The Thrift Savings Plan is a critical element of a federal employee’s financial life. For most, it serves as the primary investment account that holds stocks and bonds for retirement. Putting money into the account is very straightforward: contribute as much as you can, as often as you can. If the decision of selecting investments within the TSP poses a challenge, there is one allocation that I believe trumps all others. When it comes time to withdraw money from the TSP on the other hand, the options are more varied. There are two times in which funds will be withdrawn from the TSP: after leaving federal service or while currently employed in federal service. In this article, we’ll discuss the methods of withdrawal after leaving service.

Withdrawals After Leaving Federal Service

First and foremost, if you are leaving federal service before the year in which you turn 55, withdrawing any funds from your TSP account will result in an early withdrawal penalty tax of 10% in addition to possible federal/state income taxes. If you leave before turning 55 and wish to withdraw the funds without being penalized, you will need to either leave the money in the TSP until age 59 ½ or have a direct rollover performed from the TSP into another employer sponsored plan or IRA. Keep in mind that this simply changes the account wherein the funds are held. You still won’t be able to use the funds without facing taxation and a possible penalty. That being said, when you wish to withdraw funds from the TSP there are 3 methods of payment to choose from.

1) Partial Withdrawal: As long as you never made an age based in-service withdrawal while employed by the federal government, you are permitted a one-time partial withdrawal from your TSP upon leaving federal service. This can be useful in providing a lump sum of money when funding post-employment objectives. Partial withdrawals should always be performed in a cognizant manner towards taxes. Depending on the amount withdrawn and your personal income tax rates for the year, a sizable tax bill could be incurred.

2) Full Withdrawal: By age 70 ½, the time that IRS required minimum distributions take effect, a full withdrawal method must be selected for the entire balance in a TSP account. There are a few options to select from with the full withdrawal:

• Lump Sum Payment: The lump sum payment simply pays out the entire balance of the account in a single payment. Again, caution should be exercised in electing a lump sum payment due to the potential income tax consequences. One way to avoid taxes, and also broaden your withdrawal (and investment) options, is to perform a direct rollover into an IRA after separating. As long as the rollover is direct, meaning sent directly from the TSP to the IRA within, it is not considered a taxable event. Once the money is in the IRA you will be able to withdraw as much as you wish, at any time. The disadvantages of this action are that the IRA offers less creditor protection and higher cost investment funds than the TSP. A distinct disadvantage that I see in abandoning the TSP is the loss of access to the G fund. The G fund is an extremely valuable no-risk investment for retirees to use in structuring a portfolio for security and income, and it is available exclusively in the TSP.
• Monthly Payments: You may elect to receive your account balance paid out in a series of monthly payments. You’ll have the option of choosing 1 of 2 ways to have these monthly payments computed: Based on the IRS life expectancy tables or your own desired dollar amount. If the life expectancy tables are used, the monthly payment amount will be recalculated each year based on your account balance and age. If you choose your own monthly payment amount, the desired amount will be paid out monthly until the account balances reaches $0. 
• Life Annuity: For a minimum of $3,500, a lifetime annuity can be purchased through the TSP. In exchange for your lump sum payment, the TSP will provide a level monthly payment that is guaranteed for as long as you or a joint annuitant (if selected) are alive. Annuities can be great for those looking for guaranteed income. They relieve the annuitant of ever having to stress about markets or investments by simply guaranteeing the same check shows up each month, for life. The downside with annuities is that this guarantee comes with a cost. Since the annuity provider is assuming all of the risk and you are assuming none, they build their margin of safety into the payment. This means that by opting to receive their guaranteed income, you are likely earning less off your investment than could otherwise be possible by managing it on your own. Nevertheless, this price can be well justified by those wishing to receive stress free income for life.

3) Partial/Full Combination: If more than one of these options sounds appealing, you can split distributions among any combination of the partial and full withdrawal methods. The same individual rules and restrictions apply to each type withdrawal, such as the $3,500 minimum for an annuity. Opting for a variety of withdrawal methods can be useful in diversifying the ways in which income is extracted from the TSP.

One of the few pitfalls of the TSP is that it is considered to offer a limited amount of withdrawal options once it comes time to access your money. While this is arguably true, the withdrawal methods that are available do provide a decent mix of ways in which a participant can receive payout of their account. Between the one time partial withdrawal and the various full payment options, funds can be withdrawn from a TSP account strategically, so as to provide adequate income with minimum income tax liability. For those desiring more control over their account, the TSP balance can also be directly transferred into an IRA. Doing so provides much more control over withdrawals, but forfeits the valuable benefits of the TSP, such as creditor protection, low cost investments and the exclusive G fund.