Putting money in the TSP is easy. Millions of federal employees do it without incident every 2 weeks.
But getting money out? That is much harder, at least if you don’t know what you are doing.
Perks and Penalties
The TSP has all kinds of perks. You can grow money tax-free or tax-deferred. You can save straight from your paychecks and your agency gives you the 5% match.
There is lots to love.
But with all the perks that come with retirement accounts, there are lots of rules on how/when you can use the money.
10% Penalty
The one penalty that everyone is trying to avoid is the 10% early withdrawal penalty.
If you take money from your Thrift Savings Plan (TSP) account before the government wants you to then you’ll have to pay 10% of the withdrawal to the government on top of the taxes you owe as well.
Not fun! But here is how to avoid it.
If you make withdrawals after age 59 and ½ then you are in the clear for sure.
But I have good news; if you leave the government after age 55 then you can access your TSP without penalty as well.
Example
If you leave government service at 54 then you’d have to wait until 59 and ½ to avoid the early penalty, but if you leave at 55 or later then you’d avoid the penalty right away.
Note: If you are a special provision employee then you can access your TSP without penalty even before 55 as long as you qualify for a full/normal special provision retirement.
Best Withdrawal Options
Now that you are at the right age to avoid the early penalty, what are the withdrawal options for the TSP?
Here are the main ones:
- TSP Annuity
- Installment Payments (Monthly, Quarterly, Annually)
- One-time payments
I’m a fan of all the withdrawal options except for the TSP annuity option.
TSP Annuity Summary
You give a piece or all of your TSP to an insurance company and they guarantee a payment for you for however long you set it up for.
For example, you give MetLife $300k and they guarantee a $1,100/month payment for the rest of your life. But TSP annuities are (for the most part) irrevocable! You also can often do better by managing things yourself.
In my experience, 98% of the time TSP annuities don’t make sense for federal employees but of course, do your own research 🙂
Most Popular Option
If you need a regular amount of money from your TSP, the most common withdrawal option is a monthly installment payment. You tell the TSP how much to send you every month and you can change/stop it basically at any time.
The monthly installment is the closest thing to the paycheck you are used to receiving.
Watch Out For This!
It is very common for people to use their TSP accounts when large one-time things come up. While there is nothing inherently wrong with this, you want to be careful whenever making large withdrawals.
Large withdrawals all in the same tax year may put you in a higher tax bracket!
Your Money
Your TSP is your money and should be used to fund/enjoy a great retirement. Just make sure you understand the ramifications of your TSP choices before you get into any trouble.
