So you’ve spent your career putting money into your TSP account, but what do you do once it’s time to retire?
There are lots of TSP withdrawal options to choose from, some of them more complicated than others, and if you make the wrong choice you may not be able to fix it. Of course, every person has a different situation, so it’s important to really understand the choices. While we can’t cover all of the complicated factors involved in a single article, here are five commonly misunderstood facts about TSP withdrawals.
- In-Service Withdrawals
Employees over 59 ½ who haven’t retired yet are allowed to make a one-time, in-service withdrawal. If you do this, you have two options: cash it out, in which case it becomes completely taxable, OR roll it over to an IRA and keep the tax-deferred status. To transfer it to an IRA you need form TSP-75, “Age-Based In-Service Withdrawal Request.” That way, you can avoid being taxed on it until you start receiving installments.
- Full Withdrawal
If you retire, resign, or are terminated, you may have access to your TSP funds, which are pre-tax. To avoid the tax, you have to roll it over or transfer it to an IRA using form TSP-70 “Request for Full Withdrawal.” This is similar to the process explained in point no. 1, but this applies when you retire, not when you’re still employed.
- Partial Withdrawal
Once you retire, you can also take a partial withdrawal, using the form TSP-77, “Request for Partial Withdrawal when Separated.” It can only be used once, since you can’t take more than one withdrawal unless you annuitize your TSP.
- 10% Tax Penalty
If you are 55 or older and retired, you can withdraw from your TSP without being charged the 10% tax penalty (which is normally tacked onto early withdrawals) in addition to regular income taxes. If you’re under age 55 and retired, or if you’re under age 59 ½ and not retired, you will most likely have to pay the extra 10% penalty. There is one detailed exception, the 72(t) tax code distribution guideline, about which we recommend contacting a financial professional.
- Keeping Your Money in the TSP
If you want to keep your money in the TSP after you retire, you have three options:
- A single lump sum withdrawal. If you choose this option it’s important to remember that the money is pre-tax, so you’ll need to be aware of the amount of taxes you’ll get hit with.
- A life annuity option, which is a constant payment for the rest of your life, with options of either cash refund or increasing payments. The problem with annuitizing is that the amount is set for the rest of your life, so you will have no control over it, and your children may not get anything that’s left when you die. But depending on your particular needs and goals for retirement, it may be worth considering.
- Monthly payments, which allow you to choose a certain amount to withdraw each month. You can change the amount, or switch between the monthly payments, annuity payments, and a full withdrawal, but you can only make changes to your withdrawal elections in December of each year.
Don’t Be Surprised
There are a lot of moving parts and factors that go into TSP withdrawal strategies. The questions of how much, when, why, and how can all be different for any given person. It’s important to talk it over with your advisor to find the strategy that’s best for you.
John Stohlman has been serving clients in the DC metro area since 1983. He is a frequent keynote speaker throughout the DC area and co-author of Navigating Your Federal Retirement Benefits. For more information visit FederalNavigators.com.