It is to raise the money via a $20.5 billion stock issue, comprised of $17 billion worth of common stock and $3.5 billion of tangible equity units.
As part of its $45 billion bailout of Citigroup, the government converted $25 billion into a 34 per cent share in the financial institution.
Following the news of the planned TARP withdrawal, the US Treasury has announced it intends to sell off its shares - which have increased by 20 per cent since being bought - over the course of 2010.
The move will be a relief to Citigroup chief executive Vikram Pandit, who has been desperate to exit the TARP programme and its associated curbs on remuneration.
"We owe the American taxpayers a debt of gratitude and recognize our obligation to support the economic recovery through lending and assistance to homeowners and other borrowers in need," he said after the deal was announced.
Despite escaping the restrictions of the TARP scheme, Citigroup and other Wall Street banks are set to come under increased pressure from Barack Obama to increase their lending.
In an interview with CBS's 60 Minutes earlier this week, President Obama attacked "fat cat bankers" and stated that it was not right banks were fighting against regulatory reform and awarding staff large bonuses while the US had ten per cent unemployment.
However, the Treasury has welcomed Citigroup's planned exit from TARP, stating the government had no intention of being a long-term shareholder in any private company.
"As banks replace Treasury investments with private capital, confidence in the financial system increases, government's unprecedented involvement in the private sector diminishes and taxpayers are made whole," it said.
But the statement warned that a lot of work was still to be done on Wall Street in terms of business lending to help with job creation.
By Claire Archer