What to Do With Your TSP After Retirement?

The Thrift Savings Plan (TSP) functions as a defined contribution retirement savings plan for federal employees and uniformed service members, operating similarly to a private-sector 401(k) plan. It represents a significant component of retirement planning for many individuals. As federal employees and military members approach retirement, understanding the various options for managing these accumulated funds becomes increasingly important. Retirement signals a new phase, bringing a range of choices for how to best utilize and access TSP savings.

Keeping Your Money in TSP

After separating from federal service, individuals can keep their funds within their TSP account. This option allows continued investment within the TSP’s low-cost fund options. The account balance remains subject to market fluctuations, offering potential for continued growth.

Maintaining funds in the TSP triggers no immediate tax consequences. Traditional TSP funds continue to grow tax-deferred, while qualified Roth TSP balances can grow tax-free. Account holders retain the ability to manage investments by making interfund transfers among available TSP funds.

Access to funds while remaining in the TSP is possible through various withdrawal options, though certain rules apply. This choice provides flexibility for those who do not immediately need their retirement savings.

Receiving Payments Directly from TSP

Individuals can receive payments directly from their TSP account after retirement, providing a flexible income stream. Several direct withdrawal types are available, designed to meet different financial needs. These include single payments (partial or entire balance) and a series of monthly payments.

Payments can be structured as fixed dollar amounts or calculated based on life expectancy, offering predictability or adjustments over time. A portion or all of the TSP balance can also purchase a life annuity through a TSP-selected provider, guaranteeing monthly payments for life.

For single payments, the desired amount and bank account details for direct deposit are necessary. For a series of payments, decide on frequency (monthly, quarterly, or annually) and the specific amount or life expectancy calculation. Tax withholding preferences must also be determined for any taxable distribution. Individuals should confirm or update beneficiary information, particularly for ongoing payments or annuities.

Relevant withdrawal forms and detailed instructions are accessible on the TSP website. These forms guide users through inputting necessary data, such as bank routing and account numbers, the chosen payment amount, or annuity selection.

Completed forms can be sent via mail or fax to the TSP. The mailing address and fax number are provided on the forms or the TSP website.

Alternatively, individuals can initiate a withdrawal request through the online TSP system. After logging into My Account, participants navigate to the withdrawal or distribution section. Following prompts, they select their desired withdrawal type and confirm prepared details.

The online system guides users through submission, often requiring electronic consent or digital signatures. After submission, a confirmation notice is provided, and participants can monitor the request status online. Processing times vary, generally ranging from a few days to several weeks.

Payments are disbursed according to the chosen schedule. Tax documentation, such as Form 1099-R, is issued for reporting purposes, detailing the gross distribution, taxable amount, and any federal or state income tax withheld. It is sent to the participant by January 31 of the year following the distribution.

Moving Your TSP Funds to Another Account

Transferring TSP funds to another retirement account is a common strategy for individuals seeking different investment options or consolidated financial management. Eligible accounts for a TSP rollover include a Traditional Individual Retirement Account (IRA), a Roth IRA, or an eligible employer-sponsored plan like a 401(k).

Before initiating a rollover, decide between a direct or indirect rollover, as each has distinct procedural and tax implications. A direct rollover involves the TSP sending funds directly to the new account custodian, minimizing risks and avoiding immediate tax withholding. An indirect rollover means funds are sent to the participant, who then has a limited timeframe to deposit them into the new retirement account.

Key information required for a rollover includes the receiving institution’s name, account number, and any specific forms or instructions for accepting rollovers. The TSP website provides specific forms for initiating rollovers, such as Form TSP-60 for traditional rollovers and Form TSP-60-R for Roth rollovers.

The rollover request can be submitted after completing the necessary forms. This method is preferred as it bypasses the need for the participant to handle the funds directly.

The participant has 60 days from receipt to deposit the full amount into a new eligible retirement account. If the entire amount is not deposited within this 60-day window, the unrolled portion is treated as a taxable distribution and may be subject to penalties.

During an indirect rollover, the TSP withholds 20% for federal income taxes from the distribution. To roll over the full amount, the participant must use other funds to make up for this withholding. The online TSP system offers a guided process for initiating rollover requests, allowing participants to input and verify information digitally.

After submission, the TSP processes rollovers within two to four weeks. Participants receive confirmation once the transfer is complete, and the receiving institution confirms receipt. Proper completion ensures the transfer is a non-taxable event, deferring taxes until funds are withdrawn from the new account.

Understanding Tax Rules and Required Distributions

The tax implications of TSP funds in retirement vary depending on whether contributions were made to a Traditional TSP or a Roth TSP. Traditional TSP contributions are made with pre-tax dollars, lowering current taxable income. Withdrawals from a Traditional TSP in retirement are subject to federal income tax as ordinary income.

Roth TSP contributions are made with after-tax dollars, providing no immediate tax deduction. The advantage of a Roth TSP is that qualified withdrawals, including both contributions and earnings, are entirely tax-free in retirement. A withdrawal is qualified if at least five years have passed since January 1 of the first Roth contribution year, and the participant is at least age 59½, permanently disabled, or deceased.

Distributions from a Traditional TSP before age 59½ may be subject to a 10% early withdrawal penalty, in addition to regular income tax. Exceptions include distributions made after separation from service if separation occurs in or after the year the participant reaches age 55 (or age 50 for certain public safety employees). Other exceptions include distributions due to total and permanent disability, medical expenses exceeding a certain percentage of adjusted gross income, or substantially equal periodic payments.

Required Minimum Distributions (RMDs) are mandatory annual withdrawals from most retirement accounts, including Traditional TSP accounts, once the account holder reaches a specific age. For most individuals, RMDs begin at age 73.

The RMD amount is calculated annually based on the Traditional TSP account balance as of December 31 of the previous year, divided by a life expectancy factor from IRS Uniform Lifetime Tables. For example, the 2025 RMD uses the December 31, 2024, account balance. The TSP calculates RMDs only on the traditional balance; Roth TSP balances are not subject to RMDs for the original account owner.

The first RMD can be delayed until April 1 of the year following the year the participant reaches RMD age, or the year following retirement, whichever is later. Subsequent RMDs must be taken by December 31 of each year, which can result in two RMDs in a single year if the first is delayed. Failing to take the full RMD by the deadline can result in a 25% excise tax on the undistributed amount.