What Should I Do With My TSP When I Retire?

What is a Thrift Savings Plan?

A Thrift Savings Plan (TSP) is a retirement savings plan for federal employees. It is the government’s version of a 401(k). It was established in 1986 as part of the Federal Employees’ Retirement System (FERS) and is managed by the Federal Retirement Thrift Investment Board.

2026 TSP contribution limits

• Employee contribution limit: $23,500
• Catch-up contribution (age 50+): $7,500
• Combat zone contributions: Up to $71,000 (non-Roth contributions only)

Withdrawals from TSP are generally subject to income tax. If you withdraw before age 59 ½, you may also be subject to a 10% early withdrawal penalty. 

Five options for your TSP upon retirement

1. Keep your money in the TSP and let it grow

The easiest option is to keep it in your TSP and let it grow. You can leave the money in your TSP as long as your vested balance is at least $200. However, you will no longer be able to make contributions once you leave your federal job. You can still change your investment allocations and take advantage of the low expense ratio and management fees. This option is particularly attractive to those who want simplicity, don’t need the money right away, and want to defer taxes on the TSP earnings until they have to take distributions.

However, if you are over 73 you will need to start taking required minimum distributions from your TSP. The RMD age will increase to 75 in 2033. RMDs are calculated based on your life expectancy and the balance in your account. If you fail to take RMDs, then you will be subject to a 50% penalty on the amount you were supposed to withdraw. 

Advantages: 

• It’s the easiest option because you don’t have to make any changes. 
• You can keep taking advantage of the low expenses of TSP funds. Also, with the new TSP mutual fund window, you now have a wider range of investment options to choose from. 
• You can move your TSP at a later stage when you know what you want to do with it.

Disadvantages:

• Limited investment funds.
• You can’t make any more contributions or take out any loans.
• It can be a headache to manage lots of retirement plans. You need to keep track and manage assets across all of the platforms. 
• You usually have to submit a form to change anything in your TSP rather than do it yourself.
• When you do start withdrawing money from your TSP, you don’t get to choose which funds you are withdrawing your monthly payments from. For example, if you have a C Fund and a S Fund, and withdraw $1000 per month, 50% will come from the C fund and 50% from the S fund. If you have an IRA or a 401(k), you can choose where you withdraw your money from.

Verdict: Keeping your funds in your TSP may be best if you aren’t sure what you want to do next. There is no harm in leaving the TSP to grow while you figure out your next steps. If there is a chance that you may go back into federal service, then leaving it in the TSP is probably your best option.

2. Roll your TSP into an IRA

Another option is to roll your TSP into an IRA. When you roll your TSP over to a qualified retirement plan, then you won’t be hit with any taxes or the 10% early withdrawal penalty. This will give you more control over your investments and provide access to a wider variety of investment options. You can also consolidate all of your retirement accounts into a single IRA. This will make it easier to manage your retirement savings.

However, if you do roll your TSP into an IRA, it’s essential to ensure that you complete a direct transfer to the account and select a reputable custodian for your IRA. If you roll your TSP into a traditional IRA, you will need to start taking RMDs at age 73. If you roll your TSP into a Roth IRA, you won’t need to take RMDs, but you will need to pay taxes on the amount that you convert. You can rollover a Roth TSP into a Roth IRA without any tax implications.

Advantages:

• You will have more investment options. You can invest in things such as stocks, ETFs, mutual funds across many types of investments.
• An IRA is more user-friendly, and it’s easier to access and make changes.
• You can avoid taxes and unwanted early withdrawal penalties if you roll over to the correct IRA account.

Disadvantages:

• You might end up buying investments that are too risky or have higher fees.
• You can’t take out any loans.

Verdict: You may want to consider converting your TSP to an IRA if you want more investment options, or you want to consolidate your retirement saving accounts. This is what we generally recommend to most clients. However, it’s essential to discuss these options with your financial advisor so that you can select the best option for your needs. 

How do I do a direct rollover (transfer) my TSP to an IRA?

1. Open an IRA account: You will need to choose a brokerage firm such as Vanguard or Fidelity, and then open an IRA account. 
2. Decide whether you want to do a traditional or a Roth IRA:  If you transfer a pre-tax TSP to a traditional IRA, you won’t have any tax liabilities. Similarly, if you roll a Roth TSP into a Roth IRA, you won’t have any tax liabilities either. However, if you move your money from a pre-tax TSP to a Roth IRA, you will owe taxes on the conversion.
3. Contact the TSP administrator to initiate the direct rollover and fill out the required paperwork: Filling out the paperwork might require some back-and-forth conversations between the TSP and your new IRA provider to get the information that both sides need. Once it has been approved, TSP will liquidate your account and issue a U.S. Treasury check to your brokerage firm.
4. Invest the money in your IRA: Once the money is transferred to your IRA, you still need to invest that money. We recommend talking to your financial advisor about how you should invest that money in your IRA.

Do you pay taxes on a TSP rollover to IRA?

There are generally no tax implications when you do a direct rollover as long as the accounts have the same tax treatment. For example, if you move a pre-tax TSP to a pre-tax IRA then you won’t have to pay taxes. However, if you do a rollover from a traditional TSP to a Roth IRA, you will need to pay taxes on the amount rolled over in the year of the conversion. The reason is that Roth IRAs are funded with after-tax dollars and the money that you roll over from a TSP to a Roth IRA will be considered taxable income in the year of the conversion.

Also, if you do an indirect rollover rather than a direct rollover, you may have to pay taxes on that distribution if you wait too long. An indirect rollover is when you receive the funds from the TSP and then deposit them into an IRA within 60 days. If you deposit the money after 60 days, that is considered a distribution and you will be subject to income taxes. Additionally, if you are under age 59 ½ and do an indirect rollover after 60 days, you may also have to pay the 10% early withdrawal penalty. 

We always recommend doing a direct rollover. However, it’s best to consult your financial advisor before doing any retirement account rollover to understand any potential tax implications. 

3. Transfer TSP to your new employers’ 401(k) plan

Another option is to transfer your TSP into a 401(k) with your new employer, if you decide to get another job after civil service retirement.  It’s important to keep in mind that a traditional TSP will need to go into a traditional 401(k) and a Roth TSP will need to go into a Roth 401(k). Additionally, you should make sure to do a direct-qualified transfer to avoid getting taxed or penalized.

Advantages 

• There are no penalties or taxes for doing a direct rollover to a 401(k) plan.
• This will minimize the number of retirement accounts that you need to track.
• You might be able to borrow against your 401(k). We don’t typically recommend this though.

Disadvantages

• You are limited to the 401(k) plan investment options.
• Higher expense ratios can cause lower returns.
• Some employers have a minimum waiting period until you can sign up for their retirement plan.

Verdict: If your employer’s 401(k) has strong investment options and you want to reduce the number of retirement accounts that you have, then this is a strong option.

How do I do a direct rollover (transfer) of my TSP to a 401(k)?

1. Check with your 401(k) plan administrator: Before you initiate the transfer, check with your 401(k) plan administrator to confirm that they accept TSP rollovers. Some plans may not accept rollovers.
   
2. Request a TSP rollover: Once you have confirmed that your 401(k) plan allows TSP rollovers, you will need to login to your TSP account and request a rollover from the TSP. 
   
3. Choose a rollover method: You can choose to do either a direct or indirect rollover. We recommend that you do a direct rollover where TSP will transfer the funds directly to your 401(k) plan administrator. This will ensure that you avoid any taxes and penalties. An indirect rollover can incur income taxes and an early withdrawal penalty if you don’t complete the transaction within 60 days of receiving the money. 
   
4. Complete the rollover: Once you have selected the rollover method, you will complete the rollover by providing all of the information needed to both the TSP and 401(k) plan administrator.
   
   

Do you pay any taxes when you transfer your TSP to a 401(k)?

There are no tax implications when you do a transfer/direct rollover of your TSP to a 401(k). However, if you do an indirect rollover where you take the money directly, you only have 60 days to complete the transfer to your 401(k); otherwise, you could be subject to taxes and penalties. 

4. Take a lump sum distribution

Another option is to take a lump sum distribution from your TSP upon retirement. While this option does give you complete control over your money, it does come with consequences. If you take a lump sum, you will need to pay taxes on the entire amount in the year you receive it. This may cause you to be taxed at a higher rate and result in a larger tax bill. Depending on the TSP amount, taxes and penalties might eat up a third or half of your TSP. 

Advantages:

• You will be able to use your assets immediately, and you will have full control of them.

Disadvantages:

• The huge tax payment and the 10% early withdrawal penalty. This will reduce your overall balance by a third to half, depending on your tax bracket.
• You will lose tax deferral benefits and any potential earnings.

Verdict:
I would personally not do this. You would lose around a third to half of your TSP balance and you will reduce your overall retirement savings amount. If you really need the money for a down payment on a house or another big expense, this may be the right option for you. However, try to exhaust all other options before withdrawing money from your TSP. 

How to request a withdrawal or distribution

If you want to withdraw your TSP after you leave federal service, log in to My Account to begin the request or contact the ThriftLine. Withdrawals cannot be reversed once they have been processed. It’s important to understand any tax obligations that you will have as a result of the withdrawal.

5. Purchase an annuity

The final option is to purchase an annuity when you retire. An annuity is a financial product that pays you a guaranteed fixed income for the rest of your life. This may be a good option if you are worried that you are going to outlive your retirement savings. However, they can be expensive, and once you purchase an annuity, you usually can’t change your mind and take your money out. 

You must be younger than age 86 to purchase an annuity, and the minimum for an annuity purchase is $3,500.  The amount you will receive as a monthly annuity payment will be calculated using the dollar amount of your purchase, your age, the type of annuity, and the annuity interest rate index at the time of purchase.  

Advantages:

• It’s low risk and you know you are going to have a set income stream for life.

Disadvantages: 

• Once you have purchased an annuity, it’s final. You cannot reverse the transaction once it’s done.
• Higher fees when compared to a 401(k) or an IRA plan.
• You might pass away early and won’t leave any money to your heirs.
• It doesn’t adjust for inflation. Inflation is around 2-2.5% on average per year.
• It’s not flexible and you lose the ability to do large withdrawals. If you want to go on a big vacation during retirement, you can’t take out a large amount of money.

Verdict:

We do not recommend this option. Annuities are too complex and restrictive. If you do want to talk to a financial advisor about annuities, make sure that you talk to a fiduciary financial advisor to ensure that they are acting in your best interest.