repaying your loan, increase your TSP contributions by the amount of the loan repayments you’ve been making – rather than just adding the loan payment amount back into your lifestyle. This will build your TSP faster while maintaining the same cash flow you had while repaying your TSP loan.