Most federal employees are aware that you get hit with a 10% penalty for early withdrawals from your TSP account. Beyond that, the details are usually murky, and you don’t think you have to worry about it until you need to make withdrawals.

However, it might be good to know just in case you suddenly need to whip out that Form TSP 70 and make an immediate withdrawal.

The first thing you should know is that the threshold for penalty-free Thrift Savings Plan withdrawals is age 55, and not 59. To be more accurate, you must separate from federal service at age 55 or later to be able to avoid the penalty immediately.

But if you retire before that, you lose this privilege and must then wait until age 59 like everyone else before you get to make penalty-free withdrawals.

TSP Early Withdrawal Penalty vs. IRA Transfers and Rollovers

One often mentioned mechanism to avoid the TSP early withdrawal penalty is a transfer or rollover your TSP savings into an IRA or another eligible employer plan. That does enable you to move funds out of the account without having to pay the penalty. But that’s not the same as a penalty-free TSP withdrawal.

It might even delay you from getting access to your funds. For example, if you retire at age 55 or above and transfer or TSP rollover all or part of it into an IRA, you’re now stuck with it until age 59 and a half. If you had left it as is in the TSP account, you could have made a direct withdrawal at any time after separation. But having moved the funds into an IRA, there’s no way to get your hands on it now until you are 59 ½.

What all this means is that you should wait until age 55 before you decide to leave federal employment – if you want to be able to make TSP withdrawals without being hit with a penalty.