The House could vote as early as Tuesday to ease a tax penalty for certain federal employees that applies to early withdrawals from the Thrift Savings Plan, their 401(k)-style retirement savings plan.
Under the tax code, investors in employer-sponsored plans such as the TSP generally are subject to a 10 percent penalty if they withdraw their money before age 59½.
The tax law allows certain exceptions that apply to the TSP and to similar plans, however. The penalty doesn’t apply, for example, to those who withdraw their accounts in the form of an annuity or as payments spread out over their life expectancy, regardless of their age at retirement; it also does not apply to any form of withdrawal for those who retire at age 55 or after.
The penalty has long been an issue for federal employees who work in occupations with special retirement rules, including law enforcement, firefighting and air traffic control. They may retire earlier than most federal employees — as early as age 50, if they have at least 20 years of service, and in some cases earlier.
The bipartisan bill before the House would allow employees in those groups to withdraw their TSP money without penalty after retiring at age 50 or later. This effectively would broaden the existing exceptions to include all forms of withdrawals, including lump-sum payments and payments of an equal amount each month.
The Senate has not taken up the issue, although a counterpart bill is pending there.
Federal employees generally are not eligible for retirement until at least age 55 unless they are offered early retirement.
