FEDweek

TSP Options for Those Who Leave the Government Before Retirement

Not all federal employees finish their careers with the federal government. Below are some options those employees have with their Thrift Savings Plan account when leaving.

One option is to take the TSP money and, well, spend it.  Unless one really needs the money for living expenses, this is a bad idea.  The TSP should be considered retirement savings and not accessed for other reasons unless absolutely necessary.

Another choice is for a separating employee to leave money in the TSP until he or she withdraws it after retiring from, for example, another job in the private sector. There is no requirement that an individual take money from the TSP after leaving federal service. It can be left in place.

The only withdrawal requirement for separated employees (whether their separation is due to quitting or to retiring) is that they must begin taking required minimum distributions (RMDs) at the age of 70 ½.  There are many good reasons for leaving money in the TSP, including remarkably low expenses.

If a separated federal employee takes a job with a company that offers a 401(k) type retirement plan, another option that presents itself is rolling over the TSP into the new employer’s plan.  This should be done as a direct rollover so that there will be no withholding for federal income taxes.  Most likely the new employer’s plan will have rules similar to those of the TSP.

Rollovers do not have to be to new employer plans; a separated federal employee will have the opportunity to roll the TSP into an Individual Retirement Arrangement (IRA).  IRAs have many rules that are different from the TSP.  Sometimes those rules are advantageous (e.g., more flexibility in withdrawals), and sometimes they are more restrictive (e.g., the 10% early withdrawal penalty will apply to all withdrawals taken before the age of 59 ½).  IRS Publications 590 A and B outline IRA rules.

If an employee leaves federal service with an outstanding TSP loan, they will be required to either pay it back, or to accept a taxable distribution of the outstanding balance of the loan.  No withdrawals will be allowed until the loan is satisfied by one of these methods.