If you work for Uncle Sam, you won't have a 401(k) to save for retirement. Instead, as a government employee, you get to use a thrift savings plan, which offers both a tax-deferred traditional TSP option and an after-tax Roth TSP option for your retirement savings. You don't have to pay the early withdrawal penalty if you take a qualified TSP withdrawal or meet the requirements for an exception to the penalty.
Qualified withdrawals are never hit with the early withdrawal penalty, though regular income taxes still apply to distributions from traditional TSPs. You can take a qualified withdrawal from your traditional TSP any time after you've turned 59 1/2 years old. Roth TSPs require the account be at least five years old and you be 59 1/2 or permanently disabled. If you're 59 1/2 but the account hasn't been open for five years, you won't pay the early withdrawal penalty, but any earnings that you take out count as taxable income.
Several exceptions to the penalty exist, but none of them offer a get-out-of-jail-free card for "financial hardship." None of your distribution is hit with the penalty if you have left work after turning 55, if you are receiving payments as an annuity over the rest of your life or because you suffered a permanent disability. You can also escape the penalty money taken out to satisfy a divorce order or medical expenses that exceed the medical expenses deduction threshold, which is 10 percent as of 2013.
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If you take an early withdrawal and then realize that you don't need the money -- at least not badly enough to pay the early withdrawal penalty -- you may be able to roll it over if you redeposit it in another qualified retirement account within 60 days. Qualified retirement accounts include IRAs, 401(k)s and 403(b)s. Distributions made after you leave service are generally eligible for rollover, but financial hardship distributions are not. Assuming you successfully complete the rollover, the distribution won't be penalized.
If you're not able to take a qualified distribution, but still need to access the money in your TSP, you may be able to take a loan. Most loans have a term of one to five years, but the term can be extended to 15 years if you use it to buy your home. The interest on the loan goes back into your TSP and, as long as you repay the loan as scheduled, you won't have to pay any taxes or early withdrawal penalties. But, if you default, the remaining loan balance is treated just like an early withdrawal.
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