Page 54 - The Informed Fed--Hearn (edited 10.29.20)

Public Safety Employees’ exemption to the Early Withdrawal
Penalty

Public Law 114-26, the Defending Public Safety Employees'
Retirement Act, was signed by the President on June 29, 2015. This bill
amends the Internal Revenue Code to allow specified federal law
enforcement officers, customs and border protection officers, federal
firefighters, and air traffic controllers (“public safety employees”) who
separate from service during or after the year they turn age 50 to make a
withdrawal from the TSP without incurring a 10% early withdrawal
penalty. This change is effective for withdrawals from the TSP paid after
December 31, 2015. Another option is to borrow the money (from
yourself) and repay yourself with interest.
One of the unique features of the TSP plan set up by Congress for
federal employees is that if you retire from federal service prior to age
59½ and have not paid a penalty for a previous withdrawal, you may roll
your TSP funds into a qualified plan without penalty. An additional
problem with the TSP is that the investment options it offers are very
low return or very high risk. The past few years point out the dangers of
tying retirement funds to the market. If you are a federal employee,
you’re well aware of the fact that the vast majority of your coworkers lost
money in their TSP after October 2007. Many lost more money in 2008
than they earned in wages during the same period. Those who didn’t lose
were primarily in the G fund and gained around 3%. Remember, one-
third of that will be taken out in taxes, so the resulting gain will be slightly
less than the cost of living increase over the same period.
The traditional TSP option has a tax liability. Taxes will have to be
paid on all contributions and interest. In the event of the premature
death of the employee, those taxes can be at the highest assessed rate.
The 401k has proven to be a windfall for the government to collect taxes
when an employee dies leaving money in the account. In this case, the

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