Federal Workers Get $30K Penalty-Free TSP Withdrawals to Survive Government Shutdowns

When the government shuts down, federal employees—the people who keep the country running—are often left scrambling, working without pay or furloughed. The Emergency Relief for Federal Workers Act of 2025 is designed to be a financial safety net for them, specifically targeting the Thrift Savings Plan (TSP), which is the federal equivalent of a 401(k).

Starting after September 30, 2025, if a “qualified lapse in appropriations” (a continuous government shutdown) lasts at least two weeks, this bill allows affected federal workers to tap into their TSP funds without getting hit with the usual 10% early withdrawal penalty. The bill caps this penalty-free withdrawal at $30,000 per shutdown event, a limit that will be adjusted for inflation starting in 2026 (Sec. 2). Essentially, if you’re a federal employee and your paycheck stops coming because Congress couldn't agree on a budget, this bill gives you access to emergency cash from your retirement savings without the immediate tax sting.

The Emergency Cash Window

This legislation tackles the biggest financial stressor during a shutdown: liquidity. Normally, if you're under 59 1/2 and take money out of your TSP, the IRS treats it like a penalty box violation, demanding an extra 10% tax. This bill waives that 10% penalty for federal workers during extended shutdowns. For someone needing $10,000 to cover rent and groceries, this saves them $1,000 right off the top.

But here’s the smart part: the bill creates a pathway to put the money back. If you take out a hardship withdrawal during the shutdown, you have 120 days after the shutdown ends to put that money back into your TSP account. If you do this, the withdrawal is treated as if it were a tax-free rollover, meaning you avoid the tax complications that usually come with taking money out of a retirement account (Sec. 3). This is crucial because it allows employees to bridge the financial gap without permanently crippling their long-term savings, provided they can replenish the funds once back pay arrives.

Protecting Your TSP Loans

Another major concern during a shutdown is what happens to existing TSP loans. If you miss a payment on your TSP loan, the IRS usually considers the entire outstanding balance to be a “taxable distribution.” That means you suddenly owe income tax on the full loan amount, which is a massive, unexpected liability for someone who just lost their paycheck.

This bill explicitly states that if you miss a TSP loan payment because you weren't getting paid during a government shutdown, that missed payment will not trigger the taxable distribution of the entire loan balance (Sec. 4). This protects federal workers from getting hit with a huge tax bill on top of their financial hardship. Furthermore, the TSP Board is required to set up rules so that when the employee is finally paid, the missed amount is automatically taken out of their pay to catch up on the loan, ensuring the loan stays current.

Real-World Impact and the Long View

This act provides a necessary lifeline, recognizing that federal employees shouldn't be penalized for political gridlock. For a mid-career analyst or a park ranger with a mortgage and kids, knowing they can access $30,000 penalty-free for immediate needs is huge relief. The ability to repay the funds within four months also encourages employees to treat this as a temporary bridge rather than a permanent raid on their retirement.

However, it's worth noting the underlying issue: this bill essentially formalizes the process of dipping into retirement savings to cover basic living expenses during a crisis caused by the government itself. While it removes the punitive tax penalty, it still encourages the depletion of retirement funds. This is a crucial benefit for short-term survival, but it highlights the financial fragility many federal workers face when paychecks stop. The TSP Board will also need to quickly establish the new rules for loan access and hardship withdrawals, adding administrative complexity to an already stressful situation.