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Federal Employees Benefits Q &A

Do you have questions about your federal employee CSRS or FERS pension/annuity or federal employee retirement planning? Concerns about your Thrift Savings Plan (TSP) account or what about federal employee pay and leave issues?

Ask your question here.

The Q&A forum is moderated by Ed Zurndorfer -- an expert on federal employee benefits -- and a Certified Financial Planner, chartered life underwriter and chartered financial consultant in Maryland.

Zurndorfer is also the author of several federal employee benefits guides published by Federal Employees News Digest.

Your question will be put into a message queue and submitted for review. We cannot guarantee that all questions will be answered, however any answered questions will appear below, and some will also be featured in our daily Federal Daily e-newsletter (Subscribe here). Members of Federal Soup will not be able to submit replies to the questions posted, as we leave the replies for the moderator only.

Please do not submit employee benefits questions to the webmaster or the forum moderator.

Note: FederalSoup.com has attempted to compile information that is as accurate and current as possible for federal employees. Federal policies, laws, regulations, statistics and addresses continually change. Therefore, no warranties are made as to the accuracy or completeness of the information presented in this column. If additional clarification or information is needed, it is suggested that competent and professional assistance be sought. Mr. Zurndorfer does not moderate other forums on FederalSoup and will not reply to general FederalSoup inquiries submitted in this Q&A forum.

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admin  
#1 Posted : Friday, July 13, 2007 10:56:46 AM(UTC)
admin

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Posts: 2

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
admin  
#2 Posted : Friday, July 13, 2007 10:56:46 AM(UTC)
admin

Rank: Administration

Groups: Administrators
Joined: 2/6/2014(UTC)
Posts: 2

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
admin  
#3 Posted : Saturday, July 14, 2007 11:14:45 PM(UTC)
admin

Rank: Administration

Groups: Administrators
Joined: 2/6/2014(UTC)
Posts: 2

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

[This message was edited by FederalSoup Host1 on July 26, 2007 at 04:06 PM.]
XMinus1  
#4 Posted : Saturday, July 21, 2007 4:49:45 AM(UTC)
XMinus1

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"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."

Just to be absolutely clear, should "or older" be added between "age 55" and "in the same calendar year".

Thanks
XMinus1  
#5 Posted : Saturday, July 21, 2007 4:49:45 AM(UTC)
XMinus1

Rank: Newbie

Groups: Registered
Joined: 10/8/2005(UTC)
Posts: 16

"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."

Just to be absolutely clear, should "or older" be added between "age 55" and "in the same calendar year".

Thanks
Eugenie  
#6 Posted : Monday, August 06, 2007 1:09:11 AM(UTC)
Eugenie

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"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."

Just to be absolutely clear, should "or older" be added between "age 55" and "in the same calendar year".

If "or older" is not added, it appears that one must be specifically age 55 to make penalty-free withdrawals.
Eugenie  
#7 Posted : Monday, August 06, 2007 1:09:11 AM(UTC)
Eugenie

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"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."

Just to be absolutely clear, should "or older" be added between "age 55" and "in the same calendar year".

If "or older" is not added, it appears that one must be specifically age 55 to make penalty-free withdrawals.
Federal LEO  
#8 Posted : Friday, August 17, 2007 3:59:21 AM(UTC)
Federal LEO

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From Government Executive Magazine

Feeling Special: Q&ABy Tammy Flanagan National Institute of Transition Planning August 17, 2007

Avoiding the Tax Penalty on Distributions
Q: I am a 23-year veteran of the FBI, and will turn 55 on Dec. 16, 2010. I am interested in working until the calendar year in which I turn 55 (2010) to access my Thrift Savings Plan funds without penalty, and I also want to cash out the maximum annual leave payment.
A: The additional 10 percent tax on TSP distributions generally does not apply if you wait to retire until the year you turn 55. So in your case, if you retire any time in 2010 (even on Jan. 1), you won't need to worry about paying the early withdrawal tax penalty on your TSP distributions. Keep in mind that if you are retiring under FERS, you want to retire on the last day of a month, if possible. If you retire any other day of the month, your salary will stop, but your retirement won't start until the following month. So if you are planning an end-of-the-year retirement so that you can maximize your lump sum annual leave payout, you could retire Dec. 31 following your birthday.
Federal LEO  
#9 Posted : Friday, August 17, 2007 3:59:21 AM(UTC)
Federal LEO

Rank: Rookie

Groups: Registered
Joined: 2/6/2006(UTC)
Posts: 48

From Government Executive Magazine

Feeling Special: Q&ABy Tammy Flanagan National Institute of Transition Planning August 17, 2007

Avoiding the Tax Penalty on Distributions
Q: I am a 23-year veteran of the FBI, and will turn 55 on Dec. 16, 2010. I am interested in working until the calendar year in which I turn 55 (2010) to access my Thrift Savings Plan funds without penalty, and I also want to cash out the maximum annual leave payment.
A: The additional 10 percent tax on TSP distributions generally does not apply if you wait to retire until the year you turn 55. So in your case, if you retire any time in 2010 (even on Jan. 1), you won't need to worry about paying the early withdrawal tax penalty on your TSP distributions. Keep in mind that if you are retiring under FERS, you want to retire on the last day of a month, if possible. If you retire any other day of the month, your salary will stop, but your retirement won't start until the following month. So if you are planning an end-of-the-year retirement so that you can maximize your lump sum annual leave payout, you could retire Dec. 31 following your birthday.
daves  
#10 Posted : Monday, October 15, 2007 12:00:18 AM(UTC)
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The Pension Protection Act of 2006 changed the rules for those retired under the FF/LE. The age is now 50, not 55.
daves  
#11 Posted : Monday, October 15, 2007 12:00:18 AM(UTC)
daves

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The Pension Protection Act of 2006 changed the rules for those retired under the FF/LE. The age is now 50, not 55.
Gupdated  
#12 Posted : Monday, October 22, 2007 10:34:18 PM(UTC)
Gupdated

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That only applies to local law enforcement defined benefit plans it does not apply to the TSP. Hopefully FED LEOS and FFs can lobby to get this to apply to them and the TSP.
Gupdated  
#13 Posted : Monday, October 22, 2007 10:34:18 PM(UTC)
Gupdated

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That only applies to local law enforcement defined benefit plans it does not apply to the TSP. Hopefully FED LEOS and FFs can lobby to get this to apply to them and the TSP.
XGman  
#14 Posted : Wednesday, October 24, 2007 9:42:12 PM(UTC)
XGman

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Yes. That's how I read it too...local law enforcement is exempt but feds are not. Amazing. So if I leave next year at 52 I have to wait until 59.5, whereas if I work 3 more years until the year in which I turn 55 I can draw out whenever. I don't know if I can do 3 more years. Maybe I will have to remove the "x" from my screen name.
XGman  
#15 Posted : Wednesday, October 24, 2007 9:42:12 PM(UTC)
XGman

Rank: Newbie

Groups: Registered
Joined: 10/23/2007(UTC)
Posts: 5

Yes. That's how I read it too...local law enforcement is exempt but feds are not. Amazing. So if I leave next year at 52 I have to wait until 59.5, whereas if I work 3 more years until the year in which I turn 55 I can draw out whenever. I don't know if I can do 3 more years. Maybe I will have to remove the "x" from my screen name.
Gupdated  
#16 Posted : Thursday, October 25, 2007 10:26:50 PM(UTC)
Gupdated

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I know some organizations are trying to lobby to change this. Hopefully FLEOA and some other people will get on the band wagon and get this changed soon. Call or write your congress person. I think the FOP helped get this changed for local LE, maybe the FOP will help with Federal LEOs also.
Gupdated  
#17 Posted : Thursday, October 25, 2007 10:26:50 PM(UTC)
Gupdated

Rank: Rookie

Groups: Registered
Joined: 11/2/2009(UTC)
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I know some organizations are trying to lobby to change this. Hopefully FLEOA and some other people will get on the band wagon and get this changed soon. Call or write your congress person. I think the FOP helped get this changed for local LE, maybe the FOP will help with Federal LEOs also.
daves  
#18 Posted : Saturday, November 03, 2007 1:45:34 AM(UTC)
daves

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Posts: 331

The text of the PPA 2006 refers to state or municipal governments. OPM has ruled federal FF/LE retirees meet the criteria also.

The IRS states on their website the TSP is a qualified retirement plan, same as a 401k, 457, or 403b plan.

I am going to take their word on it.
daves  
#19 Posted : Saturday, November 03, 2007 1:45:34 AM(UTC)
daves

Rank: Senior Member

Groups: Registered
Joined: 3/26/2002(UTC)
Posts: 331

The text of the PPA 2006 refers to state or municipal governments. OPM has ruled federal FF/LE retirees meet the criteria also.

The IRS states on their website the TSP is a qualified retirement plan, same as a 401k, 457, or 403b plan.

I am going to take their word on it.
Gupdated  
#20 Posted : Monday, November 05, 2007 12:08:20 AM(UTC)
Gupdated

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I believe OPM ruled that Fed LEOs were eligible for the tax free health premiums that were written into law but not the retirement benefits.
I went to a retirement seminar a few months ago and they said TSP is not considered an eligible retirement plan.
Make sure your positive or you'll get hit with that 10% penalty.
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