TSP Withdrawal Basics
The Thrift Savings Plan (TSP) used to have more strict regulations about how many times you could withdraw from your account. But in 2019, they eased some of those restrictions, making it much more feasible for people participating in the TSP program to take out and use the money they’ve been contributing and accumulating.
This doesn’t mean, however, that there should be no careful consideration behind each withdrawal you make. After all, your retirement account is meant to help you financially after you stop working, as well as potentially help any beneficiaries you designate to benefit from your funds in the future. If you don’t understand how withdrawing from your TSP account or transferring your funds works, you may not get the most out of your money.
TSP Withdrawals After You Retire
As of 2019, you have multiple opportunities to take distributions from your TSP account after age 59 ½, as well as while still working and contributing to your account. You can take a partial withdrawal or even a full withdrawal to move elsewhere and keep contributing money to the account afterward if you so choose.
When you decide to withdraw from you account, there are four different ways you can do so:
• Installment payments that are either made monthly, quarterly, or annually, or based on an amount you select
• On a fixed dollar amount calculated based on your life expectancy
• A partial withdrawal
• Annuity purchases
You can use one or a combination of these methods to make withdrawals from your account. There is no limit on the number of withdrawals you can make after you are age 59 ½, though you are limited to only withdrawing once every 30 days, as the TSP will not process more than one withdrawal within this window.
Financial Hardship Withdrawal
You have two ways to take money out of your TSP while still working. One of those ways is by a Financial Hardship Withdrawal. In order to be eligible for this type of account withdrawal, you must fall under at least one of four specific circumstances:
• You must have a recurring negative cashflow, meaning you are consistently bringing in less money than you have going out.
• You must have ongoing medical expenses that you haven’t paid yet and aren’t covered by your insurance provider.
• You have personal casualty losses that haven’t been paid yet and aren’t covered by your insurance provider.
• You have legal expenses that you haven’t paid yet specifically for separation or divorce from a spouse.
All these restrictions only qualify if you have a related outstanding bill or invoice that you have not paid yet. If you pay any such bill and then seek to be reimbursed for that paid amount via a Financial Hardship Withdrawal, you will not qualify to do so.
You cannot withdraw less than $1,000 from your TSP, and you may only withdraw from your own contributions and earnings in the account. The matching contributions and earnings made by any related employer or service are not eligible for this type of withdrawal.
You are also subject to paying income taxes on money received from a Financial Hardship Withdrawal. And if you are under age 59 ½, you may also be subject to a 10% penalty fee for such a withdrawal.
Once you have turned 59 ½, if you are still working, you become eligible for Age-Based Withdrawals. However, you can only withdraw the funds you are vested in. You must also withdraw at least $1,000 in an Age-Based Withdrawal, or your entire vested amount if it is less than $1,000. If you are 59 ½ and still working, you may not take more than four Age-Based Withdrawals per calendar year.
Your withdrawal is also subject to an automatic 20% withholding unless it is directly transferred or rolled over into an IRA. Doing so means your withdrawal is not taxable. But if you directly receive your withdrawal, meaning TSP mails you a paper check for your withdrawal, they will automatically withhold 20% of the total amount. You do have 60 days, however, to put that full, non-taxed amount back in an IRA to qualify it as a rollover.
TSP Withdrawals While Working
It may seem strange to think you would need to withdraw from a retirement account while you’re still working and making regular income, because the hope is that you won’t need any of that money until after you retire. But there are reasons to withdraw from your TSP beyond having money to spend.
You might want to take advantage of other investment options, as you are limited to just four index funds (F, C, S, and I) and the G Fund within the TSP. There are other ways you could choose to invest the money in your TSP account if you want a broader array of investments, as well as easy access to some of your funds more than once a quarter.
For example, if you’re paying your child’s college tuition with this money monthly and need a more reasonable way to manage that expense, you could take out enough funds to put into your IRA, leave them invested, and pull those funds out of your IRA once a month instead.* This kind of strategizing gives you more flexibility with your spending, and there are many more advanced withdrawal strategies to find in our TSP 401 blog post.
*This is a hypothetical example provided for illustrative purposes only; it does not represent a real life scenario, and should not be construed as advice designed to meet the particular needs of an individual’s situation.
Traditional TSP to Roth IRA Conversion
If you are interested in tax-efficient strategies for yourself, you may want to consider a Roth IRA. Just remember that when you convert your Traditional TSP to a Roth IRA, you must wait five years after the conversion before you can access the earnings on that converted money. You can always go in and take that converted amount back out, but if you want access to the growth on the amount you’ve converted, you’ll have to be patient for five years before doing so. Also note that a Roth IRA conversion creates a current taxable event—meaning that taxes are paid the year it is processed. And it is generally preferred that you have funds to pay the taxes due upon conversion from funds outside of your IRA.
TSP Beneficiary Designations
You likely designated beneficiaries for your TSP back when you began working for the federal government—and you may not have thought about them since then. If your relationship with those beneficiaries has changed and you no longer want your TSP funds transferred to them, you’re going to want to go back into your account and update them appropriately.
The easiest way to see if you have designated beneficiaries and who they are is when you receive your annual TSP statement at the end of the year. In the upper right-hand corner of this document, it’s stated whether or not you have designated beneficiaries, and if you do, who those beneficiaries are. Your quarterly TSP statements will tell you if you’ve named beneficiaries, but they do not tell you who they specifically are.
If you want to change your beneficiaries, visit TSP.gov, sign in with your user ID and verification code, then navigate to the TSP-3 form. You may notice language on this form stating that if you pass away without a designated beneficiary, the TSP will automatically distribute your TSP funds to your widow or widower. If you were not married, they will send it to your children equally (if more than one child) and to descendants of any deceased children by representation. If you don’t have any children, they will send it equally to your parents or the surviving parent. And if none of these is possible, they will work to find your next of kin.
If there is no TSP-3 form on file, the TSP will do their own research into who is eligible for your funds, which can be a time-consuming process. If you want to help your intended heirs to receive that money directly and quickly, make sure you fill out the TSP-3 form in full.
When done correctly and with the right considerations in mind, withdrawing from your TSP account can be incredibly beneficial to you and your unique circumstances. But it’s not an action to take lightly—it’s helpful to have a well-thought-out strategy to guide your withdrawal and rollover decisions.
Ann Vanderslice Federal Benefits Made Simple, an E.A. Buck Company is an independent financial services firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This firm is not affiliated with or endorsed by the US government or any governmental agency. E.A. Buck is an independent financial services firm, offering investment and insurance products to consumers. A Roth Conversion is a taxable event and may have several tax related consequences. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Securities offered only by duly registered individuals through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. Insurance services offered through Ann Vanderslice Federal Benefits Made Simple an E.A. Buck Company. MAS, AEWM, and Ann Vanderslice Federal Benefits Made Simple, an E.A. Buck company are all separate entities. 1163196