What to do with your Thrift Savings Plan

The Thrift Savings Plan (TSP) provides military members the opportunity to save for retirement painlessly by making regular monthly contributions to their own individual TSP accounts.

The TSP has been a great option for you to boost your retirement savings for several reasons:

Pre-tax contributions – This has lowered your federal tax bill.
Tax-deferred growth – You pay no taxes on the money growing in you account until you take it out.
Diverse investment options – You have had a variety of investment open for you to choose from, from conservative cash funds to aggressive international funds and even lifecycle options pegged to your date of retirement.

So now you are leaving the service, what do you do with your TSP account?

TSP Account Options

When you leave military service you have choices for your TSP account:

Leave it in the TSP - Do absolutely nothing and leave the account alone. You can still manage the account and move money between investment choices but you will not be allowed to make any more contributions. You must begin taking distributions from your account by 1 April of the year following your 70 ½ birthday. You will be able to transfer funds into your TSP account from an IRA or an eligible employer plan.
Withdraw the money – You have the choice of withdrawing all or a portion of your TSP funds. However, if you’re under age 59½ you will likely be required to pay taxes on the withdrawal and may face an additional tax penalty applied by the IRS. Remember, this is a retirement plan.
Roll it over into an IRA - Open a Roll-over IRA and you can move the funds from your TSP account to the Roll-over IRA. Your account can be either a Traditional IRA or Roth IRA. There may be tax consequences depending on the type of IRA you use.
Roll over the funds from TSP to an existing eligible plan- You have the choice of rolling your TSP account into your new employer’s plan, such as a 401(k) plan, Profit Sharing plan, Defined Benefit plan, Stock Bonus plan, Money Purchase plan, 403 Annuity plan, and a 457 Government plan. Certain conditions may apply based on how the employer administers the plan.

Before doing any of the above options you should carefully consider the tax implications and how they impact your financial plan. Check out The Federal Retirement Thrift Investment Board for some helpful information regarding taxes.

Tax-exempt Contributions

Some of your contributions to your TSP account may include tax-exempt money from pay you earned while in a combat zone. This money is exempt from federal income tax and so are the TSP contributions that come from it. However, the earnings on those contributions are taxable when you take the money out. If you take a distribution from the TSP that has both tax-deferred and tax-exempt contributions included, the TSP will report the tax-exempt portion separately on IRA form 1099-R for your use when preparing your individual tax return.

Watch Out for Existing TSP Loans

If you have borrowed money from your TSP account prior to leaving the service, you will be required to repay it now, otherwise it will be considered a taxable distribution and face possible tax penalties. You will not be allowed to borrow from your account anymore once you leave the service.

Making Your Choice

The money in your TSP account belongs to you. You want to make sure it continues to work for you so you will have the savings you need for a comfortable retirement.

Consider the reason you made the contributions on the first place – retirement. Resist the temptation to withdraw this lump sum and take the tax hit and penalty now.

Look at the rate of return you are getting with your TSP investment options and decide if you would like to control this money yourself through an IRA or if your new employers plan can generate the same or higher rates of return.

TSP Guide to Withdrawing Your TSP Account

TSP Guide to Transferring Money into Your TSP Account