Are you planning on leaving federal service before you become eligible to retire? I suspect most of us have had those “Johnny Paycheck moments” at some point during our career. For young readers, Johnny Paycheck is best known for his song Take This Job and Shove It.
Most of us will overcome the urge to leave, realizing that our federal benefits are worth staying for, but not all current federal employees are going to finish their career with the federal government. This article looks at what options a person who leaves early will have with their Thrift Savings Plan. For more information on what happens with FERS and CSRS pension and other benefits, see Separating Before Retirement Eligibility at ask.FEDweek.com.
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. The choices will become much more flexible with the implementation of the TSP Modernization Act later this year.
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.
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 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, 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 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 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, 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.
If you’re thinking of leaving federal service, be sure to give ample thought to what you will do with your Thrift Savings Plan.
See also, Separating Before Retirement Eligibility at ask.FEDweek.com