JOINT BASE SAN ANTONIO, Texas -- During the ongoing COVID-19 pandemic, many people may be experiencing financial burdens they had not planned for. For participants in the federal Thrift Savings Plan, there may be an early withdrawal or loan option they can utilize to help ease their financial situation and the stress that comes with it.
The administrators of the Thrift Savings Plan have developed a coronavirus-related distribution option for qualified participants.
“The distribution option, which the Internal Revenue Service defines as a withdrawal, can be made from an eligible retirement plan to a qualified individual between Jan. 1 and Dec. 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs,” said Melissa Schmidt, a financial consultant at the Military and Family Readiness Center, Joint Base San Antonio-Lackland.
To qualify for the distribution, an eligible participant must meet at least one of the following requirements:
- You have been diagnosed with the virus SARS–CoV–2 or with coronavirus disease 2019, also known as COVID–19, by a test approved by the Centers for Disease Control and Prevention.
- Your spouse or dependent, as defined in section 152 of the Internal Revenue Code of 1986, has been diagnosed with such virus or disease by such a test.
- You are experiencing adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease; being unable to work due to lack of child care due to such virus or disease; due to the closing or reducing hours of a business owned or operated by the individual due to such virus or disease; or other factors as determined by the Secretary of the Treasury, or the Secretary's delegate.
Schmidt encourages TSP participants to carefully consider whether or not to make a withdrawal from their TSP and suggests doing plenty of research to determine the future implications a distribution may cause.
“A TSP distribution may be an option, but once you withdraw from your account, you will be reducing the amount of funds you are currently investing into your retirement,” Schmidt said.
There are additional implications to consider as well.
“Usually, when a person is debating on whether to withdraw funds from their TSP, there are three major concerns,” Schmidt said. “Penalty, tax, and repayment are all things to consider.”
Penalty
Normally, there is a penalty for withdrawing funds from a TSP account early, unless there are extenuating circumstances.
“This is often a major concern for individuals who are considering a withdrawal from their TSP,” Schmidt said. “If you designate your withdrawal as a coronavirus-related distribution when you file your taxes, the IRS will waive the 10 percent additional tax on early distributions. By having no withdraw penalty, this allows a person to retain all the money they are withdrawing, which does not occur under ordinary circumstances.”
Taxes due
Even though the additional tax, or penalty, is waived, income taxes on distributions may still apply, depending on which type of account from which you withdraw funds.
There are traditional and Roth accounts within TSP, and an important concept to understand at the outset is that, except for withdrawals that you’ve specified as all-traditional or all-Roth, withdrawals are taken proportionally.
“For example, if the Roth balance makes up 30 percent of your total TSP account, every withdrawal you make will be 30 percent Roth. And if that Roth balance contains 40 percent contributions and 60 percent earnings, then 40 percent of the Roth portion of your withdrawal will be treated as contributions and 60 percent will be treated as earnings,” according to TSP.
Whichever account you decide to withdraw funds from, the good news is that the applicable tax payments may be made over time.
“The taxable income from withdrawals made by qualified individuals may be spread ‘ratably’ over a three-year period, starting with the year in which you receive your distribution,” Schmidt said. “For example, if you receive a $9,000 coronavirus-related distribution in 2020, you could report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022. This will help spread your tax bill over three years versus paying it all at once.”
This information is explained fully at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.
Repayment option
If you would like to make a withdrawal from your TSP, but you do not want to pay the applicable taxes, you have the option to repay the funds as if they were a loan.
“If you are a qualified individual, you may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided you complete the repayment within three years after the date you received the distribution,” Schmidt said. “If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct, plan-to-plan transfer, so you would not owe federal income tax on the distribution.”
The repayment plan is not for everyone.
“This option is for someone who knows they will be able to repay the loan within three years,” Schmidt said. “There will be no income tax penalty if you repay within that timeframe. If you do not repay, there could be a substantial penalty.”
“The downside to withdrawing from your TSP is that the money withdrawn is no longer an investment and has now become a debt that must either be repaid or have taxes paid on,” Schmidt said. “This is not free money!”
The availability of coronavirus-related distribution options from TSP is a result of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, which created special rules for most types of TSP withdrawals made by participants affected by COVID-19, Schmidt said. But she encourages participants to do their research and ask questions if they do not fully understand the options and their implications.
“We understand that this is a very serious situation, and if you are contemplating making a TSP withdrawal, please consult with a financial consultant at your Military and Family Readiness Center to discuss how it might affect your future financial goals,” Schmidt said. “We are available to virtually meet with people to review their decision on whether or not to withdraw from their TSP, and we can help them establish a repayment plan if they chose that route.”
To request assistance from a financial consultant at JBSA, TSP participants may call one of the local Military and Family Readiness Centers at JBSA-Lackland, 210-671-3722; JBSA-Fort Sam Houston, 210-221-2705; or JBSA-Randolph, 210-652-5321. If connected to voicemail, please leave a detailed message indicating financial planning assistance is needed.
Additional information may be found at https://www.tsp.gov/whatsnew/Content/coronavirus/index.html#cares-update-loans.