Last Updated: September 30, 2026 Reading Time: 9 min

A comment in r/thriftsavingsplan this week told 74 people that a VA 100% Permanent and Total rating "absolves you from the 59 1/2 rule 10% penalty." Someone replied that it was a game changer and started planning around it. The one person who asked whether the IRS definition is different from the VA's got told the difference is an audit-risk problem. It is not an audit-risk problem. It is two different legal tests, and if you are a federal employee or annuitant with a VA rating, the difference is worth 10% of the taxable portion of whatever you withdraw. This post puts the thread's claims next to the statute, then walks through the routes that actually do get TSP money out before 59½ without the penalty.

Myth vs. Fact: What the Thread Says and What the Law Says

What the thread says What the primary text says Authority
"The 100% P&T VA disability absolves you from the 59 1/2 rule 10% penalty" The exception applies to distributions "attributable to the employee's being disabled within the meaning of subsection (m)(7)"; (m)(7) defines disabled as "unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration," with proof furnished by the individual 26 U.S.C. 72(t)(2)(A)(iii); 72(m)(7)
A VA rating and the IRS's "total and permanent" are the same thing "The percentage ratings represent as far as can practicably be determined the average impairment in earning capacity resulting from such diseases and injuries" 38 CFR 4.1
The VA said I cannot work, so the IRS agrees The VA finding about work is TDIU under 38 CFR 4.16, which assigns a total rating where the veteran is unable "to secure or follow a substantially gainful occupation," and even TDIU tolerates marginal employment below the Census poverty threshold for one person. Nothing in 4.16 speaks to 26 U.S.C. 72 38 CFR 4.16(a), (b)
The difference is just audit risk, it's on the honor system The regulation measures substantial gainful activity against "the activity, or a comparable activity, in which the individual customarily engaged prior to the arising of the disability," giving "primary consideration" to the impairment's nature and severity; even the listed ordinarily-disabling impairments "will not, however, in and of itself always permit a finding that an individual is disabled" 26 CFR 1.72-17A(f)(1), (f)(2)
The TSP will code it as a disability withdrawal You claim it. Form 5329, line 2, exception 03: "You are considered disabled if you can furnish proof that you can't do any substantial gainful activity because of your physical or mental condition. A medical determination that your condition can be expected to result in death or to be of long, continued, and indefinite duration must be made." Form 5329 instructions, line 2, item 03
The IRS page cited in the thread supports it IRS Tax Topic 557 describes the exception as "Made because you're totally and permanently disabled" and says nothing about VA ratings IRS Tax Topic 557
My disability retired pay is tax-free, so the TSP withdrawal is too Military disability retired pay may be excludable under 26 U.S.C. 104(a)(4), a separate provision about a different payment. It does nothing for the 10% additional tax on a TSP distribution 26 U.S.C. 104(a)(4)

Every row quotes the primary text named in the third column. The thread's comments are quoted as reader beliefs, attributed to a Reddit discussion, not as authority.

Why the Two Tests Diverge

The VA schedule asks: how much does this condition reduce average earning capacity? A 100% schedular rating means the schedule assigns the maximum for your conditions. "Permanent and Total" is about the permanence of the rating and freedom from future examinations. Neither is a finding that you, personally, cannot work, and the VA system has a separate mechanism for that finding: total disability based on individual unemployability. Even TDIU permits marginal employment.

The Internal Revenue Code asks a narrower question: can you engage in any substantial gainful activity? The regulation compares you to the work you customarily did or comparable work, and it weighs your education, training, and work experience. It also says a remediable impairment is not a disability. The burden is on you to furnish proof "in such form and manner as the Secretary may require."

Put those side by side and the practical rule is short. If you are drawing a GS paycheck while holding a 100% P&T rating, you are engaged in substantial gainful activity, and the exception is not available to you on the rating alone. In a 2023 case summarized by the Journal of Accountancy, the Tax Court denied the disability exception to a taxpayer who kept performing his job after his diagnosis (Lucas v. Commissioner, T.C. Memo. 2023-9); I have not read the opinion itself, so I am reporting the summary, not quoting the court. No VA rating was involved in that case; the principle is "still working."

What the rating is good for: evidence. A 100% P&T award, a TDIU award, medical records, and a physician's determination can together support the 72(m)(7) claim for someone who genuinely cannot work. What no retrieved authority establishes is that an SSDI award, a TDIU award, or any single document settles the question by itself. Practitioners treat an SSDI award as strong evidence because Social Security's standard is also occupation-general, but I found no primary source or case on that point, so treat it as an open question, not a rule.

The By-Situation Self-Check

Your situation Is the 10% waived? Route What to watch
Working full time as a federal employee, 100% P&T No, on the rating alone None on disability; see the age routes below You are engaged in substantial gainful activity
Separated, genuinely unable to do any substantial gainful work, medical determination in hand Possibly 72(t)(2)(A)(iii) via 72(m)(7); claim on Form 5329 exception 03 The proof is yours to furnish; the rating is evidence, not the determination
Federal law enforcement officer, firefighter, air traffic controller, CBP officer, nuclear materials courier, Capitol or Supreme Court Police, DSS special agent, separated at 50 or with 25 years under the plan Yes 72(t)(10): "age 50 or 25 years of service under the plan, whichever is earlier" substituted for age 55 Do not roll to an IRA; 72(t)(3) removes the exception for IRA distributions
Any federal employee who separates in or after the year they reach 55 Yes, from the TSP 72(t)(2)(A)(v); Form 5329 exception 01 Applies to qualified plans only; an IRA rollover loses it
Medically retired from the military (Chapter 61), now taking TSP money Same 72(m)(7) test as everyone else Disability exception if you meet it; 104(a)(4) covers the retired pay, not the TSP The DoD rating and the tax-free retired pay do not carry over to the TSP
FERS disability retiree Not automatically OPM's test is inability to render "useful and efficient service in the employee's position" (5 U.S.C. 8451), narrower than "any substantial gainful activity" An OPM approval is evidence you can offer; it is not the IRS's finding
Separated from federal service, cannot meet any other exception, and need money before 59½ The SEPP route (for a TSP account the payment series must begin after you separate: 72(t)(3)(B)) 72(t)(2)(A)(iv); Form 5329 exception 02 See our 72(t) SEPP guide for the mechanics and the lock-in period

The Route the Thread Missed: Age 50 for Public-Safety Employees

The commenter planning to separate at 50 as a FERS special-provision retiree does not need a disability claim at all. Under 26 U.S.C. 72(t)(10), a qualified public safety employee taking a distribution from a governmental plan, which the TSP is, applies the age-55 separation exception "by substituting 'age 50 or 25 years of service under the plan, whichever is earlier' for 'age 55.'" The statute names federal law enforcement officers by their title 5 definitions, federal customs and border protection officers, federal firefighters, air traffic controllers, nuclear materials couriers, members of the Capitol Police and Supreme Court Police, and diplomatic security special agents by their title 5 definitions. That population overlaps heavily with FERS special-provision retirees.

Two cautions. First, it is a separation-from-service exception: the money has to come from the TSP after you leave. Second, 72(t)(3) says the age-55 and public-safety exceptions "shall not apply to distributions from an individual retirement plan." Roll your TSP to an IRA at 50 and you have thrown the exception away.

How the Claim Actually Gets Made

The TSP pays the distribution and reports it on a 1099-R. Whether the form shows a disability code is not something I could verify from the TSP's own tax notice this run, so plan on the conservative case: you claim the exception yourself on Form 5329, Part I, exception 03, when you file. The instruction restates the statutory test and requires a medical determination. Keep the determination, the records, and any VA and OPM documents together; they are the proof the statute puts on you.

If you separate at 55 or later, or at 50 with a covered public-safety job, the same form carries exception 01. If you set up substantially equal periodic payments, it is exception 02.

Project the Withdrawal Before You Take It

Before you take money out early under any exception, see what it does to the balance you retire on. The TSP Calculator takes your current balance, contribution rate, and years to retirement and projects growth and withdrawal scenarios, so you can compare a penalty-free withdrawal at 50 or 55 against leaving the money in. It does not compute the 10% additional tax; that is Form 5329's job, and this post is about whether the form applies to you.

Frequently Asked Questions

Does a VA 100% Permanent and Total rating exempt me from the 10% penalty on TSP withdrawals before 59½?

Not by itself. The exception in 26 U.S.C. 72(t)(2)(A)(iii) waives the 10% additional tax only for distributions attributable to being disabled within the meaning of 72(m)(7): unable to engage in any substantial gainful activity because of a medically determinable impairment expected to result in death or to be of long-continued and indefinite duration, with proof furnished by you. A VA rating measures average impairment in earning capacity under 38 CFR 4.1, a different question, which is why 100%-rated veterans can and do work full time. The rating is evidence you can offer; it is not a determination the IRS must accept.

I'm still working as a GS employee with a 100% P&T rating. Can I use the disability exception?

No. Working full time is substantial gainful activity, which is the one thing 72(m)(7) says a disabled person cannot do. In a 2023 case, as summarized by the Journal of Accountancy, the Tax Court denied the exception to a taxpayer who kept performing his job after his diagnosis (Lucas v. Commissioner, T.C. Memo. 2023-9). Look at the age-55 and public-safety routes instead.

How do I claim the disability exception on a TSP withdrawal?

On IRS Form 5329, Part I, using exception code 03. The instruction says you are considered disabled if you can furnish proof that you can't do any substantial gainful activity because of your physical or mental condition, and that a medical determination that your condition can be expected to result in death or to be of long, continued, and indefinite duration must be made. Keep that determination with your return.

I'm a federal law enforcement officer retiring at 50. Do I owe the 10% on TSP withdrawals?

No, as long as the money comes from the TSP after you separate. Under 26 U.S.C. 72(t)(10), qualified public safety employees, including federal law enforcement officers, firefighters, air traffic controllers, customs and border protection officers, nuclear materials couriers, Capitol and Supreme Court Police, and diplomatic security special agents, use age 50 or 25 years of service under the plan, whichever is earlier, in place of age 55. Rolling the money to an IRA first removes the exception under 72(t)(3).

My military disability retired pay is tax-free. Does that make my TSP withdrawal penalty-free?

No. Military disability retired pay can be excluded from gross income under 26 U.S.C. 104(a)(4), a separate provision about a different payment. A TSP distribution before 59½ is judged under 72(t), and the disability exception there uses the 72(m)(7) test, not the DoD rating.

Does FERS disability retirement approval satisfy the IRS disability test?

Not automatically. OPM approves FERS disability retirement when you are unable "to render useful and efficient service in the employee's position" under 5 U.S.C. 8451, a position-specific standard. The IRS asks whether you can do any substantial gainful activity, an occupation-general standard. The OPM approval is evidence you can offer toward the IRS test; it is not the same finding.

Sources: 26 U.S.C. 72 (subsections (m)(7), (t)(2)(A), (t)(3), (t)(10)) · 26 CFR 1.72-17A(f) (meaning of disabled) · 38 CFR 4.1 (essentials of evaluative rating) · 38 CFR 4.16 (total disability ratings based on unemployability) · Instructions for Form 5329, line 2 exceptions · IRS: Retirement topics, exceptions to tax on early distributions · IRS Tax Topic 557 · 26 U.S.C. 104(a)(4) · 5 U.S.C. 8451 (FERS disability retirement) · Lucas v. Commissioner, T.C. Memo. 2023-9, as summarized by the Journal of Accountancy (opinion not independently read) · r/thriftsavingsplan discussion, September 28 to 29, 2026 (reader comments, quoted as beliefs).