New Federal Worker Relief Bill Waives 10% TSP Penalty on $30K During Government Shutdowns

The aptly named Emergency Relief for Federal Workers Act of 2025 is a direct response to the recurring headache of government shutdowns. If you’re one of the hundreds of thousands of federal employees who gets furloughed or works without pay when Congress can’t agree, this bill is designed to give you a financial lifeline without the usual tax sting. Specifically, it changes the rules for accessing your Thrift Savings Plan (TSP)—the federal equivalent of a 401(k)—when a shutdown lasts at least two weeks.

The Emergency Cash Valve: $30,000 Penalty-Free

Right now, if you’re under 59½ and need to tap into your TSP, the IRS hits you with a 10% early withdrawal penalty on top of regular income taxes. This bill (Sec. 2) waives that 10% penalty if you take a distribution due to a qualified government shutdown. For each shutdown period, you can pull out up to $30,000 penalty-free. Think of it: that’s $3,000 you get to keep in an emergency, rather than giving it to the Treasury. Starting in 2026, that $30,000 limit will even be adjusted for inflation, recognizing that the cost of living keeps rising.

This is huge for the everyday federal worker—the park ranger, the TSA agent, or the office administrator—who lives paycheck to paycheck. When the government closes shop, their mortgage payment or childcare costs don't. This provision means they can access their own savings to cover those immediate bills without incurring a punitive tax penalty for a crisis they didn't cause.

Protecting Your Loan and Giving You a Do-Over

The bill also addresses two major issues that plague employees who have TSP loans or who take emergency withdrawals. First, if you miss a TSP loan payment because you weren't getting paid during a shutdown, the bill ensures that missed payment is not treated as a taxable distribution (Sec. 4). This means you won’t suddenly owe taxes on the entire outstanding loan balance just because your paycheck was delayed. The TSP Board is also required to set up rules allowing employees to take out new loans during a shutdown (Sec. 3).

Second, the bill offers a crucial “do-over” mechanism (Sec. 3). If you take one of these special hardship withdrawals, you have up to 120 days after the shutdown ends to contribute that money back into your TSP account. If you repay the funds within that window, the law treats it as if the money was never withdrawn for tax purposes, allowing you to restore your retirement balance and keep your long-term savings plan on track. This is a smart move that recognizes the money is needed for a temporary crisis, not a permanent depletion of savings.

The Trade-Off: Sacrificing Future Growth for Today’s Bills

While this relief is necessary and welcome, it’s important to look at the trade-off. By making it easier to access retirement funds, the bill introduces a temptation. Even if you put the money back 120 days later, you’ve missed out on potential market gains during that time. And if you don't put it back, you've permanently reduced your retirement nest egg. For a 35-year-old federal worker, $30,000 taken out today is significantly more money they won’t have in retirement due to lost compound interest.

Ultimately, this legislation provides a responsible emergency brake for federal workers caught in political gridlock. It uses the retirement system as a temporary safety net, ensuring that while Congress figures things out, the people doing the actual work don't have their financial lives completely derailed by a lack of pay—and they won't be penalized for using their own money to keep the lights on.