Recently introduced legislation would expand the circumstances under which federal employees can make penalty-free withdrawals from the Thrift Savings Plan (TSP) after separating from federal service.

The Thrift Savings Plan Emergency Withdrawal Act (H.R. 6929) was introduced by Congresswoman Eleanor Holmes Norton (D-DC). It would allow recently separated federal employees to withdraw from the TSP without penalty in two situations:

After retiring and while receiving interim annuity payments

After an involuntary separation from federal service

In both scenarios, the maximum withdrawal amount is $100,000. Individuals would be able to withdraw funds up to a year after separation and repay the withdrawn amount within three years to avoid the existing early withdrawal penalty, which is a 10% additional tax.

What Are Interim Annuity Payments?

Federal employees receive interim annuity payments after retiring until the Office of Personnel Management (OPM) finalizes their retirement applications. According to OPM, the interim payments are typically 60-80% of the full annuity and are intended to help cover expenses while OPM processes a federal employee’s retirement application.

According to OPM’s Retirement Quick Guide, the current estimate, as of this writing, is that it takes 3-5 months on average to fully process a federal employee’s retirement application.

The legislation is being pitched as a way to help fill in the gaps from any financial hardships that result from only receiving these partial annuity payments for these few months at the outset of retirement. However, if somebody does not want to rely on the TSP to help supplement the smaller interim annuity payments, a little extra budgeting and planning could provide another option.

Because retirement is usually planned well in advance, one approach would be to budget additional savings for the reduced interim annuity payments as part of that process, thus eliminating the need to rely on the TSP.

For instance, as part of his overall retirement plan, a federal employee could have a savings account earmarked for this income gap immediately after retirement. He could decide what time period those savings would need to cover (4 months, 6 months, a year, etc.) and how much would be needed based on his typical household expenses. Then, as part of his long-term retirement planning, he could set up a savings account and fund it over several years so that, by the time he reaches retirement, it’s fully funded and available to cover the first few months of reduced annuity payments.

Important Considerations When Using the TSP as an Emergency Fund

The intent of the bill is to help federal employees who may be facing financial difficulty, and it sounds good on the surface, but there is a significant downside to withdrawing money from the TSP to cover a temporary financial hardship if you have not yet reached retirement age.

When withdrawing money from the TSP, the account balance is reduced which causes the investor to miss out on investment returns. This would be particularly noticeable during times of outstanding returns, such as what the markets have experienced in the last three years.

In 2023, the C Fund returned 26.25%; in 2024, 24.96%; and so far in 2025, 19.29%. Reducing the TSP account balance by $100,000, even for a few months, could sharply cut returns.

For example, this is a comparison of the returns after 1 year at a 19% rate of return such as what we have experienced in 2025 with the C Fund. One account balance started with $500,000, the other with $100,000 less. Both figures assume no additional monthly contributions are made:

Initial Balance$500,000$400,000Gain$95,000$76,000Total$595,000$476,000

The problem is even worse the more time goes on. Here are the figures again after three years at the same 19% annual rate of return:

Initial Balance$500,000$400,000Gain$342,579.50$274,063.60Total$842,579.50$674,063.60

The lower initial balance creates a gap of almost $170,000 lost with the compounding interest over a three year period.

A Better Option

With a little planning, there are better options that could avoid this ugly scenario entirely.

A better solution for short-term financial hardships is to rely on an emergency fund. Financial advisors often recommend setting aside 3-6 months of regular household expenses in a money market or savings account for an unforeseen financial emergency.

For example, if your average monthly household expenses are $2,500, then your emergency fund would be somewhere between $7,500 on the low end (3 months) and $15,000 on the high end (6 months) based on this formula.

This is even more important for someone who is under age 59 1/2 which is the cut off age for avoiding a 10% early withdrawal penalty from the TSP in most cases. As currently written, the legislation indicates that funds would have to be repaid within 3 years to avoid the 10% early withdrawal penalty.

While the proposed bill may offer short-term relief to federal employees facing financial hardships, relying on the TSP as an emergency fund in your younger years comes at a steep long-term cost to overall retirement finances. The loss of compounding investment returns can significantly erode retirement savings, especially during periods of strong market performance. While withdrawing from the TSP may be necessary in dire financial situations, it’s generally best to use the TSP for retirement expenses rather than as an emergency fund.

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