Age-Based TSP Withdrawals: What You Need to Know

The whole point of a Thrift Savings Plan (TSP) is to put away extra money, little by little, to add up to big savings by the time you retire. When it comes to retirement savings, the first rule is not to touch that money until you retire, no matter how tempting it might be to dip into those funds for other purchases (or in case of emergency).

That’s sound advice, but there are exceptions to every rule. When it comes to the TSP, did you know that you’re allowed to take money out — penalty-free! — before you retire? And that it can actually be a good idea under the right circumstances?

Welcome to the wonderful world of age-based withdrawals. Here’s what you need to know to make them work for you.

What Is an Age-Based In-Service Withdrawal?

Generally speaking, your TSP money is off-limits while you’re still working in your government position. However, an age-based in-service withdrawal allows you to take money out of your TSP while you’re still working as long as you have reached age 59½. 

In addition to being old enough to qualify, you also need to meet a few additional requirements:

• You can only withdraw from funds in which you are fully vested (i.e., you have enough years of service to do so).
• You must withdraw at least $1,000.
• If you have less than $1,000 in your TSP, you must withdraw the entire amount.
• You can make a maximum of four age-based withdrawals per year.

What’s the Catch?

Keep in mind your withdrawal is subject to a 20% federal income tax unless you roll it over into another eligible retirement plan such as an IRA.

So if you plan to spend the money, you’ll be taxed on the portion that came from traditional TSP funds, but not Roth funds.

On the other hand, you have the opportunity to roll your TSP funds into an IRA account totally tax- and penalty-free.

Change your mind after you have moved money into an IRA? You can move your money back to the TSP as long as you keep your account open by maintaining a minimum balance.

What’s the Advantage?   

The TSP is a great benefit, but your investment options are pretty limited. Right now you can only choose from five different index funds, and you’re stuck managing that money yourself. This means that when you retire, it will be all on you to make sure your investments are well-balanced and that you time selling shares and taking distributions to minimize your taxes and make sure your money is invested as wisely as possible.

That’s a tall order, especially if you’d rather relax during your retirement than worry about your money. 

If you roll over your TSP funds into a private IRA, though, you can let an investment fiduciary take charge of managing your money. For many people, this comes as a huge relief. It allows you to streamline your retirement management and get great advice so you don’t have to worry about your TSP money in an economic downturn. It also gives you the freedom to invest in a much broader range of ETFs, mutual funds, stocks, bonds, annuities and more — anything that you and your advisor decide is right for your plan is now available outside the confines of the TSP.

An age-based withdrawal also provides you the opportunity to convert a traditional TSP to a Roth IRA. A Roth conversion will require you to pay taxes on the money you roll over, but once you do, you’ll never have to pay taxes on it again. Additionally, Roth IRAs are not subject to Required Minimum Distributions (RMDs) once you reach age 72. This is a huge advantage for anyone who is happy to live on their pension and would like to keep their IRA intact to pass on to their heirs — or just to keep it for as long as possible before spending it down. 

What’s Next?

To make an age-based in-service withdrawal, you’ll need to log into your TSP account and click on the withdrawals section. From there, you can complete your request for the withdrawal online. Funds are delivered via direct deposit, electronic transfer, or paper check. From there, you can transfer the money to your IRA — just make sure to hang onto the paperwork as you do so to show the IRS that your withdrawal was actually a rollover. 

Age-based withdrawals are often a “hidden” benefit of TSPs, and many people never take advantage. If you’d like to learn more about rolling over your TSP funds into a professionally managed IRA or making that Roth conversion to avoid RMDs, we’re here to help! Please get in touch to learn more about our specialized financial planning for federal employees today.