3 Quirks About the TSP in Retirement

By on February 4, 2015 in Retirement with 150 Comments

The TSP is a phenomenal benefit for Federal Employees. There are so many wonderful aspects of the TSP – it can be a great tool to help when you are accumulating your retirement savings.

But what about when it comes time to use the money you’ve saved?

The TSP has quirks that you need to know about when it comes to using your TSP money in retirement. These quirks can catch most Federal Employees by surprise.

If you plan to keep your money in the TSP after you retire – you need to understand how it works so these quirks won’t catch you off guard.

Is the TSP Different in Retirement?

Many Federal Employees want to know if the TSP works differently in retirement than it did while they were working. While there are a few very minor changes – for the most part the way the TSP works stays the same.

The problem is not that the TSP ‘changes’ in retirement (it really doesn’t) – it’s that your needs change in retirement.

What you need when you’re growing your money might be different than what you need when you are ready to use the money in retirement.

3 Quirks of the TSP in Retirement

In the pre-retirement classes and webinars I teach, again and again people are surprised when they learn about the TSP’s ‘quirks’ in retirement.

The TSP will play an important role in your retirement – so it’s important to understand how the TSP works in retirement. And if you know about these quirks BEFORE you retire – you’ll be in a better position to make the best choices for your personal situation.

Quirk #1: Limited Withdrawal Options

AKA: “What do you mean I can’t take money out whenever I want?”

Most Federal Employees go into retirement thinking that they’ll be able to take money out of their TSP whenever they want. They think they’ll be able to use their TSP like a bank account – but it doesn’t work that way.

When it comes to taking money out of your TSP in retirement, you have two options:

  1. One-Time-Only Partial Withdrawal
    This is where you have a one-time chance to take a specific dollar amount out of your account before you submit a Full Withdrawal. (This could be either an Age-Based In-Service Withdrawal or a Partial Withdrawal after you retire – but not both… you only get one)
  2. Full Withdrawal
    This is where you can choose between a combination of a lump-sum, monthly payments from TSP, and/or purchase the Met-Life Annuity through TSP.*You could say there is a third option: if you have chosen monthly payments as a part of your full withdrawal, you can later choose to stop those payments and receive the remaining balance of your TSP in a lump sum.

But that’s it.

This may be sufficient for you – but most people don’t realize that they won’t be able to pull money out whenever they want.

And once you submit your Full Withdrawal, there’s no going back.

Here’s what the TSP says in TSP Booklet: “Withdrawing Your Account After Leaving Federal Service” in the section, “Changing Your Withdrawal Election”…

“After payments begin. You cannot change your withdrawal choice after your account has been paid out. Also, if you have chosen an annuity, you cannot change either the annuity options or your choice of joint annuitant after the TSP has purchased an annuity for you”

Let’s look at an example of how this could become tricky for some people…


Let’s say you retire and want to take monthly payments from your TSP. So you submit your Full Withdrawal form and start receiving your monthly payments.

But a few months later you decide to buy a house in a warmer locale and you want to use some money from your TSP for the downpayment. Or say something comes up and you need several thousand dollars for a home repair, or you want to buy a car, or take a vacation, or any other thing that comes up that you need money for.

Your TSP may still have several hundred thousand dollars in it – but you won’t be able to take out the money you want and still keep your monthly payments going.

Once you have filed your Full Withdrawal to start your monthly payments, you won’t be able to access the money that’s left in your account without ending your monthly payments and taking it as a lump sum. And that may not be the best choice for you.

Solution? Have a plan for how you’ll use your TSP money to make the most of your withdrawal options. There’s more to know about your TSP withdrawal options, take time to learn more and familiarize yourself with your choices.

Quirk #2: Limited Monthly Payment Changes

AKA: “What Do you mean I can only make 1 change a year?”

Many federal employees plan to take monthly payments from their TSP in retirement. But most aren’t aware of the limitations involved.

If you want to take monthly payments from your TSP as a part of your Full Withdrawal – make sure you take time to consider how much you want to receive.

This is always a good idea – but it is especially important with the TSP because you only get one chance to change the amount per year… and the change takes effect the NEXT calendar year. Yes – you read that right.

If you want to change the amount of your monthly payments from TSP, you need to submit Form TSP-73 during the ‘annual change period’ (Oct 1 – Dec 15).

Here’s a clip from the TSP Booklet: “Withdrawing Your Account After Leaving Federal Service”…

” during the annual change period at the end of each calendar year, you can change the dollar amount of your payments… the TSP must receive Form TSP-73, Change in Monthly Payment Amount, from you by December 15 for the change to be effective with the first payment you receive after December 31.”

Have you ever looked at this form? Take a look.

If you’re trying to access this form anytime outside of the ‘annual change period’ from (Oct 1 – Dec 15) – you’ll see a message from TSP that says,

“Use this form at any time from October 1 through December 15 to change the amount of your TSP monthly payments. The form is accessible for printing only during this change period.”

Yes – you’re reading that correctly, you can’t even see the form unless it’s the annual change period.

Let’s look at an example where this can become an issue…


So let’s say that based on your retirement plans, you want to take a monthly payment from the TSP for $1,000. Let’s say you retired in March… and a few months you realize that you need more. You’ll have to wait until the annual change period from Oct 1 to Dec 15 to increase the amount you’re receiving and you won’t actually receive more until January.

Solution? Have a plan for your retirement income. When you know about these limitations before you retire – you can make better choices.

#3) Quirk #3: Proportionate Distributions

AKA: “What do you mean I can’t choose how the money comes out?”

Any money you withdraw from the TSP comes out as a microcosm of your entire account. As far as I know, this is a quirk unique to the TSP – I have never found another retirement plan or investment that has this strange requirement. So if you’re working with a financial planner and they’re not familiar with federal benefits they probably won’t be aware of this quirk.

At first this quirk seems rather harmless, but the more you learn about it the more you can see how it can take the wind out of your retirement sails.

There are two levels to look at this quirk on… proportionate distribution of funds to be sold and proportionate distributions from Traditional and Roth TSP monies.

Let’s take a look at the funds issue first.

Proportionate Distribution of Funds

When you take money out of your TSP, which funds does the TSP sell in order to come up with the money?

Each withdrawal is a microcosm of your account.

For easy numbers, let’s say your TSP balance is 80% in the C fund and 20% in the G fund. When your monthly withdrawal comes out, the TSP will get 80% of the money by selling the C fund and the other 20% from selling the G fund. So they’ll sell however many shares of the C fund it takes to get $800, and however many shares of the G fund it takes to get the other $200 to make up your $1,000 withdrawal.
TSP Monthly Payments Chart

Why is this a problem?

Let’s say the C fund is going up, and you expect it to continue to go up for a while… do you really want to sell it then when you expect the value of your C fund shares to go up?

Or another perspective, what if the C fund was going down but you felt it would go back up soon. Would you rather sell shares from the G fund for a while?

But the way the TSP makes all withdrawals proportionate on the fund level, you don’t get to make that choice.

This also brings us to the rule about not having money you need to use in the next 5 years invested in the stock market. (For more about this concept, see my articles on Buckets of Money)

This proportionate distribution rule means that you can’t manage a portion of your TSP for longer term and manage another portion for your shorter term needs. Even if you had a portion of your TSP balance in the G fund that you planned to use for your short term needs – you can’t access just your G fund money if you have your TSP balance invested in any other TSP funds.

This quirk really surprises most federal employees because you have the ability to choose how your contributions are invested – but there is no such option with withdrawals.

What Does this Mean for Roth TSP?

The quirk about proportionate withdrawals for distributions also has an important impact on your Roth TSP and Traditional TSP monies. I’ll be discussing that topic in our next article.

If you have ANY money in the Roth TSP, or have thought about putting money in the Roth TSP you’ll want to learn more about how proportionate distributions can throw a monkey wrench in your Roth plans if you’re not prepared.

What Else Don’t You Know About the TSP?

Did you learn something new in this article? What else might there be that you don’t know about the TSP?

Many people move into retirement not knowing what to do with their TSP. They don’t know how to take money out, and they don’t realize that some ways are better than others.

Mistakes in the early years of retirement can really cost you. They can be the most damaging because they lead to bad habits and drain your resources at a critical period.

Take time to make sure you understand your TSP retirement choices and how they will impact your retirement.

© 2016 Micah Shilanski, CFP®. All rights reserved. This article may not be reproduced without express written consent from Micah Shilanski, CFP®.


About the Author

Micah Shilanski is a Certified Financial Planner™ professional who specializes in helping federal employees get the most out of their retirement benefits. Micah helps his clients with tax planning, retirement planning, federal retirement planning, estate planning, and investment advice.

Plan Your Federal Retirement is a dba of Shilanski & Associates, Inc., an Alaska Registered Investment Advisor, with securities offered through Summit Brokerage Services, Inc., Member FINRA/SIPC.