Special Category Employees and Elimination of the Early Withdrawal Penalty

Here’s something that Congress did right!

Bottom line up front: If you retire under the SCE FERS provisions for public safety, you are now eligible to receive penalty free TSP withdrawals regardless of age.

Let’s clarify some things first:

GENERAL RULE

401(k)s, TSP, IRAs, etc., have a general rule that you cannot withdraw from them prior to reaching age 59.5 without paying a 10% early withdrawal tax. (Most people call it a penalty, so I will, too. But it’s technically a tax you pay to the IRS.)

However, there are exceptions….

OLD TSP EXCEPTION

If you are a Special Category Employee, (Firefighters, LEOs, and Air Traffic Controllers), there was an exception for the TSP that said if you worked at least 1 day into the year you turned 50 before leaving the government, you could avoid that 10% penalty.

For Regular FERS (everyone else), that same rule applies but the age is different—it’s 55 years of age.

In either case, no one had to work until they were 59 1/2 years of age to get their TSP penalty free.

If you do not meet one of these exceptions, you have to wait until 59.5

Example: You are a LEO, you came on at 21 years of age, you retire at 46 years of age. You have to wait until 59.5 before you can withdraw TSP penalty free, NOT 50. In order to do it at 50, you had to WORK until the year you turned 50. People mixed that up all the time. The exception requires working until your 50th year. If you don’t meet the exception, you are under the general rule, which is 59.5

(PLEASE UNDERSTAND: This is/was a distinct and separate rule from the OPM requirements to retire. For an SCE to retire, it was, and still is, required that they do 20 years of SCE time AND actually BE 50 years of age, or do 25 years of SCE time at any age. It is a common mistake for some people to combine the TSP rule with the OPM rule and come up with some incorrect hybrid. Like you have to do 20 years of SCE time and then retire in the year you turn 50. That’s not correct. For retirement purposes you have always had to, and still have to, make it to your 50th birthday. The TSP access rule was to work 1 day in the year you turn 50. So you could have satisfied the TSP withdrawal rule in the past, but not been able to retire yet, so the rule was irrelevant. You had to have met both rules. If you read on, you’ll see now that the two rules line up with each other much better….)

NEW TSP EXCEPTION

In the new spending bill that passed on 12/23/22, the law for all special category employees to withdraw penalty free from TSP is no longer “work into the year you turn 50.” The new law is very, very simple. It mirrors the OPM rules for retirement.

In other words, the 10% penalty is waived if you retire at 50, or retire after 25 years of SCE service, whichever is earlier.

Basically, it means this—once you retire as an SCE under FERS SCE provisions, regardless of age, you can have penalty free TSP withdrawals. There is no “Age 50” threshold to get to anymore.

Don’t read requirements into this that aren’t there. If you retired as an SCE (20 SCE years and age 50, or 25 SCE years at any age), you are eligible to make TSP withdrawals penalty free.

Example

John is hired by the United States Marshals Service as a Deputy U. S. Marshal at age 21. Under the OPM SCE provisions, he can retire with full benefits at age 46 after completing 25 years. Under the old rule, John would have to wait until age 59.5 to have penalty free TSP withdrawals. Or, he would have to stay and work at least one day into the year he turned 50. No longer. Now, when he retires at 46, he can get his TSP at any time without paying the extra 10% penalty. Age 46, 50, 55, 58, whenever.

I talk to 3-4 people a week that have done, or will do, their 25 years and still be in their 40’s. They do NOT want to have to work until 50 to pull from TSP, but they are hanging on by their fingernails, gritting it out, just for the penalty free TSP access. They no longer have to do that. Just retire when you want. The TSP hurdle no longer exists.

Also, this new rule is not necessarily for those that want to get their TSP in their 40’s'; it’s for those that want to be able to get to their TSP any time before 59.5. A lot of people say to me, “I’m retiring in my 40’s but I’m not planning on touching my TSP for a few years. Under the old rules, if you retired in your 40’s, you would not be able to touch your TSP penalty free until 59.5. Now, you can leave at say, 47, and start pulling from TSP at say, 57. Before, you could not do that.

Lastly, as far as I can tell, this ONLY applies to TRADITIONAL TSP, NOT ROTH TSP. That has been 59.5 years of age since inception and I don’t see anything that changes that in this law.

Hopefully that’s all clear enough.

LEGALESE

Now, for you legal/CPA/CFP/attorney/nerd types, here are the details and citations.

The federal law that governs early withdrawals are found under 26 USC 72. Specifically section (t). Which is why you might have heard of the “72(t) Rules”.

(I even wrote an article about it, which is largely irrelevant now: HERE)

(t) is the section devoted to “10-percent additional tax on early distributions from qualified retirement plans”. This section details the penalty and the exceptions to the penalty.

Section (t) 10 “Distributions to Qualified Public Safety Employees in Governmental Plans” is the part that said work until age 50. That will be amended under the current law. “Age 50” will be stricken, and it will be replaced by inserting “age 50 or 25 years of service under the plan, whichever is earlier.”

Want to see the law for yourself?

I don’t blame you. Check out 26 USC 72(t)

Depending on when you click on that and when it is updated, you may see the old law or the new law.

The new law is found in Section 329 “MODIFICATION OF ELIGIBLE AGE FOR EXAMPTION FROM EARLY WITHDRAWAL PENALTY”, of the Consolidation Appropriations of 2023, officially known as H. R. 2617. It became law on 12/29/2022.

See Section 329, which begins on the bottom of page 902 and continues onto page 903.

It states specifically,

(a) IN GENERAL.—Subparagraph (A) of section 72(t)(10), as amended by this Act, is further amended by striking ‘‘age 50’’ and inserting ‘‘age 50 or 25 years of 13 service under the plan, whichever is earlier’’.

(b) EFFECTIVE DATE.—The amendment made by 15 this section shall apply to distributions made after the 16 date of the enactment of this Act.

You may be asking, “Who does this apply to?”

For that answer, go to 26 USC 72(t)(10)(B), which defines public safety officer. Basically, LEO, Fire, EMS, Air Traffic Controller, Nuclear Currier, DSS Agent, Border Patrol, etc.

Questions? Put them below and let’s talk about it.

This article should not be construed as advice or encouragement to retire or use your TSP without discussing it with a financial professional. Remember—that money needs to last you a really long time, potentially 40 or 50 years if you retire in your 40’s. So keep that in mind. This new law is more to provide you options earlier in life, not necessarily for you to start spending your savings. In all likelihood, most of us are still in our accumulation phase in our 40’s and 50’s, not the spending phase.