Can You Still Contribute to TSP After Separation?

The Thrift Savings Plan (TSP) is a defined contribution retirement savings and investment program established for federal employees and uniformed service members. It functions similarly to a 401(k) plan offered by private sector employers, allowing participants to save a portion of their income for retirement. The TSP offers tax advantages and various investment options to help grow retirement savings. This plan forms a component of the federal government’s retirement benefit package.

Understanding Post-Separation Contributions

Once an individual separates from federal civilian service or the uniformed services, new contributions to their Thrift Savings Plan account cease. This means that payroll deductions for employee contributions, along with any agency matching contributions or agency automatic contributions, will no longer be made to the account.

The cessation of contributions is a fundamental aspect of the TSP’s design, as it is structured as an employment-based retirement plan. While new contributions are not permitted after separation, the existing account balance remains within the TSP. Participants can continue to manage their accumulated funds.

Options for Your TSP Account After Separation

Upon separating from federal service, individuals have several choices regarding their existing TSP account balance. One option is to leave the balance within the TSP. Many participants choose this path due to the TSP’s historically low administrative expenses and its range of investment funds.

Another common choice is to roll over the funds to an Individual Retirement Account (IRA) or an eligible employer-sponsored retirement plan, such as a 401(k). A direct rollover involves the TSP sending the funds directly to the new account custodian. This method generally avoids immediate tax consequences.

When rolling over funds, it is important to consider the type of account the funds are moving into. Traditional TSP balances can be rolled into a Traditional IRA or an employer’s 401(k) plan without immediate taxation. Roth TSP balances can be rolled into a Roth IRA or a Roth 401(k) without incurring taxes on the rollover, provided the Roth funds are qualified.

Rolling a traditional TSP balance into a Roth IRA is considered a Roth conversion and will result in the entire converted amount being taxed as ordinary income. Similarly, rolling a Roth TSP balance into a traditional IRA is generally not permitted without tax implications. It is advisable to confirm with the receiving plan or custodian that they accept rollovers and understand their specific requirements and any potential fees.

Withdrawing Funds from Your TSP Account

Separated TSP participants have various methods for accessing their accumulated funds. Several withdrawal options are available, including a single payment (lump sum), monthly payments, partial withdrawals, or the purchase of a life annuity. A partial withdrawal must be at least $1,000.

Eligibility for withdrawals depends on age and separation from service. Withdrawals before age 59½ are subject to a 10% early withdrawal penalty on the taxable portion, in addition to being taxed as ordinary income. However, certain exceptions to this penalty exist, such as separation from service in or after the year the participant turns age 55. For public safety employees, this exception may apply if they separate in or after the year they turn age 50, or meet specific service requirements.

Other penalty exceptions can include withdrawals due to total and permanent disability, certain unreimbursed medical expenses, payments to a beneficiary after death, or payments under a qualified domestic relations order. When a taxable payment from a traditional TSP account is made directly to the participant, the TSP is required to withhold 20% for federal income taxes. This mandatory withholding applies even if the participant intends to complete an indirect rollover within 60 days, requiring them to make up the difference from other sources to avoid taxes and penalties on the withheld amount.

Important Post-Separation Account Management

Managing a TSP account after separation involves ongoing considerations. Required Minimum Distributions (RMDs) are mandatory withdrawals that must begin at a certain age from traditional TSP accounts. For participants born in 1960 or later, RMDs generally start in the year they turn 75, or the year they separate from federal service, if later.

The first RMD can be delayed until April 1st of the year following the year it is due. Subsequent RMDs must be taken by December 31st of each year. Failure to take an RMD can result in a significant penalty on the amount not withdrawn. Since 2024, Roth TSP balances are no longer subject to RMDs during the owner’s lifetime.

Maintaining an up-to-date beneficiary designation is crucial for a TSP account. The TSP uses its own beneficiary form, which supersedes any designations made in a will or other estate planning documents. Regularly reviewing and updating this information ensures that the account balance is distributed according to the participant’s wishes upon their death.

Separated participants can access their account information, review statements, and manage investments online. The TSP website and ThriftLine offer resources for account inquiries and guidance on available options. It is important to keep contact information, including mailing address, current with the TSP to receive important communications and ensure access to account services.