- Once you retire, no new contributions or loans can be made to your TSP, and any existing loans must be resolved before withdrawal requests can be processed
- Distributions taken before age 59 and a half may be subject to a 10% early withdrawal penalty, with specific exceptions for separation after age 55 and disability
- Required minimum distributions now begin at age 73, with an increase to age 75 scheduled for January 1, 2033
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The Thrift Savings Plan remains a valuable retirement asset after you leave federal service, but the rules governing withdrawals, taxes, and beneficiary designations change once you are no longer an active employee. There are no new contributions allowed, no new loans available, and any existing loans must be closed either through full repayment or a taxable distribution before any withdrawal requests can be processed. Understanding your options and the tax implications of each choice is essential for making the most of your TSP balance in retirement.
Early Withdrawal Penalties
TSP distributions may be subject to a 10% early withdrawal penalty if the money is paid directly to the participant before age 59 and a half. However, this additional 10% tax generally does not apply in several specific situations. If the payment is made after separation from service during or after the year the employee reaches age 55 (or age 50 for public safety officers or those with 25 years of service regardless of age), the penalty does not apply. The penalty is also waived for distributions resulting from total and permanent disability, payments made as substantially equal installments over life expectancy, and automatic enrollment refunds.
Roth Account Tax Considerations
Earnings on Roth contributions that are withdrawn and not rolled over may be taxable if the participant has not yet reached age 59 and a half or if five years have not passed since the first Roth contribution was made. The 10% early withdrawal penalty may also apply in these cases. There are possible exceptions for participants with permanent disabilities and for money that was rolled over from another Roth account into the TSP. It is important to note that Roth IRA funds may not be rolled over into the TSP.
Participants who switch from monthly payments based on life expectancy to another withdrawal option may also be liable for a 10% early withdrawal tax penalty on payments previously received, known as the recapture tax. Details on this provision can be found in IRS Publication 575 under the pension and annuity income section.
Withdrawal Options
Retirees have several options for accessing their TSP funds. You can leave the money in the account, take single payments (from the entire account or just a portion), set up installment payments based on life expectancy or a specific dollar amount, purchase a TSP annuity, or choose a mixed withdrawal that combines multiple options.
Leaving Money in the TSP
If you choose to keep your funds in the TSP, you can continue to manage your investments through reallocations. Recent legislation changed the age for required minimum distributions from 70 and a half to 73, with a further increase to age 75 effective January 1, 2033. Persons who turned 70 and a half before December 31, 2019 are excluded from this new rule. Required minimum distributions cannot be rolled over to an IRA, and Roth balances are no longer subject to required minimum distribution rules.
Single Withdrawals
You may withdraw the entire account or just a portion of it, and there is no limit on the number of withdrawals you can make, as long as your account contains at least $1,000 of your own money. If your account holds both Roth and traditional balances, you can draw from either or both. Single withdrawals are subject to mandatory withholdings on certain distributions. Withdrawals rolled over to an IRA or eligible retirement plan are not taxed until the money is withdrawn from that receiving account. Roth funds can be rolled to one IRA or plan and traditional funds to another, but the rollover must be a single payment, a part of the entire account, or payments spanning less than a 10-year period.
Installment Payments
Installment payments can be taken monthly, quarterly, or annually, based on either life expectancy or a specific dollar amount. Life expectancy-based payments cannot be rolled over to an IRA or eligible retirement plan, and the payment amounts are recalculated annually based on the whole account. You can stop payments at any time, and if your account has both Roth and traditional balances, you can choose which to withdraw from first or take proportionally from both.
For specific dollar amount installments, any portion of the payment can be rolled over if the payment is expected to last less than 10 years. You can request a final single payment at any time, and you can stop or change the amount or frequency of payments. The minimum installment amount is $25.
Purchasing a TSP Annuity
The TSP offers both single life and joint life annuity options. A single life annuity provides monthly payments for as long as the retiree lives. A joint life annuity with a spouse or other survivor provides 50% or 100% of the benefit to the surviving beneficiary. Both options offer level payments as well as increasing payments that adjust annually based on the Consumer Price Index, similar to cost-of-living adjustments on the pension side.
Annuity beneficiary options include a cash refund, which pays the difference between the purchase amount and payments already received to a designated survivor, and a 10-year certain option, which continues payments to a beneficiary for the balance of the original 10-year period if the annuitant passes away before that time. The TSP website provides a calculator to help you estimate these options.
Spousal Rights and Consent
Married FERS employees or retirees who wish to make a withdrawal election other than the standard annuity option must obtain their spouse's written consent, signed in the presence of a notary public. The notarized document must include a seal confirming that the conversation took place and that the spouse is aware of the withdrawal. If an annuity is elected, it must be a joint life annuity with the spouse receiving at least 50% survivor benefits, level payments, and no cash refund option.
Non-Spouse Beneficiary Options
Non-spouse beneficiaries have two primary options: a single taxable payment received in the tax year it is paid, or a rollover to an inherited IRA. The IRA 10-year rule applies to funds rolled over to an inherited IRA.
Contacting TSP
The Thrift Savings and Investment Board offers a toll-free service line for participants with a 24-hour automated telephone system. Customer service representatives are available Monday through Friday from 7 a.m. to 9 p.m. Eastern Standard Time at 877-968-3778. The TSP website is tsp.gov, and general email inquiries can be sent to thriftline@tsp.gov.
