If you’re thinking of leaving federal service, take the necessary time to consider what you will do with FERS and your TSP. Image: Lester Balajadia/Shutterstock.com
Not everyone who starts a federal career will end up still being a federal employee at the time they retire. I remember when I started as a federal employee; I thought my job (city letter carrier) was going to be but a stop on my career journey. Twenty-six years later, I retired from Treasury as a federal employee. But that’s not the path all new-hires take; many of them end up leaving the federal government at some time, maybe soon after hiring on, or maybe half-way through their work life. This article is directed to those who think they will leave federal employment at some point prior to retirement and will discuss what happens to their FERS retirement and their Thrift Savings Plan.
If, when you separate from federal service, you have at least five years of civilian service, you will be entitled, at some future date, to a deferred annuity under FERS. It is almost always better to leave your FERS contributions on deposit with OPM than to withdraw them. With as little as five years of service, you will be entitled to the deferred annuity at the age of 62. With ten or more years of service (at least five must be civilian) you will be entitled to a deferred annuity (possibly reduced) at your minimum retirement age (MRA). Most readers of this article have an MRA of 57, though some older readers may have a MRA of 56.
Regarding the Thrift Savings Plan, an employee who separates from federal service prior to retirement eligibility will have the same withdrawal choices as does one who waits until retirement. That is, they can take individual payments, installment payments, purchase a TSP annuity or roll the TSP monies over to another qualified account.
One tempting option is to take the TSP money out by means of an individual distribution and spend it. However, unless one really needs the money, this is generally a bad idea. The TSP should be considered retirement savings and not accessed for other reasons unless absolutely necessary. A recent report from the Harvard Business Review found that 41.4% of those leaving employment before retirement cashed out their 401(k) type plan when leaving. 85% of that group emptied the entire account. Not a good idea for future retirement security!
Another choice is for a separating employee to leave their money in the TSP until they begin withdrawing from it after they retire from their post-federal career. There is no requirement that an individual take their money from the Thrift Savings Plan after they leave federal service. In fact, 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 73. 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, they could roll 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. More likely than not the new employer’s plan will have rules similar to the TSP’s.
Rollovers do not have to be to new employer plans; a separated federal employee will have the opportunity to roll their TSP into an Individual Retirement Arrangement (IRA). IRAs have many rules that are different from the Thrift Savings Plan. 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, set up a payment schedule that will pay off the loan in the original timeframe, or take 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.
If you’re thinking of leaving federal service, take the necessary time to consider what you will do with FERS and your TSP.
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See also,
Legal: How to Challenge a Federal Reduction in Force (RIF) in 2025
The Best Ages for Federal Employees to Retire
Alternative Federal Retirement Options; With Chart
Primer: Early out, buyout, reduction in force (RIF)
Retention Standing, ‘Bump and Retreat’ and More: Report Outlines RIF Process