Thrift Savings Plan for Voluntary Early Retirement over 55

ishop2buy
ishop2buy Member Posts: 1 Newcomer
in Retirement Income

Last year when I filed my taxes, I didn't see the way to deal with TSP withdrawals prior to age 62 when I qualify for a penalty free withdrawal because I retired from Federal Service with VERA and I was over 55 when I first started making withdrawals. I'm currently making withdrawals and the IRS website says that they should be penalty free but there was no option for this situation when I filed my 2025 return. I looked since I knew I would need it for 2026. Will the app be updated for this special circumstance?

Comments

  • GregW
    GregW Star Posts: 13 image
    edited August 3

    If the TSP has determined that the withdrawal is penalty free, your Form 1099-R should have a code 2 in box 7 (now box 7a). This will prevent the penalty from being assessed. In some cases, the TSP may not be aware of your circumstances and may continue to use code 1. In that case, if you are sure that you qualify, you should file Form 5329 with the exception code 01 for line 2.

    Note that the "Rule of 55" applies only when you retire after you reach age 55 (except in some special circumstances). If you retire before that age, you are still subject to the penalty even after you reach age 55. It doesn't stop until you reach age 59 1/2.

  • JanaA
    JanaA FreeTaxUSA Agent Posts: 183 image
    Hello ishoptobuy and GregW! Form 5329 is part of the software, and the "separation from service in or after the year you reach age 55" exception is one of the options available to claim.

    As you correctly noted, the easiest path is if your TSP issues a 1099-R with distribution code 2 in box 7a, which tells the IRS the distribution is already recognized as penalty-free. In that case, no further action is needed on your part.

    If your 1099-R shows code 1 instead, here is how to handle it in the software. Select the Income tab, then from the drop-down menu, under Common Income, select Retirement Income (1099-R). Here you will enter the 1099-R as prompted by the software. On a follow-up screen, our software will ask questions about the 10% penalty. You will reach a screen titled "Do any of these 10% penalty exceptions apply?" where you can select the option for employee plan distributions due to separation from service in or after the year you reach age 55. Enter the qualifying amount, and the penalty will be removed from your return. If you have any issues or questions with the process, our support team would be happy to help!

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