Avoiding the 10% penalty
Rule of 55, disability and 72(t).
Leaving before 59½? Keep the money in the TSP until you know which rule you’ll use.
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1. The penalty
Take money from the TSP, a 401(k) or an IRA before 59½, and you owe an extra 10% federal tax on top of income tax. On a $40,000 withdrawal, that’s $4,000. The tax code lists exceptions. Three matter most to feds who leave early.
2. The rule of 55
Leave your job in or after the calendar year you turn 55, and withdrawals from that employer’s plan avoid the 10% penalty. The year counts, not your birthday: leave in March of the year you turn 55 and you qualify.
- It covers the TSP and 401(k)s, not IRAs. Roll your TSP to an IRA and you lose it.
- It covers the plan of the job you left. Money you rolled into the TSP before you left counts too.
More detail in the TSP rule of 55.
3. Age 50 for public safety
For qualified public safety employees in a government plan like the TSP, the age is 50, or 25 years of service if that comes first. That includes federal law enforcement and corrections officers, customs and border protection officers, federal firefighters and air traffic controllers.
4. Disability
Disability works at any age, for the TSP, 401(k)s and IRAs, with no dollar limit. But the IRS test is strict: you can’t do any substantial gainful activity because of a condition expected to last indefinitely or end in death.
- FERS disability retirement isn’t automatic proof. OPM asks whether you can do your job; the IRS asks whether you can work at all.
- Keep proof. A Social Security disability award is strong evidence.
- Terminal illness has its own exception: a doctor certifies an illness expected to cause death within 84 months.
See also FERS disability retirement.
5. 72(t) payments
If you leave before 55, or the money is in an IRA, you can take substantially equal periodic payments without the penalty. You figure them one of three IRS ways: the RMD method, fixed amortization or fixed annuitization.
- The lock: payments can’t change for 5 years or until 59½, whichever is later.
- Break it and the 10% tax hits every payment you’ve taken, plus interest. Death or disability doesn’t count as breaking it.
- One switch allowed: from a fixed method to the RMD method, once.
- Interest rate: no higher than 5% or 120% of the federal mid-term rate for either of the two months before your first payment, whichever is greater. The November 2026 figure, 6.11%, can be used for payments that start in December 2026 or January 2027.
- From the TSP or a 401(k): you must have left that employer first. TSP monthly payments figured on life expectancy are built for this; fixed-dollar ones aren’t. Confirm with the TSP before you start.
Uses the IRS single life expectancy table. The IRS’s own example, $400,000 at age 50 and 4%, gives $11,050 under the RMD method and $21,102 under amortization.
6. Other exceptions
All plans, TSP and IRAs:
- Death of the account owner.
- An IRS levy.
- Medical costs above 7.5% of your adjusted gross income.
- Birth or adoption: up to $5,000 per child.
- One emergency withdrawal a year: up to $1,000.
- Domestic abuse victims: up to $10,000, adjusted for inflation, or half the account.
- A federally declared disaster: up to $22,000.
- Reservists called to active duty.
IRAs only: a first home (up to $10,000), college costs, and health insurance while unemployed.
TSP and 401(k) only: payments to an ex-spouse under a court order.
7. Claiming it on your return
- Check box 7 of your Form 1099-R. Code 2 means an exception was applied. Code 3 means disability. Code 1 means no exception was shown.
- If it says 1 but you qualify, file Form 5329 with your return to claim the exception.
Planning the withdrawals? TSP withdrawal options explains the choices. Federal Warrior’s FERS pension estimator shows the annuity you’d have alongside. Leaving FEHB behind? Warrior Insure’s FEHB premium estimator prices your coverage. With a VA rating, Warrior Disability’s calculator adds up your income.
8. Frequently asked questions
What is the 10% early withdrawal penalty?
It is an extra 10% federal tax on money you take from the TSP, a 401(k) or an IRA before age 59½, on top of regular income tax. The tax code lists exceptions, including leaving your job in or after the year you turn 55, disability, and a series of equal yearly payments under section 72(t).
Does the rule of 55 apply to the TSP?
Yes. If you leave federal service in or after the calendar year you turn 55, TSP withdrawals avoid the 10% penalty. For federal law enforcement officers, firefighters, air traffic controllers and customs and border protection officers, the age is 50, or 25 years of service. The rule doesn’t apply to IRAs, so rolling the money to an IRA gives it up.
What counts as disabled for the penalty exception?
The IRS uses a strict test: you can’t do any substantial gainful activity because of a physical or mental condition that is expected to last indefinitely or end in death. Approval for FERS disability retirement does not automatically meet it. Keep proof, such as a Social Security disability award.
How does a 72(t) plan work?
You take substantially equal payments at least once a year, figured by one of three IRS methods. You must keep them unchanged for five years or until age 59½, whichever is later. From the TSP or a 401(k), you must have left that employer first.
What happens if I change my 72(t) payments early?
The 10% tax applies to every payment you have taken, plus interest. The one change allowed is a one-time switch to the RMD method, which usually lowers the payment.
How do I claim an exception on my tax return?
Your Form 1099-R shows a code in box 7. Code 2 means an exception was applied, and code 3 means disability. If the code is 1 but an exception applies, file Form 5329 with your return to claim it.
Federal tax rules; your state may tax early withdrawals differently. Not tax advice.