TSP Withdrawal Rules After Retirement: What to Know

You’re retiring. Now what do you do with your Thrift Savings Plan (TSP) savings?

What you do with this money becomes even more important as you will need to start taking income from your TSP to help cover your retirement expenses.

At Advance Capital Management, we’ve helped many federal employees make informed retirement decisions. We know at this stage of life, things like investment performance, excessive withdrawals and inefficient tax planning can impact the likelihood your TSP lasts throughout your retirement.

So, let me go over the key TSP withdrawal rules after retirement to help you prepare and avoid any missteps that could impact your financial security.

This article covers:

• Navigating TSP withdrawal rules after retirement
• Partial TSP withdrawals
• Full TSP withdrawal (single payment)
• TSP transfer to an IRA
• TSP installment payments
• Annuity option with TSP

Navigating TSP withdrawal rules after retirement

Upon retirement, there are several withdrawal options available to employees. It’s important to carefully choose your withdrawal options as well as your withdrawal amounts. Excessive withdrawals can reduce the likelihood of a successful retirement. Meanwhile, overly frugal withdrawals could diminish your quality of life in retirement.

This aspect of financial planning should be done in conjunction with the assets of the whole family, including your spouse’s estimated retirement income.

Taking this view will help guide you through decisions that impact your retirement income, your taxes and your ability to pass assets on to others upon your death.

Now, let’s go through each option in detail.

Partial TSP withdrawals

You can withdraw a portion of your funds while saving the remaining balance in the TSP for later. There is no limit on the number of partial withdrawals you can take after separating from federal service (except that you won’t be able to take more than one every 30 calendar days).

Full TSP withdrawal (single payment)

This option allows you to withdraw the full balance of your TSP account, either as a lump-sum cash payment (taxable distribution) or transferred directly to an IRA (not a taxable distribution).

TSP transfer to an IRA

An IRA transfer is a recommended option for many federal retirees. Although the TSP offers solid investment options to grow your assets while still working, it may not provide the diversity, tax efficiency, investment selection and flexibility that can better provide a reliable and sustainable stream of income throughout your retirement.

An IRA has the following benefits over the TSP:

• Greater diversification – There are more asset classes available in an IRA, such as international bonds, emerging market stocks and bonds, and alternative investments, that can help you build a more diversified portfolio.
• Wider investment selection – IRAs offer retirement investors access to almost any investment available to help pursue specific income needs and future goals.
• Flexibility – An IRA gives you the flexibility to purchase or sell investments as economic conditions or your needs change.
• Easy access to your assets – With an IRA you can quickly raise and access cash for expenses, especially for unexpected costs such as medical emergencies or home repairs.
• Active management – Investments in an IRA allow for active management of the portfolio. That means instead of holding funds that simply try to match the market, such as those in the TSP, investments are purchased or sold based on economic fundamentals in an attempt to hold investments that outperform the market.
• Pro-Rata TSP Withdrawals – When withdrawing money from an investment portfolio, assets need to be sold to generate the cash. Many advisers have dedicated assets within an IRA specifically set aside for near-term cash flows and will sell these (and only these) as cash is needed. All withdrawals from the TSP sell evenly across all investments according to the size of each investment (if an important stock fund takes up 25% of the account, 25% of the withdrawal amount will be sold from this fund.) Better management of these withdrawals can be maintained within an IRA.

However, there are reasons why you might choose to leave your funds in the TSP, including:

• Low Fees: One of the most significant advantages of the TSP is its extremely low administrative and investment fees.
• G Fund Investment Option: The TSP’s G Fund offers a type of investment that is not directly available in the open market, providing government bonds without the risk of losing principal, making it an attractive option for conservative investors or those nearing retirement.
• Tax Treatment of TSP Contributions from Combat Zones: For military members, contributions to the TSP from tax-exempt pay earned in a combat zone are eligible for tax-free withdrawal, a benefit not available in IRAs.

This is an important example of why you should consider speaking with a financial adviser to determine which option is appropriate for your situation.

TSP installment payments

This option allows you to receive monthly, quarterly or annual payments, either as a fixed-dollar amount or based on your life expectancy. You can change the amount and frequency of your installment payments – and stop and start payments – at any time.

You may also change from life expectancy payments to a fixed-dollar amount, but only as a one-time change. (Once you choose to receive fixed-dollar payments, you cannot switch to the life expectancy option.) TSP payments based on your life expectancy should be avoided. It may sound like a good idea, until you live longer than your life expectancy.

Annuity option with TSP

Lastly, purchasing an annuity with your TSP can be done using all or part of your TSP balance, with a private insurance company handling the annuity. Of course, there are pros and cons to this option.

TSP annuity pros

• Guaranteed Income: Provides a steady, predictable income every month for the rest of your life.
• Flexibility in Investment: You can use either your full TSP balance or just a portion for the annuity.
• Reliability: Offers financial stability similar to Social Security and the Basic Benefit under FERS (Federal Employees' Retirement System).

TSP annuity cons

• High Costs: Annuities often come with substantial commission fees, which don’t contribute to your benefits.
• Limited Access to Funds: Once you annuitize, you lose the flexibility to withdraw additional funds for unforeseen expenses or rising living costs.
• Inheritance Restrictions: Passing on inheritance becomes difficult unless you pay more for added benefits.
• Less Investment Growth: Your TSP investments, if left available, can be a significant strategy for income generation and asset growth. Choosing an annuity might limit this potential.

Key Reminder: With FERS, you already have Social Security and the Basic Benefit, both providing consistent monthly income with cost-of-living adjustments. It’s important to consider how an annuity fits within this structure and whether it aligns with your overall retirement strategy.

Get a better understanding of your FERS and TSP benefits by downloading our free ebook now: FERS Made Simple: Understanding and Maximizing Your Benefit.

Bottom line

Navigating TSP withdrawal rules after retirement can feel like a complex journey. Remember, the key is to balance your immediate financial needs with your long-term retirement goals. With options ranging from partial withdrawals to annuities, each choice comes with its own set of pros and cons.

Everyone’s particular circumstances are unique and should be discussed with a financial professional before taking any action.

Your decision should align with your overall financial plan, considering other retirement income sources like Social Security and the Basic Benefit under FERS. As you weigh the options, think about how each choice impacts your lifestyle, tax situation and your legacy.

If you have any questions or would like a complimentary review of your TSP, please don’t hesitate to schedule a call with an Advance Capital Management adviser by clicking HERE.

Although the firm does not charge a fee for a TSP review, it is intended to result in the recipient purchasing a product or establishing an advisory relationship.