TSP

Once you separate from federal service, you will no longer be allowed to contribute to the TSP. Image: andrea crisante/Shutterstock.com

At some point in the future, you will separate from federal service. After you separate you will be able to withdraw money from your Thrift Savings Plan account. The TSP doesn’t care why you separated, it might be due to retirement, or you may choose to resign prior to becoming eligible for retirement. Regardless of the reason for your separation, don’t expect immediate access to your funds; you must clear the payroll system first. It usually takes around thirty days before the TSP is even aware that you have left federal service.

Many separated employees will choose to roll (transfer) their funds into an outside IRA or other tax deferred account. But you can also leave your funds in the TSP if you want (the Thrift Board encourages you to not transfer your funds out of the TSP). The rest of this article will discuss what happens if you leave your money with the TSP.

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Once you separate from federal service, you will no longer be allowed to contribute to the TSP; TSP contributions must come from payroll deductions, and you will no longer be on the payroll. As a former employee, you will be able to do most of the other things that current employees do, such as:

• You will still be able to re-balance your TSP account by means of inter-fund transfers. You will be subject to the same restrictions on inter-fund transfers that current employees face; that is, you will be limited to two unrestricted transfers per month, with additional transfers being allowed only if they are moving money into the G fund from the other funds (called “safe harbor” transfers).

• You will still be able to roll or transfer qualified money from other individual or employer sponsored retirement accounts into the TSP.

There are some differences between current and separated employees:

• A separated employee can withdraw their money from the TSP at any time, while a current employee can only withdraw money from the TSP via a hardship withdrawal or an age-based withdrawal. The TSP is clear as to what constitutes a hardship, and you must be 59 ½ or older to take an age-based withdrawal.

• A separated employee will have to start taking required minimum distributions (RMDs) at the age of 72, while a current employee who has reached 72 is not required to take a RMD.

Those who have separated by retiring and those who have separated by resigning will have the same choices as to how to withdraw their money from the TSP, if they decide to do so. The Thrift Savings Plan has several choices of withdrawal method. These methods are covered in the TSP publication, Distributions tspbk25.pdf.

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Here are a few things you should be aware of about distributions.

• Federal income taxes will have to be paid on all withdrawals from the Traditional portion of your TSP. Whether or not state income taxes need to be paid will depend on the state in which you live; some states do not have an income tax, and others may exempt all or part of retirement income.

• Federal income taxes may have to be paid on the portion of withdrawals from the Roth portion of your TSP if those withdrawals are not qualified, as may state income taxes. To be considered qualified, you must have had your Roth balance in your TSP account for at least five years and you must beat least 59 ½ years old.

• You will still have to resolve any outstanding TSP loans, either by paying them off, setting up an installment plan, or by taking a taxable distribution of the outstanding loan balance.

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