What should I do with my TSP when I retire?

What should I do with my TSP when I retire?

March 30, 2022

Updated 3-30-2022

Perhaps the most common question we receive from our government employee clients is: “What should I do with my TSP when I retire?”

It’s a great question, and one we will address in this blog post! The question requires a bit of strategy to ensure you are taking full advantage of the benefits that TSPs (Thrift Savings Plans) have to offer for your specific situation.

While there’s not a one-size-fits-all approach, by better understanding the options available to you, you can make a more strategic, wiser decision. As always, we recommend you speak with a professional before taking any action.

“What should I do with my TSP when I retire?”

Essentially, when you retire you have 4 options for your TSP:

1. Begin regular (likely monthly) installment payments

If you separate from government service at age 55 or higher and enter directly into retirement, you may begin taking set withdrawals without incurring an early withdrawal penalty. Some may actually begin as early as 50 if you are in what’s considered a Special Category Employee (SCE) such as law enforcement officers, firefighters, and border protection officers, to name a few. Otherwise, everyone else needs to wait until age 59 and 1/2 in order to begin withdrawals without incurring a penalty.

Keep in mind, when you begin making withdrawals, there could be tax implications to be aware of. The amount of taxes you will need to pay depends on the type of contributions you made over the years. If you contributed to the TSP with after-tax dollars (Roth) then the distributions should be tax-free. If you contributed to the TSP with pre-tax dollars (Traditional) then you will need to pay regular income taxes on these distributions. We recommend chatting with a tax professional to better understand the tax implications and strategies associated with TSP withdrawals.

2. Purchase an annuity

You can actually take your TSP balance and purchase an annuity that will pay you income for life. This is attractive to some who simply want the security of a regular payment, and are worried about running out of money in retirement. It is a security blanket.

Keep in mind, this is an insurance policy, and insurance policies offer security and protection, in exchange for a cost. Typically (not always) it is the insurance company who ends up benefiting financially from this type of arrangement in exchange for the peace of mind it offers.

3. Leave it in the TSP and let it grow

Depending on when you begin retirement, you can simply leave the money in the TSP let it continue to grow. If you do not need to access it yet, it might be wise to let it be. Similar to other retirement accounts, you will need to begin minimum withdrawals at age 72. This is called a Required Minimum Distribution (RMD). The amount of your RMD is a calculation based on account size and life expectancy.

If you leave your balance in the TSP, the investment options are limited to funds offered inside of the plan.

4. Make a single withdrawal / transfer the TSP to an IRA

The fourth and final option is the one we most recommend to clients. You can make single withdrawals from the account at any time if the amount is over $1,000. Many people in retirement elect to withdraw the entire amount and transfer the TSP to an IRA. This is typically the best option for folks simply because it gives you greater control.

Think about those first three options again: If you begin regular withdrawals you are limited in your investment options. If you decide to annuitize your TSP, you are limited to the one annuity option offered. If you decide to leave it be and let it grow, you are limited in investment options and the person managing it is not fully aware of your financial goals. 

With this 4th option, if you think about it you can really do all of the first 3 options, but with more control because an IRA is yours to choose what you'd like to do with. If you decide an annuity is right for you, go ahead and purchase an annuity out of an IRA and enjoy the freedom that comes from shopping around. If you decide to let the funds sit and grow, find an advisor and investment manager who has your unique goals and risk tolerance in mind so you can experience growth while avoiding undue risk. 

As you can tell, we are the biggest proponent of option 4 (in most cases). But a word of caution: be sure to take precautions when transferring a TSP to an IRA. You will want to consult with a professional to avoid making potentially large tax mistakes. If done correctly, TSPs should be able to transfer to a similar IRA without any tax consequences.

Thank you for taking a few minutes to better understand your options with TSPs in retirement. We hope we’ve started you down the path of answering the question of what you should do with your TSP when you retire. Feel free to give us a call if you have further questions. We are happy to help!

If you would like to learn more about how what to do with your TSP when you retire, we invite you to schedule a complimentary 15-minute phone call with one of our financial advisors who specializes specifically in retirement planning for government employees!

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