What Should Federal Employees Do With Their TSPs After Retiring?

“A Thrift Savings Plan can turn ordinary government employees into millionaires. But, is it a good idea to leave all of your nest egg in one basket?”- Joe Runza

As of June, 2021, there were over 98,000 Thrift Savings Plan (TSP) millionaires! These feds achieved this status by consistently investing in their TSP’s stock-indexed and C, S, and I funds.

With five funds covering international and US markets, including a bond fund and special Treasury securities fund, the federal Thrift Savings Plan (TSP) is a low-fee, easy-to-implement investment choice for active and retired civil servants. For many civil servants, the TSP is the lynchpin of their retirement blueprint.

What it lacks in investment sophistication, the Thrift Savings Plan makes up for with ultra-low fees that put more money back into workers’ pockets. When you consider the government’s matching contribution, it’s no wonder that many people outside federal service are envious of those with TSPs. However, as fantastic as the TSP can be, a growing number of federal employees are concerned about its’ lack of diversity and limited investment choices.

Upon leaving government service, significant numbers of participants are taking their TSP money with them. Even TSP millionaires increasingly opt to abandon the plan. These feds often cite the availability of much better fund options, including exchange-traded funds (ETFs) and technology funds.

Another fear is that having too many eggs in a government basket might be riskier than you think. After all, the government is the one who makes the rules concerning federal programs. They can, and do, decide to change those rules with the stroke of a pen.

What can you do with your TSP after leaving government service?

There are essentially four things you can do with a TSP when you retire from government service.

You can start regular payouts. If you are 55 or older, separate from service, and go directly into retirement, you can take withdrawals without paying an early withdrawal penalty. A few “special category employees” (SCEs) may be eligible to receive payments beginning at age 50. Everyone else needs to wait until 59 and ½ to avoid the 10% early withdrawal penalty. If you decide on this option, you should contact a federal benefits specialist to discover potential tax implications and strategies.
You can buy an annuity. Some retirees, particularly those concerned about running out of money before they die, use their TSP balances to purchase an annuity or life insurance policy. Annuities are products that pay you a guaranteed income for life while protecting your principal. Annuities are attractive options for those who want the security of a regular, predictable income stream. It’s a good idea to find a federal benefits specialist with a deep knowledge of the annuity product before deciding.
You can leave your TSP alone. If you are leaving government service, but you don’t yet need to access funds in your TSP, you can simply leave it where it is. However, be aware that, as is the case with other retirement accounts, you must begin your “Required Minimum Distribution (RMD) when you turn 72.
You could make a single withdrawal and then transfer the TSP to an IRA. You can make single withdrawals from your Thrift Savings Plan any time as long as the amount is over $1,000. A growing number of feds choose to take the entire amount and transfer it to an IRA. Many employees like this option because it gives them more flexibility and control of their wealth. By taking a single withdrawal, you will be able to choose your own IRA or annuity or find an investment advisor who can grow and manage your money.

Summing it up: Deciding what to do with your TSP when you separate service is probably a federal employee’s most critical decision. If you want to avoid making money mistakes with your TSP that could spell disaster in retirement, you should seek advice from a qualified federal employee benefits advisor. You should also gain a deeper understanding of the tax implications of every choice you make with your federal benefits. A CPA or tax planner can assist you.