Avoiding the Early Withdrawal Penalty and the TSP for Federal Public Safety Employees

Introduction
Federal public safety employees are the backbone of our communities, dedicating their careers to protecting and serving others. Recognizing their invaluable contributions, recent legislative efforts have introduced provisions to enhance retirement security for these essential workers. Among these provisions is the Public Safety Employees’ exemption to the Early Withdrawal Penalty, a vital component of the SECURE Act 2.0 passed on December 29, 2022. This exemption benefits public safety professionals with the Thrift Savings Plan or TSP as they plan for their financial futures.

The Secure Act 2.0 had two previous Acts that should be mentioned. The first law that allows public safety workers to avoid the 10% early withdrawal penalty when they separate from service at or after age 50 is part of the Pension Protection Act of 2006. This act made several changes to retirement plan rules, including the specific provision for public safety employees to encourage and facilitate their retirement planning and security. The second provision related to public safety workers and the 10% early withdrawal penalty was further reinforced and clarified by the Defending Public Safety Employees Retirement Act of 2015. This act extended the early withdrawal penalty exception to include federal public safety workers, such as federal law enforcement officers, customs and border protection officers, federal firefighters, and air traffic controllers. Finally, we have the 2022 Secure Act 2.0 with the federal Public Safety Employees' exemption that allows even more flexibility for federal public safety workers to avoid the 10% early withdrawal penalty if they have worked at least 25 years of service.

Understanding the 25 Years of Service Exemption
The Public Safety Employees’ Exemption to the Early Withdrawal Penalty allows eligible federal public safety workers to access their retirement savings without incurring the standard 10% early withdrawal penalty. This exemption is particularly beneficial for individuals who have dedicated their careers to public service and have accumulated significant federal service.

Eligibility Criteria
To qualify for the exemption, public safety employees must meet specific eligibility criteria:
1. Completion of at least 25 years of federal service: Eligible individuals must have completed a minimum of 25 years of federal service, demonstrating a long and distinguished career in public safety.
2. TSP-eligible position at the time of separation: The exemption applies to individuals who were in Thrift Savings Plan (TSP)-eligible positions at the time of separation from federal service, ensuring that those who have contributed to retirement accounts throughout their careers can benefit from the exemption.

Determining Eligibility

To be precise, the TSP will treat participants who meet the criteria below as eligible for the exemption from the 10% early withdrawal penalty:

(1) identified by their employing agencies as public safety employees through the “P” code

and

(2a) determined by the TSP to have separated during or after the year they turn 50 (based on their date of birth)

or

(2b) have at least 25 years of service between their TSP service computation date (SCD) and their “P” Employment Code date corresponding to their date of separation.

Essentially, you need to have a minimum of 25 years of service or have turned 50 at the time of the distribution from the TSP, whatever comes first. This provision is one of the most generous but applies only to public safety workers.

Who are Public Safety Workers?
Public safety workers encompass many professionals dedicated to serving the public good. Note these professions deal with public security and safety. This 10% early withdrawal penalty exemption does not apply to regular civil service workers. They include, but are not limited to:
- Law enforcement officers
- Firefighters
- Emergency medical services personnel
- Emergency management personnel
- Certain federal employees involved in protecting public safety and security

Benefits of the Exemption
The Public Safety Employees’ Exemption to the Early Withdrawal Penalty offers several significant benefits:
1. Financial Flexibility: Eligible individuals gain access to their retirement savings without incurring penalties, providing them with increased financial flexibility during the transition to retirement.
2. Recognition of Service: The exemption acknowledges the valuable contributions of public safety employees and honors their dedication to protecting and serving their communities.
3. Retirement Planning Options: By allowing penalty-free withdrawals, the exemption enables public safety workers to explore various retirement planning strategies and make informed decisions about their financial futures.

Implications for Retirement Security
Introducing the Public Safety Employees’ Exemption to the Early Withdrawal Penalty underscores a broader commitment to enhancing retirement security for public safety professionals. By providing targeted benefits tailored to the unique needs of this essential workforce, policymakers aim to support their financial well-being and ensure a dignified retirement after years of dedicated service. The drawback of this exemption is that it targets a small segment of federal government workers enrolled in the TSP. It does not currently apply to other retirement plans or other levels of government.

Suppose you do not fall into the category of federal public safety worker. In that case, there are different ways of avoiding the 10% penalty on early distributions before 59.5, such as the separation from service at age 50. The separation from service exception for public safety employees aged 50 or over includes specified federal law enforcement officers, corrections officers, customs and border protection officers, federal firefighters, private-sector firefighters, and air traffic controllers. An exemption is allowed for distributions from defined benefit plans, defined contribution plans, or other governmental plans, such as the TSP. It does not apply to traditional IRAs or Roth IRAs. Withdrawals from these accounts before age 59½ will still incur the 10% early withdrawal penalty unless other exceptions apply. However, the new public safety provision of the Secure Act 2.0 enables workers to potentially retire and take distributions from the TSP in their 40s, which can significantly benefit those who want to retire early or take on a different career post-government.

Conclusion
Although there has been a public safety exemption for early withdrawal of money from retirement plans at age 50 for years, the new Secure Act 2.0 has enabled even more flexibility. The Public Safety Employees’ Exemption to the Early Withdrawal Penalty represents a significant step forward in recognizing the contributions of public safety workers and enhancing their financial security. By offering penalty-free access to retirement savings for eligible individuals, this exemption provides valuable benefits that empower public safety professionals to navigate the complexities of retirement planning confidently. As policymakers continue to prioritize the needs of public safety employees, it is essential to support measures that promote their financial well-being and honor their unwavering commitment to our communities. If you are considering retiring from federal civil service and want to talk about how to get ready for retirement, don't hesitate to get in touch with me on the contact page below.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid Federal Government tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.