Navigating a break in service as a Fed, whether for personal or professional reasons, requires careful financial planning. When the time comes to leave government service and possibly return later, understanding the best ways to manage your benefits, retirement accounts, and long-term financial health is critical. Below are some key considerations to help you make informed decisions when leaving and reentering the federal workforce.
Don’t Cash Out Your Thrift Savings Plan (TSP)
One of the most important decisions when leaving federal service is what to do with your TSP. While it may be tempting to cash out your TSP account, doing so could have significant tax consequences and reduce your long-term retirement savings. There are several options here.
Do nothing. Ah, yes. The tried and true method of financial management (just kidding!). In all seriousness, there is some merit to this approach. There is no rule that you have to pull your money out of the TSP when you leave government service. As long as you maintain at least a $200 balance in the account, you can leave the funds right where they are and continue to invest in the 5 core funds offered in the TSP. Benefits to this option would be keeping fees low—while not currently the cheapest option out there when compared to some of the no-fee funds from custodians like Fidelity, TSP’s fees are pretty cheap. It’s also simpler, because you don’t have to do anything. Cons are that the TSP has pretty limited investment options which leave you without meaningful access to whole asset classes like small or large cap value, real estate, and emerging markets.
Roll your TSP funds into a private-sector 401(k). Assuming you’re taking a break in service to go private sector and your new gig has a 401(k) plan (see below), you also have the option of rolling funds from your TSP into your new 401(k). As long as you make sure pre-tax/Traditional balances in your TSP go into the pre-tax/Traditional portion of your 401(k) and Roth TSP balances go into the Roth portion of your 401(k), this should be a tax-free transaction. Remember—if any portion of your TSP balance is paid out directly to you and you are under 59 ½, you could face early withdrawal penalties (and tax on the amount of the distribution, if it’s coming from pre-tax/Traditional TSP). Merits to this approach include “jumpstarting” your new 401(k) – psychologically, it’s disheartening to start over from $0 in a new retirement account, especially if you’ve been saving a while and are used to seeing a significant balance. You may also gain access to more investment options in the new 401(k), depending on the quality of the plan’s investment options. In the private sector, 401(k) investment options are often used to enhance benefit packages with the hopes of recruiting and retaining top talent. However, since the employer is the one footing the bill for all the plan’s bells and whistles, you’re still going to be limited to whatever investment options they choose to include. Another drawback here is that your 401(k) plan fees could be higher than the fees on your existing TSP, so you should always double-check costs before making a move.
Roll your funds into an IRA or Roth IRA. This option offers the most freedom when it comes to investment options. Similar to rolling your TSP to a 401(k), you won’t face any tax consequences as long as pre-tax/Traditional TSP balances move into a Traditional IRA and Roth TSP balances move into a Roth IRA. By setting up your own IRA/Roth IRA outside of a workplace retirement plan, you will be able to invest in a much broader range of investment options. In an IRA/Roth IRA portfolio, you can invest in individual stocks, bonds, mutual funds, exchange-traded funds (ETFs), and even more specialized assets like real estate or commodities. This gives you much more control to tailor your portfolio to match your investment strategy, risk tolerance, and financial goals. Even when compared to a typical private-sector 401(k), which may offer a range of funds but still limits your choices, rolling your TSP into an IRA/Roth IRA can give you greater flexibility and access to a wider array of investment opportunities. Now, every rose has its thorn—fees are likely going to be higher on an IRA/Roth IRA than in an employer-sponsored plan, because you are footing the bill for the administration of the account instead of your employer. You also have to do the legwork on selecting the right investment options, although it is possible to offload this to a qualified investment manager.
The advantage of rolling your TSP into an IRA is the broader range of investment options available. However, keep in mind that with greater investment flexibility often comes higher fees, so it’s important to carefully compare costs when choosing where to roll over your TSP.
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Keep Saving for Retirement with a Private Sector 401(k)
If you transition to a job in the private sector, don't stop saving for retirement! Many private employers offer a 401(k) plan, which is similar to the TSP in its ability to help you save for retirement. Contributing to a 401(k) allows you to continue building your retirement savings, and in many cases, your employer may match your contributions, effectively increasing your retirement fund. And this is familiar territory: the annual contribution limits for TSP and 401(k)s are the same— as of 2025, if you’re under 50 years old, you can put in $23,500 per year and if you’re 50 or older, you’re able to pitch in an extra $7,500 “catch-up” contribution each year.
Should you return to federal service in the future, you will have the option to roll your 401(k) balance into your TSP, or you can choose to roll it into an IRA or Roth IRA portfolio (see discussion above). This flexibility allows you to maintain your retirement savings momentum and avoid disruption in your financial planning.
Don’t Cash Out or Refund Your FERS Balance
Another common question when leaving government service is whether to cash out or refund your Federal Employees Retirement System (FERS) balance. While this may seem like an appealing option at first, it’s generally best to avoid cashing out your FERS balance, especially if you plan on—or are even remotely open to the possibility of—returning to federal service at some point.
By leaving your FERS balance intact, you retain the years of service you've already accumulated. Should you return to federal service, you can simply pick up where you left off contributing to your pension and not lose your years of service for annuity calculations. This continuity is crucial because your FERS pension will not only provide income but will also play a key role in retaining Federal Employees Health Benefits (FEHB) in retirement. Maintaining a vested pension means that you’ll have continued access to FEHB when you retire, which is one of the most valuable benefits available to federal employees.
Build a File of Your Employment Records
When planning a break in service, it is essential to keep thorough records of your employment history, including the dates of your hire, break in service, and, importantly, the status of your benefits. This file will be invaluable when you return to government service, as it helps ensure that you won’t lose any critical benefits or miss out on any opportunities.
Having documentation of uninterrupted participation in the FEHB and, to a lesser degree, the Federal Employees Group Life Insurance (FEGLI) program is vital. Additionally, keeping records will help ensure that your TSP match vests immediately upon your return, which can provide a boost to your retirement savings right from day one. The clearer and more organized your file is, the easier it will be to transition back into federal service without missing a beat.
Leaving government service doesn’t have to mean giving up on your long-term financial goals. By making smart decisions about your TSP, FERS, and private-sector retirement savings, you can ensure that your break in service doesn’t derail your retirement plans. Additionally, keeping thorough records of your employment history will streamline your return to the federal workforce, making it easier to pick up where you left off. With careful planning and the right strategies, you can protect and enhance your financial future, no matter where your career path takes you.
At Serving Those Who Serve, we’re committed to helping Feds navigate these transitions with confidence. If you’re considering a break in service or reentry into federal employment, we’re here to provide personalized guidance tailored to your unique situation. Feel free to reach out to us to schedule a 1-1 consultation today to learn how we can help support you in achieving your goals, whatever they may be.
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. **
