If you are considering separating from service or retiring from your work as a federal employee, you may be wondering what to do with your Thrift Savings Plan (TSP). 

Hopefully you’ve been contributing to your TSP and have watched the account grow year after year. Unlike a traditional pension that converts into a fixed income stream, the TSP gives you the flexibility to decide how best to manage your savings after retirement or separation from service. 

Here, we describe the possibilities you have available for your TSP in terms of withdrawals, rollovers, or leaving the funds in the account after you retire or separate. We hope this will help guide you as you decide which option might be best for you. If you’d like complimentary one-on-one guidance from a financial advisor, you can also schedule a call with us here.

Understanding Your TSP After Retirement

The Thrift Savings Plan (TSP) is one of the three key components of your retirement as a federal employee. Your TSP is a defined contribution retirement account that is designed specifically for federal employees and military personnel. It functions much like a 401(k) plan but comes with its own set of rules, benefits, and options. There are some key differences in a TSP for civilian employees versus one for military members, as these can affect your options after separation or retirement.

TSP for Military vs. Civilian Employees

A major difference between civilian and military TSP accounts is how contributions and matching work. Federal employees under FERS automatically receive up to a 5% government match on contributions, while military members only get matching contributions if they are in the Blended Retirement System (BRS), introduced in 2018. Those under the legacy military system receive no match.

Both groups can choose Traditional (pre-tax) or Roth (after-tax) TSP, but military members contributing in a tax-exempt combat zone get a unique benefit: traditional contributions grow completely tax-free, while Roth contributions (including earnings) can be withdrawn tax-free in retirement. Civilians, however, pay taxes on Traditional TSP withdrawals, depending on when those withdrawals are taken.

After separating, neither civilians nor military members can continue contributing to their TSP unless they take a federal job. However, both can take TSP withdrawals, roll the funds into another retirement account, or leave the money in their TSP. Let’s take a look at each option in more detail.

1. How to Withdraw from Your TSP: Options & Rules

One of the most common questions facing retirees is: “How do I withdraw from my TSP after separation?” The answer depends on your unique financial situation and retirement goals.

Generally, you can begin withdrawing from your TSP once your separation from federal service is finalized. However, be cautious: withdrawing too early may subject you to penalties unless you meet specific age or exception criteria. 

For this reason, we recommend holding off on your Thrift Savings Plan withdrawal unless you need the funds immediately. Before making any withdrawals, meet with a financial advisor to ensure you have a solid retirement plan so you can strategically plan which of your assets to use for retirement first so you can minimize taxes and maximize growth as much as possible.

There are several withdrawal options available:

1. Lump-Sum Withdrawals:
   This option allows you to take your entire TSP balance in one payment. While it offers immediate access to your funds, a lump-sum withdrawal can lead to a significant tax bill if not managed carefully. More on that shortly.
2. Monthly Installments/Annuity:
   With this method, you set up regular payments based on a fixed amount or your life expectancy. It provides steady income and may help with budgeting throughout retirement.
3. Partial Withdrawals:
   This strategy involves withdrawing only the funds you need while leaving the rest invested or rolling it over for future growth.

If you have no other options and decide to withdraw funds from your TSP, how can you do so without triggering a tax penalty?

How to Withdraw From TSP Without Penalty

Generally, you can withdraw from your TSP without the 10% early withdrawal penalty once you reach age 59½. 

However, there are a few of exceptions:

• If you retire or separate from federal service at age 55 or older, you can also take penalty-free withdrawals. 
• For military members, the "Rule of 50" allows penalty-free withdrawals if you separate at age 50 or after 25 years of service, whichever comes first, if you are a public safety employee.
• Other penalty-free withdrawal options include taking Substantially Equal Periodic Payments (72(t)) or taking a withdrawal because of a permanent disability.
• In-service withdrawals, which we’ll touch on below.

Regular income taxes still apply to Traditional TSP withdrawals, while Roth TSP withdrawals are tax-free if the account is at least five years old. 

Withdrawing from your TSP can provide immediate access to funds, but it comes with potential tax penalties and the risk of depleting your retirement savings too early, making it a good option only when you have an urgent need and after consulting a financial advisor to ensure it aligns with your long-term goals. Click here to learn more about other options available for a TSP withdrawal, even while in service.

In-Service Rollovers: Moving Your TSP into an IRA Before Separation

Did you know you can roll a portion of your TSP into an IRA while still employed? This is known as an in-service withdrawal. 

It allows you to transfer funds from your TSP into an IRA without separating from service, giving you greater control over your investments and financial strategy.

An in-service rollover is a transfer of funds from your TSP to an IRA or another eligible retirement account while you are still working for the federal government. A properly executed in-service rollover allows you to maintain the tax-advantaged status of your retirement funds.

Why Consider an In-Service Rollover?

• Greater Investment Choices: IRAs typically offer a broader range of investment options compared to the limited funds available in the TSP.
• More Control Over Your Investments: You can manage your portfolio with greater flexibility and adjust your investments based on market conditions.
• Tax Planning Opportunities: Depending on your situation, rolling funds into a Traditional or Roth IRA can provide strategic tax advantages, such as Roth conversions or tax-efficient withdrawal strategies in retirement.

How to Execute an In-Service Rollover

1. Check Your Eligibility: The TSP allows participants aged 59½ or older to roll over their TSP funds into an IRA while they are still working.
2. Choose an IRA Provider: Research financial institutions and financial advisors that offer IRA accounts with investment options that align with your financial goals.
3. Request a Direct Rollover: Contact the TSP and request a direct rollover to avoid any tax implications. The funds should be transferred directly from your TSP to the IRA provider.
4. Select Your Investments: Once the rollover is complete, you will need to choose how to invest the funds within your IRA or consult your financial advisor to help you with this choice.

If you are considering an in-service rollover, it’s important to consult a financial advisor to determine whether it makes sense for your specific situation and financial plan.

2. Rolling Over Your TSP to an IRA or 401(k)

One of the best options for what to do with your TSP after separation from service or retirement is to consider a rollover to another retirement account so you can keep the tax benefits of your plan intact until you need the funds. 

Many federal employees contemplate rolling over their TSP into an IRA or, if they are then going back to work for a private company, into a 401(k). 

The benefits of rolling over your TSP into an IRA include:

• Greater Investment Options: IRAs typically provide a broader range of investment choices than a TSP, offering opportunities for improved diversification and risk-adjusted returns.
• More Control Over Your Investments: With an IRA, you can often manage your investments with more hands-on control or with the guidance of a financial advisor.
• Potential Tax Benefits: Depending on whether you choose a Traditional or Roth IRA, you may gain long-term tax advantages such as by exploring a Roth IRA conversion if it aligns with your current and expected tax situation.

How to Roll Over your TSP into an IRA

If you decide to roll over your TSP, here’s a general step-by-step approach:

1. Evaluate Your Current TSP Account: Determine whether you have a Traditional or Roth TSP, as this will affect your rollover decision.
2. Select an IRA Provider:  If you want help investing your TSP funds after rolling them over, choose a financial advisor who understands federal employees' unique needs. If you prefer to manage the IRA yourself, you can find online brokers or financial institutions that offer a wide range of investment options with low fees and tools to help you make informed decisions.
3. Initiate the Rollover: Work with your chosen financial institution to ensure a smooth, tax-compliant rollover process.

Consulting a financial advisor before initiating a rollover can help you navigate the complexities and avoid common pitfalls.

3. Leave Your Money in the TSP

Another option after separation or retirement is to leave your funds in the TSP. This can be a solid choice if you are comfortable with the investment options available in the TSP. Leaving your funds in the TSP rather than withdrawing them ensures your account continues to grow tax-deferred (Traditional TSP) or tax-free (Roth TSP), depending on which type of account you have.

However, leaving your money in the TSP also means limiting your ability to diversify beyond the funds offered within the plan. You won’t have the same investment flexibility you’d get with an IRA or 401(k), which might be important if your financial goals change or if you want to make adjustments based on market conditions. 

Required Minimum Distributions (RMD) reminder: Also, keep in mind that once you reach age 73, the IRS requires you to withdraw a minimum amount annually from your TSP and IRA accounts. Failing to meet this requirement can result in hefty penalties on the money you don’t take out.

If you decide to leave your TSP funds, be sure to review your account regularly to ensure it aligns with your retirement strategy.

Creating a Smart TSP Withdrawal Strategy

When deciding what to do with your TSP after separation or retirement, be sure to consider all of your assets, income sources, and potential expenses to make the decision that will optimize your wealth in the long-run. 

This might include reviewing your Social Security withdrawal strategy and the tax treatment of your other investment accounts and retirement accounts, especially if you have other IRAs or 401(k)s from prior jobs.

Some common mistakes to avoid include: 

• Withdrawing too much too soon, which can deplete your savings faster than planned.
• Failing to account for the tax implications of early or large withdrawals.
• Neglecting to plan for RMDs, leading to unexpected penalties.

By considering these as part of your retirement planning, you can ensure a more efficient and sustainable retirement income.

Want Guidance to Make the Right Decision About Your TSP?

Your Thrift Savings Plan (TSP) is an invaluable tool for building a secure retirement, but deciding what to do with it after retirement can be complex. Whether you choose to withdraw funds gradually, roll over your TSP to an IRA, or leave your money in the TSP to continue growing, the key is to plan ahead and make informed decisions. 

With the right strategy, your TSP can help ensure a comfortable and worry-free retirement. By consulting with a financial advisor and reviewing your options carefully, you can make an informed choice that maximizes the benefits of your retirement savings and helps secure your financial future. Click here to schedule a complimentary consultation with one of our financial advisors in Tampa today.