A thrift savings plan, or TSP, can be a valuable retirement account for federal employees because of its tax-favored status. This advantage is given in exchange for less access to your money before retirement. Loans and hardship withdrawals are two methods available to access your TSP before retirement. If you have taken out a TSP loan, you are still allowed to take out a hardship withdrawal, but you have to wait for the loan request to be completely processed first.
Thrift Savings Plan
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The Thrift Savings Plan is the equivalent of a 401k for federal employees. It gives a number of tax advantages to encourage retirement savings. You are allowed to deduct your annual contribution to a TSP from your income taxes in the year of the contribution. Investments in your TSP grow tax free until they are withdrawn in retirement. The federal government also gives a matching contribution each time you put money into your TSP. Early access to your funds is limited as you must follow the rules regarding loans and financial hardship withdrawals.
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Loans
One way to access your TSP balance early is through the use of loans. You are allowed to take general purpose and residential loans from your TSP. General loans can be used for any purpose and must be repaid in one to five years. Residential loans must be used to purchase or repair a primary residence and must be repaid in one to 15 years. You need at least $1,000 in your account to take a loan. You are allowed to borrow between $1,000 and $50,000 from your TSP.
Hardship Withdrawal
Another way to access your TSP account is through a hardship withdrawal. To qualify for a hardship withdrawal, you must have a recurring negative monthly cash flow, medical expenses, property casualty losses that are not covered by insurance or legal expenses resulting from a divorce. You cannot withdraw less than $1,000 for a hardship withdrawal. You must pay income tax on the entire withdrawal. Withdrawals for disability and for medical expenses greater than 7.5 percent of your adjusted income are received penalty free. Other withdrawals will be charged a 10 percent early withdrawal penalty.
Applying for Both
If you have taken out a TSP loan, you are still eligible to take a hardship withdrawal against the remaining balance in your account. You cannot take a withdrawal against the current loan, however. You will need to pay your TSP loan back into your account. You are only able to submit one request for a loan or withdrawal at a time. If you apply for a withdrawal before your loan request has been process, the withdrawal request will be denied and you will need to re-apply.