Bill Summary
The "Thrift Savings Plan Emergency Withdrawal Act of 2025" amends the Internal Revenue Code to provide Federal employees who leave Federal service the ability to withdraw funds from their Thrift Savings Plans (TSP) without incurring penalties. Key provisions include:
1. **Penalty-Free Withdrawals**: Employees who separate from service can take distributions from their TSP accounts without facing the usual 10% early withdrawal penalty.
2. **Income Reporting Flexibility**: These distributions can be reported as income over a three-year period, rather than all at once, allowing for potentially lower tax liability in any given year.
3. **Withdrawal Limit**: The total amount eligible for these penalty-free distributions is capped at $100,000.
4. **Repayment Option**: Recipients of these distributions may elect to roll the funds back into an eligible retirement plan within three years, allowing them to avoid taxation on the withdrawn amount if repaid.
5. **Effective Date**: The provisions apply to distributions made after January 20, 2025.
This legislation aims to provide financial relief to Federal employees during transitions following their separation from service.
Possible Impacts
Here are three examples of how the "Thrift Savings Plan Emergency Withdrawal Act of 2025" could affect people:
1. **Increased Financial Flexibility for Separated Federal Employees**: The legislation allows federal employees who separate from service to access their Thrift Savings Plans (TSP) without incurring the usual penalties associated with early withdrawals. This means individuals facing financial hardships or unexpected expenses after leaving federal service can withdraw up to $100,000 from their TSP accounts without the typical 10% penalty, providing them with immediate liquidity during a potentially challenging transition period.
2. **Tax Planning Advantages**: The act enables qualified distributions to be included in gross income over a three-year period rather than in the year of withdrawal. This provision can help manage tax liabilities for individuals who might otherwise face a significant tax burden in a single year due to a large withdrawal. By spreading the income over three years, individuals may remain in a lower tax bracket and reduce their overall tax liability.
3. **Encouragement to Reinvest in Retirement**: The legislation allows individuals to treat the withdrawal as an eligible rollover distribution, meaning they can repay the amount to an eligible retirement plan within a specific timeframe. This provision encourages individuals to reinvest their funds back into retirement accounts, potentially helping them restore their retirement savings and avoid long-term financial setbacks caused by withdrawing from the TSP. This could lead to improved financial security in retirement for those who take advantage of this option.
[Congressional Bills 119th Congress]
[From the U.S. Government Publishing Office]
[H.R. 6929 Introduced in House (IH)]
<DOC>
119th CONGRESS
1st Session
H. R. 6929
To amend the Internal Revenue Code of 1986 to allow Federal employees
who are separated from Federal service to make penalty-free
distributions from Thrift Savings Plans and include such distributions
in gross income over 3 years.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
December 23, 2025
Ms. Norton introduced the following bill; which was referred to the
Committee on Ways and Means
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to allow Federal employees
who are separated from Federal service to make penalty-free
distributions from Thrift Savings Plans and include such distributions
in gross income over 3 years.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Thrift Savings Plan Emergency
Withdrawal Act of 2025''.
SEC. 2. TAX-FAVORED WITHDRAWALS FROM THRIFT SAVINGS PLAN FOLLOWING
SEPARATION FROM FEDERAL SERVICE.
(a) In General.--In the case of a qualified civil service
separation distribution--
(1) section 72(t) of the Internal Revenue Code of 1986
shall not apply, and
(2) unless the taxpayer elects not to have this paragraph
apply for any taxable year, the amount of any such distribution
otherwise required to be included in gross income for such
taxable year shall be included in gross income ratably over the
3-taxable-year period beginning with such taxable year.
(b) Limitation.--The aggregate amount which may be treated as a
qualified civil service separation distribution by any individual shall
not exceed $100,000.
(c) Amount Distributed May Be Repaid.--
(1) In general.--Any individual who receives a qualified
civil service separation distribution may, at any time during
the 1-year period beginning on the day after the date on which
such distribution was received, elect to be treated as having
received the qualified civil service separation distribution in
an eligible rollover distribution (as defined in section
402(c)(4) of such Code).
(2) Treatment of elected repayment.--In the case of an
election under the preceding sentence, the individual may, not
later than the 3-year period beginning on the day after the
date on which such distribution was received, make 1 or more
contributions in an aggregate amount not to exceed the amount
of such distribution to an eligible retirement plan of which
such individual is a beneficiary and to which a rollover
contribution of such distribution could be made under section
402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16) of such
Code, as the case may be, and such contributions shall be
treated as amounts transferred to the eligible retirement plan
in a direct trustee to trustee transfer made within 60 days of
the distribution.
(d) Definition and Special Rules.--
(1) Qualified civil service separation distribution.--For
purposes of this subparagraph, the term ``qualified civil
service separation distribution'' means any distribution to an
individual from the Thrift Savings Fund if such distribution is
made during the period--
(A) beginning on the date on which, after
separating from the civil service, the individual
elects an annuity payment under chapter 83 or 84 or
title 5, United States Code, and
(B) ending on the date that is 1 year after the
date on which, after the Office of Personnel Management
finalizes the individual's annuity claim, the
individual receives the first annuity payment (but not
including any interim annuity payments) under such
chapter 83 or 84, as the case may be.
(2) Treatment of contributions to which 3-year averaging
applies.--For purposes of subsection (a)(2), rules similar to
the rules of section 408A(d)(3)(E) of the Internal Revenue Code
of 1986 shall apply.
(3) Exemption of distributions from trustee to trustee
transfer and withholding rules.--For purposes of sections
401(a)(31), 402(f), and 3405 of such Code, a qualified civil
service separation distribution shall not be treated as an
eligible rollover distribution.
(e) Effective Date.--This section shall apply to distributions made
after January 20, 2025.
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