TSP Withdrawal Rules and Options

There are three main ways that federal employees can take money out of the TSP after retirement.

There are three main ways we will cover to take money from the TSP when eligible: lump sum distribution, setting up installment payments or choosing an annuity. When accessing funds in the TSP (Thrift Savings Plan), you need to know what rules are in place and the different ways to take a distribution from your plan. Before choosing one of these options, it is important to look at when a participant would be first eligible to take a distribution.

TSP Withdrawal Ages

Regular FERS employees separating from service the year they are turning 55 or older can access their TSP and do so without incurring a 10% penalty.

Previously, special provision employees (Law Enforcement, Firefighters, Air Traffic Controllers) had to separate from service the year they are turning 50 or older to be eligible to access their TSP. As part of the Secure Act 2.0 that was put into effect January 1st 2023, special provision retirees can either access their TSP separating from service the year they are turning 50 or older, or if separating with at least 25 years of service at any age. 

To access funds while still working you need to reach age 59 ½. It is also important to note that any withdrawals made from a Traditional TSP is taxable unless transferring to an outside IRA.

IRA Transfers

To have access to IRA funds without a 10% early withdrawal penalty, you must be 59 ½. As previously stated, regular FERS employees separating from service the year they are turning 55 or older can access their TSP without that 10% penalty. As a result, you may not want to transfer all your TSP funds into an IRA if you might need access to your funds before reaching age 59 ½.

Three TSP Withdrawal Options

Lump Sum Distribution

The first option to access the TSP is taking a lump sum distribution. Once you reach one of the scenarios previously discussed, you are allowed to take a partial withdrawal once every 30 days.

You can also elect to take all of the funds out of your TSP. With the new update to the TSP website last year, they require your bank or other financial institution’s information to be on file for at least 7 days before the TSP will initiate the transfer. Also, you are restricted to one withdrawal per 30 days. There is no way around this, so plan accordingly. 

Installment Payments

The second option is to take installment payments. This means that you can elect an amount (minimum of $25) to be paid to you automatically every month, quarter or year (whichever you choose). You can also choose to have your installment payments based on your life expectancy. You can stop these installment payments or change the amount; however, as of this writing, to change the amount of your payments you must call TSP.

Choose an Annuity

The third option is to choose an annuity option. This option provides another income stream that can be guaranteed to last your whole lifetime in exchange for giving up control of all or some of your money.

You can choose between single life coverage, joint life with a spouse or even joint life to cover a person with an “insurable interest” (someone who is financially dependent on you).

Level or increasing payments can be selected. Selecting level payments means that the amount of the monthly annuity payments remains the same every year. Increasing payments are where the amount of your monthly payments increases by 2% every year on your anniversary date of your first payment.

If you choose the increasing payment option, the amount you start with is less than if you chose the level option but does increase every year and can potentially wind up significantly higher than the level option. You can only choose the increasing payment option for single and joint life with a spouse. You cannot choose this option for joint life with an insurable interest. 

There are a couple of options for beneficiaries when choosing an annuity. If you choose the “cash refund” option, if you die before using the amount you purchased the annuity for, the remaining amount will be paid out in a lump-sum to whoever you select as a beneficiary. You can select this option for single or joint life.

For Example: You purchase a cash refund annuity for $100,000 and pass away after receiving only $50,000 of payments. The remaining $50,000 would be paid out to your beneficiary as one lump-sum payment. 

The other option for beneficiaries would be to choose 10 year certain. This option can only be utilized with a single life annuity. Basically, if you pass away before receiving payments for a 10 year period, then the monthly payments would continue to your beneficiary until that 10 year period is up. 

For Example: You purchase an annuity and pass away after receiving annuity payments for six years. The annuity payments would continue to be paid out to your beneficiary for the remaining four years.

Before choosing an annuity option, it is recommended to speak with an advisor that knows the ins and outs of annuities and make sure you know the positives and negatives before utilizing any of these annuity options. TSP annuity purchases are irrevocable and changes cannot be made after the fact.

What option will you choose?

The TSP can play a significant role in a federal employee’s retirement. It is crucial to know what options you have ahead of time and have a good plan in place to ensure you are getting the most out of your TSP in retirement.

Investment advisory services offered through Integrity Advisor Solutions, LLC (“IAS”), an investment adviser registered with the SEC. Integrity Wealth is a marketing name for IAS. FedSmart Retirement and the above firms are not affiliated. FedSmart Retirement does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstances. Not associated with or endorsed by the Social Security Administration or any other government agency.

About the Author

Steven Puckett is co-owner of FedSmart Retirement Planners and co-host of the FedSmart podcast, as well as co-creator of Federal Retirement Course and Community. He does webinars, seminars, and one-on-one appointments with federal employees all across the country and has thousands of social media followers he keeps up to date on the retirement system.