Can I Do an Early Withdrawal From a TSA Annuity?

Working for a non-profit gives you the ability to contribute to a tax-sheltered annuity to prepare for retirement. However, financial need forces many to consider using some, if not all, of the TSA well before the retirement age of 59 1/2. Understand the regulations of early withdrawals before you create an unwanted tax liability perpetuating your financial distress.

An early distribution is defined as any money taken out of the TSA before age 59 1/2. The IRS penalizes early distributions 10 percent, on top of adding the distributed amount to your annual gross income. You are allowed to take out anything that is "vested" from the account. Vested money is money that is yours, whether by your own salary reductions or by employer contributions. Not all employer contributions are vested immediately; there may be a five-year waiting period to be 100 percent vested. Taking an early distribution requires only a distribution form from your TSA plan administrator.

There are certain exceptions that allow you to take early distributions without being penalized 10 percent. You can use $10,000 to pay for a first home, whether buying, building or remodeling. Using money for college tuition is another exception. Both of these exceptions are allowed for you, your spouse, child or grandchild. You can also take penalty-free distributions to pay medical expenses that exceed 7.5 percent of your annual income. You may also use your TSA to prevent foreclosure or eviction.

The IRS permits TSAs to allow loan provisions to employees. The plan administrator is not required to offer loans. Ask your TSA administrator if a loan is an option, and what the allowances are. The IRS allows 50 percent of your vested balance, capped at $50,000 in plan loans. The loan does not require a credit check and you pay yourself interest. There is no tax on the money taken out, nor is there a tax deduction for interest paid. The money is repaid within five years by salary reductions.

It may seem like common sense to only take what you need, but when in financial difficulties it can be attractive to take a little extra out to have a cushion. Remember that what you take out is added to your annual income. The result is not just taxes on what you take out; it can increase the tax bracket on all income for the year. You can take taxes out when the distribution is taken, reducing the tax liability when you file your tax return later.