VERA and Accessing your TSP before 59.5:
The general rule for Traditional retirement accounts such as IRAs, 401(k)s, TSP is that they can only be accessed at age 59.5. If you dare access them before 59.5, the IRS slaps you with a 10% early access penalty.
But there are two notable exceptions to the age 59.5 rule, and these two exceptions may be critical for those retiring before age 59.5 with VERA.
Exception #1 – The Age 55 Rule
Although the general rule requires waiting until 59.5, there’s an exception known as the Age 55 Rule which applies specifically to employer-based retirement plans. If you separate from an employer at the age of 55 or above, you can access that employer’s retirement plan at age 55 without the 10% penalty.
The TSP is an employer-based retirement plan, so if you retire with VERA at age 55, you can access your Traditional TSP without the 10% early access penalty.
The Age 55 Rule does not apply to IRAs. So, with IRAs you will still need to wait until 59.5, unless you roll your IRA into your TSP! If you roll your IRA into your TSP, you will be able to access that IRA money along with the TSP!
However, if you separate from Federal service at 55, and roll your TSP into an IRA, you will then need to wait until 59.5 to access that money.
[Believe it or not, there’s an exception within this exception, specifically for public safety employes (LEOs, FFs). Public Safety employees can access their TSP even before age 55, once they’ve retired with regular public safety retirement eligibility (either age 50 with 20 years of service, or any age with 25 years of service.)]
Exception #2 – 72(t)
The 72(t) exception also allows you to withdraw from your retirement accounts before 59½ without the 10% penalty—so long as you commit to a withdrawal plan called Substantially Equal Periodic Payments (SEPPs).
There are different ways to calculate your SEPP, and I’ll illustrate all of them below, but here are some important things to keep in mind:
VERY IMPORTANT TO KEEP IN MIND:
- Once you start SEPPs, you have to keep them going for at least five years or until you turn 59½, whichever is longer.
- If you alter your SEPP schedule (outside of IRS-allowed exceptions), you’ll owe the 10% penalty retroactively—plus interest.
- The SEPPs are taxable.
With that intro, here are the three withdrawal methods you can use to calculate your SEPP
- Required Minimum Distribution (RMD) Method
- Fixed Amortization Method
- Fixed Annuitization Method
How the Math Works
Here are examples of how the 72(t) exception might work in practice, assuming a TSP balance of $500k.
Example 1: Required Minimum Distribution (RMD) Method
The RMD method calculates your annual payment by dividing your TSP balance by your remaining life expectancy (determined by IRS mortality tables). It’s a simple formula:
Annual Payment = Account Balance ÷ Life Expectancy Factor
For example, imagine you’re 50 with a $500,000 IRA. According to the Uniform Lifetime Table, your life expectancy factor at age 50 is be 34.2 years. That gives you: $500,000 ÷ 34.2 ≈ $14,620
Note: each year as your account balance and life expectancy change, your SEPP amount will change.
For example, if by Year 2 your balance grows to $510,000 and your life expectancy factor drops slightly to 33.3 (at age 51), your new payment would be: $510,000 ÷ 33.3 ≈ $15,315
Note: Your SEPP amount may go up or down, depending on the performance of your portfolio.
Example 2: Fixed Amortization Method
You’ve heard of amortization before. With your mortgage. When you pay back your mortgage, you are not just paying back the principle amount that you borrowed, but principle + interest. The lender applies an interest rate, projects it forward over, say, 30 years, and is able to calculate a FIXED PAYMENT which combines principal and interest.
You can use an amortization calculator, or a mortgage calculator for this, but here’s an over-simplified example:
Let’s say you have $500,000 in your TSP, and you are 50 years old, with a 34.2 year life expectancy (as we saw in the RMD method above). Using the Fixed Amortization Method you would project how much a mortgage payment would be if you took out a $500,000 loan for 34.2 years with whatever interest rate you assume.
With this method, you do not need to redo the calculations every year. However, with this method, your payment stays fixed, even if your account balance decreases.
Example 3: Fixed Annuitization Method
Using the Fixed Annuitization Method, an IRS annuity factor is used to determine the SEPP. For example, if the IRS annuity factor is 17, then your SEPP would be $500,000 ÷ 17 = $29,411 per year. This payment also remains fixed throughout the withdrawal period.
Is This a Good Move for You?
Before making any decisions, it’s important to run your own numbers and perhaps even chat with a financial advisor to ensure the strategy you choose fits your retirement goals.
Wishing you a secure and well-planned financial future,
Stephen Zelcer
