What to do with your TSP when you retire
Nothing happens to your Thrift Savings Plan automatically when you retire. That is the trap. Here are the real options and the trade-offs behind each.
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Your main options
After you separate from federal service, the money stays where it is until you decide. You generally have these choices, and you can often combine them:
Leave it in the TSP. You keep the TSP's very low fund costs and familiar fund lineup. You are also subject to the TSP's own withdrawal rules, which are less flexible than a typical IRA.
Take partial withdrawals or installment payments. You can set up a regular payment or take money out as needed, and the rest stays invested.
Take a lump sum. A full or partial withdrawal is allowed, but the taxable portion is added to your income for that year. Large withdrawals can push you into a higher bracket.
Roll it to an IRA. A rollover moves the money out of the TSP and opens up more investment and distribution choices, though not necessarily lower costs.
Buy a TSP annuity. You can use part of your balance to buy a lifetime income annuity through the TSP.
None of these is automatically right. The TSP is hard to beat on cost. An IRA is hard to beat on flexibility. The best choice depends on which of those two things matters more in your plan.
Taxes: the part people overlook
Money in a traditional TSP balance is pre-tax, so withdrawals are taxed as ordinary income. Money in the Roth TSP balance can come out tax-free if the withdrawal is qualified. Many retirees have both, and the order you draw from them changes your tax bill every year.
If you separate from service in or after the year you turn 55 (age 50 for certain public safety employees), withdrawals from the TSP are generally exempt from the 10% early withdrawal penalty. Rolling the money to an IRA can give up that exception, so confirm before you move anything.
Required minimum distributions still apply
Traditional TSP money is subject to required minimum distributions. The starting age is 73 for those born from 1951 through 1959 and 75 for those born in 1960 or later. If you do not need the income, RMDs can still force it onto your tax return.
Questions worth answering before you decide
How much income will your FERS pension and Social Security already cover? What is the gap the TSP has to fill? How would a large withdrawal affect your tax bracket and your Medicare premiums? Do you want to leave this money to someone, and in what form?
Answering those first usually makes the TSP decision much clearer.
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Common questions
What happens to my TSP when I retire?
Nothing automatically. Your balance stays invested until you choose to leave it, take withdrawals, roll it to an IRA, or buy an annuity.
Can I leave my money in the TSP after I retire?
Yes. Many retirees do, mainly because of the TSP's low costs. You are subject to the TSP's withdrawal rules and required minimum distributions.
Is it better to roll my TSP into an IRA?
It depends. An IRA can offer more flexibility, but the TSP's fund costs are very low and rolling out can affect penalty exceptions. Review your full plan before deciding.
Is a TSP withdrawal taxable?
Withdrawals from traditional TSP money are taxed as ordinary income. Qualified withdrawals from Roth TSP money are generally tax-free.
This page is for general education only and is not investment, tax, or legal advice. Rules, limits, and ages change, and your situation is specific to you. Confirm current figures with the IRS, the Social Security Administration, OPM, or the TSP, and consult your own tax advisor or attorney before acting.
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