Military Finances 301: Get Money Out of Your Retirement Accounts Early Without Penalty. Really.TSP Taxes
I was presenting at an ETAP at Quantico and a Senior NCO came up to me and asked the following. "I put all my money into TSP like I was told to do, but now I need it to start a franchise and I can't get it out without paying a penalty. What do I do?" While we can argue the wisdom of taking out retirement funds out for other use, sometimes in life we need to just "do" things. So if you need to get money out of retirement funds without paying a penalty, what do you do?
Getting Money Out of a Roth IRA Early
Getting some of your money out of a Roth IRA early (prior to age 59 1/2) without tax or penalties is one of the easier things to do, if you've kept good records. You are allowed to withdraw your contributions without paying taxes on them and you're allowed to withdraw your contributions first. But, you must have a record of those contributions. Hopefully, you or your tax preparer have been reporting and tracking your Roth contributions on a IRS Form 8606. If you haven't done that, if you have your annual statements you can reconstruct the information you need to complete a Form 8606.
If you converted some funds from a Traditional IRA to a Roth IRA, you can also get them out tax free and they come out second. But it isn't as simple as for contributions. Converted funds must be inside the Roth IRA for 5 years or they will be penalized on distribution. And the 5-year rule applies to each dollar individually not like the 5 year rule for the account as a whole.
If you try to get your earnings out early, I can't help you. You'll be paying taxes and penalties.
Getting Money Out of a Traditional IRA Early
It is a lot tougher to get money out of a Traditional IRA early without penalty but it can be done...if you're patient. Now I'm going to ignore the first time home buyer and disability waivers to talk about what if you just need some money. You can get the money without penalty, but still subject to tax, by setting up a series of substantially equal payments. The payments must be calculated using an IRS approved method. You must take annual distributions and you must take distributions for 5 years or until you turn 59 1/2, whichever is later. You can't modify the distributions once you start them.
This isn't a great option, but it is there if you need it.
Getting Money Out of TSP Early
One option would be to roll your funds to an IRA or Roth IRA depending on your TSP account type and using the rules above. The 72(t) rules apply to TSP as well.
For the case of starting a business there is one other option. You could form your business as a Corporation. You could then set up a 401(k) and transfer your TSP balance to the 401(k). Once the funds are in your 401(k), you could (not saying you should) buy your company stock inside your 401(k). This would move cash into your business and stock into your 401(k). However, if you have employees in your company, you can't exclude them from participating in a 401(k) or the plan will lose its qualified status. This method has a lot of risk, but if it is the only way you can fund a business dream it just might work. Make sure you work with a plan specialist to set up the plan though or the whole thing could blow up in your face.
Finances Are More Complicated After You Retire from the Military
I'm of the opinion that your financial life gets a whole lot more complicated after you leave the military. If you'd like some help, give us a call.
If you found this article useful, you might like the following blog posts:
Minimum Distribution Rules: Key Things Every Retired Military Officer Should Know
Watch Out for this Tax Tripwire
4 Steps Military Officers Should Take When Inheriting an IRA