One of the best benefits available to you as a federal employee is the Federal Employees Retirement System (FERS). When you separate from government service, your post-job life will be supported by the three-legged FERS stool consisting of Social Security, a defined-benefit pension plan, and a Thrift Savings Plan (TSP).
Social Security and the pension plan pay monthly — what you receive depends on your job tenure and other factors. Not so with the TSP. Once you separate from service, you have multiple options for taking money from your TSP.
However, before you touch one penny of that balance, it’s essential to have a withdrawal strategy in place. Advanced planning ensures you’ll have enough to fund your post-career years.
What to know about withdrawal options
There are three ways to get your money from the TSP:
Full withdrawal: Taking it all
Also known as a total distribution, a complete withdrawal means you remove the entire balance, which deletes the account. This strategy gives you full control over your money — you decide what to do with it.
One option is reinvesting it into an IRA or Roth IRA, so the money keeps growing. If you decide to go this route, consider working with a Certified Financial Planner™ from a fed-focused company like Serving Those Who Serve. This qualified individual can point you toward IRAs or other tax-advantaged, retirement investments that fit your needs.
Partial withdrawal: Leaving some behind
With a partial withdrawal, you request a certain amount from the TSP, leaving the rest behind. This method lets you withdraw at least $1,000 every 30 calendar days. To follow this plan, your vested account must total at least $1,000, and you must be separated from federal service for 31 days or longer.
The advantage here is that the remaining TSP balance continues to grow, which is important in your retirement years. However, you don’t have control over where that balance is invested.
Installment payments: Getting paid monthly
With installment payments, you direct the TSP to pay you monthly if you leave your government job at age 55 (or older) and move directly into retirement.
Like the partial withdrawal, an installment payment strategy leaves a remaining balance behind to grow. And, like the partial distribution strategy, another entity decides where that money is invested.
Unlike the partial distribution path, once you set installment payments in motion, you automatically receive your payments until you decide otherwise.
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Then, there are the taxes…
Yes, TSP withdrawals come with tax implications. These are reported to the IRS and state agencies. In many cases, your federal employee could be required to withhold the taxable portion of your distribution or withdrawal, meaning you might receive less than requested.
If you park part or all of your TSP funds in a traditional or Roth IRA, there could also be tax issues.
None of this suggests that TSP withdrawal options are off the table. But it does mean you should work with a CFP® to understand any tax consequences, while potentially finding ways to keep more of your money.
What to know about early withdrawals
If you leave the federal government at age 55 or older, you can withdraw from your TSP without fear of a penalty—as long as you retire immediately. However, if you decide to get another job or are younger than 59 ½ (except in the case of those Feds eligible for early withdrawals under the Rule of 55), any early TSP withdrawal could mean a 10% penalty.
There are financial hardship exceptions to this penalty for early withdrawal, like:
- Negative monthly cash flow
- Unpaid medical expenses
- Casualty loss
- Legal fees due to a separation or divorce
- Losses due to a significant natural disaster as declared by FEMA
Early withdrawal should be considered a last resort. In addition to the penalty, taking funds away from your TSP before retirement could reduce your earnings once you leave your job.
What to know about RMDs
If you’re investing in a traditional TSP, you don’t pay taxes on those distributions. But you’re not getting off scot-free. Those taxes have to be repaid at some point. That “some point” is where required minimum distributions (RMDs) come into play.
RMDs are government-required withdrawals from your TSP once you reach a certain age. Right now, that age is 73. The Setting Every Community Up for Retirement Enhancement Act of 2022 (SECURE 2.0) has extended the RMD age to 75 after January 1, 2033.
How much of a distribution must you take? That’s determined by the TSP account balance divided by life expectancy numbers issued by the IRS. Another issue to consider: That RMD is subject to the ordinary income tax rate.
One way to potentially avoid this is by requesting a full distribution from your TSP and rolling it into a Roth IRA. While you’ll be taxed on the withdrawal, you won’t be when you take money from the IRA (assuming you’re 59 ½ or older). An added advantage is that Roth IRAs don’t require RMDs.
Know before you withdraw
Whether you’re a few years away from retirement or have just walked out the door, having TSP withdrawal strategies in place is essential to help you understand everything from tax implications to investment options. Knowing your choices enables you to achieve a secure and comfortable retirement.
And you don’t have to do this alone. Partnering with a CFP® from Serving Those Who Serve can help you make sense of TSP withdrawal planning and other retirement strategies. To learn more, visit the STWS website or email [email protected].
The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
