Sponsor
Eleanor Holmes Norton
Representative · D-DC
Representative · D-DC
The bill gives separating federal employees targeted tax relief and flexible repayment options for up to $100,000 of TSP distributions (including penalty avoidance and three-year income spreading) at the cost of reduced withholding protections, potential longer-term tax risks for those who don't recontribute, and limited benefit for those with larger balances.
Federal employees who separate and elect a civil-service annuity can avoid the 10% early-distribution penalty on up to $100,000 of TSP distributions, reducing immediate tax costs when accessing retirement funds.
Recipients can elect to spread taxable income from the distribution evenly over three years, smoothing tax liability and lowering short-term tax burdens for those taking large lump-sum distributions.
Separating employees have a window to repay or recharacterize distributions into eligible retirement plans, restoring tax-deferred status and giving retirees flexibility to avoid taxes if they recontribute.
Excluding these distributions from rollover/withholding rules removes mandatory withholding protections, increasing the risk that taxpayers will face under-withholding and unexpected tax bills.
Taxpayers who take distributions but do not (or cannot) recontribute may end up with higher long-term tax liability if they spread income over three years without sufficient planning.
The $100,000 cap limits relief for separating employees with larger TSP balances, leaving those individuals to face less favorable tax treatment or liquidity choices for amounts above the cap.
Based on analysis of 2 sections of legislative text.
Creates a special tax rule for certain post-separation TSP withdrawals: no 72(t) penalty, income may be spread over 3 years, repayment allowed, $100,000 cap; applies after Jan 20, 2025.
Official title: 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.
Introduced December 23, 2025 by Eleanor Holmes Norton · Last progress December 23, 2025
Allows certain separated federal civilian employees who elect an annuity to take a special Thrift Savings Fund distribution with favorable tax treatment. The legislation exempts these qualified civil service separation distributions from the early-distribution penalty, permits the income to be spread over three years (unless the taxpayer elects otherwise), lets individuals repay/recharacterize the distribution into an eligible retirement plan within set windows, caps eligible amounts at $100,000 per person, and excludes these payments from rollover and certain withholding rules for distributions made after January 20, 2025.