What Should You Do with your TSP When You Leave the Service?

When I separated from the USAF in 2006, I was faced with a decision regarding my Thrift Savings Plan (TSP). Since I would no longer be a member of the armed forces, I could no longer contribute to the TSP. So what should I do? In the end I decided to leave the money in there, but I’ll walk you through your options so you can make an informed decision if ever the need arises.

Options for your TSP when you leave the service

The TSP plan is similar to a civilian 401(k) plan. Members contribute pre-tax money into their Thrift Savings Plan account and only pay taxes when they withdraw the money. When your employment ends with the military or civil service and you can no longer contribute to your TSP account, you are faced with several decisions regarding your TSP account. Your options are similar to those with a civilian 401(k) plan.

There are 5 options for your TSP account.

  1. Leave the assets in your TSP account.
  2. Roll your TSP account assets into an IRA
  3. Roll your TSP account into your new employer’s 401(k) plan.
  4. Withdraw your TSP account assets in a lump sum.
  5. Transfer your TSP account assets to a qualified annuity.

Let’s take a closer look at your options:

1. Leave TSP account assets in your account.

The easiest thing to do is leave your assets in your TSP account. However, you need to keep in mind that you will not be able to make additional deposits to your account once you are no longer part of the uniformed services or civil service.





Advantages: The TSP is a great place to invest for retirement. The TSP is easy to use, and while it doesn’t have many investment choices, the fees are among the lowest you can possibly find – even lower than most popular index funds. You always maintain the option of moving your funds from the TSP at a later date. There are also special tax considerations if you invested in your TSP while deployed to a war zone. Read more about advantages of investing in the TSP.

Disadvantages: The TSP has limited investment options. There are only 5 main funds to choose from and a few target funds. You will also not be able to make new contributions or take loans from your old TSP account. Having one more account to keep track of can also be a headache for some people. Not only does it involve more work when balancing your assets, but you also must maintain more paperwork. Read more about disadvantages of investing in the TSP.

Verdict: The fees charged to manage the Thrift Savings Plan are probably the lowest you will ever find. Consider leaving your funds in the TSP unless you don’t want to deal with extra paper work or you want more investment options. Otherwise, consider rolling your TSP account assets into your new 401(k) plan if you have one, or one of the other following options.

2. Roll your TSP assets into an IRA

Rolling your Thrift Savings Plan assets into a Traditional IRA will help you avoid the 10% early withdrawal penalty. You will also control your IRA and have unlimited investment options. If you enjoy hands on investments, then rolling your TSP into an IRA may be for you.

Advantages: The biggest advantages of rolling over your TSP into an IRA are avoiding the 10% early withdrawal penalty, maintaining certain tax advantages, and controlling your investment options which will no longer limited to the investment options in the Thrift Savings Plan or your new employer’s 401(k) plan. Total control allows you to limit your expenses and maintain full control of your investment. Also note that rolling your TSP assets into an IRA does not mean it is final – you may be able to roll it into your new 401(k) plan later.

Disadvantages: You will not be able to take loans from your TSP, which you would have been able to do if you rolled it into your new employer’s 401(k) plan. It is also easier to make withdrawals from 401(k) plans under certain circumstances.

Verdict: Consider this option if you want total control over your investments, you want more investment options, your new employer’s 401(k) plan does not offer strong investment options, or you want to consolidate your investment holdings into fewer accounts.




3. Roll your TSP assets into new employer’s 401(k) plan

This is a good option if your new employer’s 401(k) plan has strong investment options and low expense ratios. Another thing to consider is reducing the number of investment accounts you have to keep track of, maintain, and balance.

Advantages: Your retirement assets maintain their tax advantages and there are no penalties or fees to transfer or your money. You can borrow against your 401(k) if you want, and you will minimize the number of retirement accounts you have.

Disadvantages: You are limited to your new plan’s investment options. This is important if your new 401(k) plan has limited investment options or higher than average expense ratios, which cause lower returns. Some employers have a minimum waiting period before you can sign up for their 401(k) plan, so you may have to wait before you can rollover your TSP assets.

Verdict: Consider this option if your new plan has strong investment options and/or you want to reduce the number of retirement accounts you need to maintain.

4. Withdraw your TSP assets in a lump sum

Withdrawing your Thrift Savings Plan assets in a lump sum is not usually recommended because you will be assessed with taxes (usually 20%) and early withdrawal penalties (10%). Together, these can eat up nearly a third of your total TSP assets.

Possible Advantages: Your assets (minus income taxes and early withdrawal penalties) will be available for immediate use. This can help during periods of unemployment after separating form the military or civil service.

Disadvantages: The huge tax payment and the 10% early withdrawal penalty (if you are under age 59½) reduces the amount you receive by almost a third. In addition you also all lose tax deferral benefits, potential future earnings, and lock in any market losses. Most importantly, you reduce the amount of money you have for your retirement.

You can change your mind within 60 days. The law requires your old fund manager to deduct 20% of your withdrawal for taxes at the time of withdrawal. If you change your mind, there is a 60-day rollover rule which allows you to roll the money into an IRA within 60 days. However, you will be required to come up with the 20% difference to reinvest the entire amount and avoid paying income taxes. You will get the 20% back when you file taxes the following year as long as you complete the rollover within 60 days.

Verdict: Consider this option only if you need the funds immediately and you cannot meet those expenses through other means. But I strongly advise you to speak with a financial planner to look at other options before doing this.

5. Transfer the assets to a qualified annuity

The final option is to transfer your TSP assets into a qualified deferred annuity. This is an an option few people are aware of, and one not many people use. In many cases it is not the best option. As with rolling over TSP assets into an IRA or 401(k), the assets will remain tax deferred and you will not pay early withdrawal penalties.

Possible Advantages: An annuity is similar to a “personal” pension and creates an income stream for life. Retirement plans such as the TSP, IRAs, and 401(k)s are limited to the amount of money you are able to invest and you can outlive them. Your heirs may be able to inherit a portion of your annuity if you pass away during the accumulation phase.

Possible Disadvantages: Rolling your TSP into an annuity is final. Once it has been done, it cannot be reversed. Many annuities come with much higher fees than 401(k) plans and IRAs, and many states charge high tax premiums on annuity plans. In addition, you may pass away before your annuity pays out the amount of money you would have had in your 401(k) or IRA, leaving nothing for your heirs.

Verdict: Annuities are not necessarily bad, but there are often complicated and have many associated variables. If you think an annuity may be for you, consider talking to a certified financial planner or other tax or retirement professional for more details. One more note concerning annuities: beware of salesmen. Many annuities are given the hard sell because they are often extremely profitable for the investment management company.

Best options for your Thrift Savings Plan account

In most cases, the best option will be to transfer your TSP assets to your new 401(k) plan, an IRA, or leave your assets in the TSP account. Your should base your decision on your situation.

What did I do with my TSP account?

I chose to leave my TSP alone because the portion of money you invest in your TSP account while in a tax free combat zone will remain tax free, even when you withdraw it during retirement. I deployed 5 times while I was in the service, so I was able to invest a decent amount of tax free money in my TSP.

Do you have a 401(k) plan you need to transfer? Then check out this article: Should you consolidate 401(k) accounts? This article looks at the same situation rolling over a TSP account.

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Date published: July 17, 2008. Last updated: January 14, 2014.

Article by

Ryan Guina is the founder and editor of this site. He is a writer, small business owner, and entrepreneur. He served over 6 years in the USAF and also writes about money management, small business, and career topics at Cash Money Life. You can also see his profile on Google

Comments

  1. I think with the way things are going today any service member that has a deployed multiple times and has contributed to the TSP would be wise to keep their money there when they separate. True you won’t be able to keep contributing but tax free money growing tax free will out weigh that (just make sure you invest somewhere else).

    With contribution limits higher on the TS than a Roth IRA you might be well off investing as much as you can while deployed to take advantage of the tax free growing of non-taxed monies.

  2. It is absolutely true that the TSP has very limited choices. But, they are solid choices, excellent for a good asset allocation plan, and the fees are unbelievably low. I agree: Even if it’s a little inconvenient to keep more than one account, keep it in the TSP.

    For a little advice on the TSP, I defer to the outstanding Paul Merriman, an investment advisor that gives excellent, free, advice on proper asset allocation and index fund investing on his website, FundAdvice.com. His article on TSP can be found here.

  3. shiela says:

    I have a question: my husband is separating from the military but is planning to join the Natioanl guard. Can he still make TSP contributions even he’s no longer in the active service? thank you!

    • Shiela: From what I understand, yes, he will continue to be able to contribute to the Thrift Savings Plan when he joins the National Guard. Best of luck!

  4. Thank you SO MUCH for writing this article! My husband is ETSing in 4 months and considering National Guard; we didn’t know what our options were, and reading through the TSP site left me utterly confused. We’re leaving the money in! THANK YOU!

  5. Dan Reising says:

    You can still contribute to the TSP after separation. You can’t contribute “employee” contributions, however you can STIL contribute to your TSP from IRA’s and other eligible employer plans.

    form TSP-50 (TSP-U-50)investment allocation

    Note: TSP-50 is for civilians, and TSP-U-50 is for Uniformed service members.

    • Dan, My understanding is that you can do a rollover, which is transferring the assets from an IRA or a different employer sponsored retirement plan. But you can no longer make contributions from other sources.

  6. I recently separated from the Military, I have not yet taken any actions with my TSP. I understand I can roll it over, but is there a time frame in which I need to roll it over to a 401k? If I decide to keep it in TSP I know I wont be able to contribute, will the money still grow if I was to leave it? And is it possible to change my funds for instance from life-cycle to whichever. I don’t really know too much about TSP because i did it when i first joined the military so i have no touched it since basic training. I have no access to my TSP either so how do i withdraw it if i ever need to?

    • Mike, there is no set time frame regarding when you can roll over your TSP account. You can either roll it into your 401k at your new job, or you can roll it into a Traditional IRA. Alternatively, you can leave your investments in your TSP account and they will continue to work for you. You may still change your asset allocation, however, as you mentioned, you will not be able to add additional contributions to your Thrift Savings Plan account.

      Finally, if you need access to your TSP account, visit the TSP website and click on the contact link at the bottom of the page. YOu will be able to get your login information online, or by calling them on the phone.

      Best of luck, and thanks for your service!

  7. Good advice. I will definately leave it alone to take advantage of the tax free money I invested while I was deployed. I’m thinking of moving my allocations around a little to see if I can get it to grow a bit more, any suggestions here?

    • Daniel, I think it’s a great idea to keep your funds in the TSP if you can gain some additional tax advantages. I don’t have any specific advice regarding which funds to choose, because everyone has a unique situation. I recommend treating your TSP account as part of your overall investment account and not to try and diversify everything in your TSP, but use your TSP as part of your overall diversification.

      Best of luck and thanks for your service!

  8. I looked into doing this and I believe the form is TSP-60 (TSP-U-60). Here’s a link to the page on the TSP website: https://www.tsp.gov/planparticipation/transfers/methods.shtml

  9. You forgot one of the best options… Rolling it over to a Roth IRA. Almost the exact same thing as rolling it over to an IRA, except that you pay the taxes on the non-taxable contributions. Because the TSP keeps a record of what money is tax-free vs. tax-deferred, if you have a lot of tax-free contributions, then you won’t have to pay taxes on that portion when you transfer it.

    In order to do this, you need to be SURE that you have the money to pay the taxes. However, once you do, that money is forever tax-free. It grows tax-free and is withdrawn tax-free. It’s like being able to make a mega-contribution to a Roth IRA. There’s a reason why the Govt limits how much you can contribute to a Roth IRA, and it’s because it’s an incredible deal. Rolling a 401k (TSP) to a Roth IRA does not count as a contribution and therefore, does not get counted against the contribution limit. Also, the best time to roll it over is during a year when you have little income and/or when the market is down (less money in the account = less taxes; less annual income = less taxes.)

  10. You also forgot an important aspect to consider, which is that if you transfer out all of your money, then you lose your TSP benefit forever…

    Let’s say that after your govt service you get a job and start a 401k with a civilian employer. When you eventually leave that employer, if you still have money in your TSP, then you can roll your civilian 401k into your TSP account. The advantage of this lies in the fees, as the TSP fees are rock-bottom, the lowest in the industry.

  11. There is some talk about the FEDS taking over 401 accounts and allowing limited access to account holders in an effort to combat budget shortfalls. Should I be concerned about this and how can I protect myself from Uncle Sam? In Rolling my TSP over to an IRA where I have more control would I be able to gain access to the funds more quickly if it looked like I needed to make a withdrawal to escape GOV control?

    • Darrell, the government has no access to your TSP account, so at this point, it shouldn’t be a concern. However, if you want more control over your investments, then sure, rolling your TSP into an IRA will give you that control. You will have even more control over your distributions if you do a Roth IRA conversion as well, because there is no minimum distribution requirement as there is with a Traditional IRA.

  12. Ryan,
    Great article. When I separated from active duty Air Force in 2007 and entered federal civil service (for the Air Force), I opened a FERS TSP account and transfered my AD TSP account into it. I’m glad I had that option when I took off the uniform and put on a suit.

  13. I think some may be confused or it is just me? The money contributed to TSP while in a combat zone is Tax Exempt! The profits made from those funds are not exempt only deferred. Basically when you are eligible to withdraw from TSP the only amount that is exempt are the funds you contributed in a combat zone. Each are proccessed through TSP on seprate tax forms as well. Please correct me if I am wrong…

    USMC Ret…

  14. Is it possible to rollover your TSP account into a Traditional IRA while still on Active Duty? I fully understand the benefits of the TSP (low fees mostly) but I no longer wish use their limited investment options. Thanks.

    • Luke, unfortunately it isn’t possible to roll over your TSP while you are still on Active Duty. You can only roll over the funds once you leave the service.

  15. hELLO, i WAS WONDERING. if I leave my federal job and therefore the military and want to withdraw all my money. Are we talking about everything that is on the tsp including what they matched or juast what I contributed? Please answer that for me I am a little confused!

    • Rafael, here are the TSP vesting requirements, according to Wikipedia:

      Vesting Requirements: All employees or service members are fully vested in their contributions and any earnings thereon from the first day of employment or service. FERS employees are also fully vested in agency matching contributions and any earnings thereon from the first day of employment. However, most FERS employees must complete three years of Federal civilian service (some positions require only two years) to be fully vested in agency automatic contributions and any earnings thereon.

      Based on that information, you should be able to withdraw all matching contributions. Keep in mind, however, that if you are under the minimum age limit for withdrawals, that you may be required to pay early withdrawal penalties and taxes on your withdrawal if you don’t roll over your TSP into an IRA, another employer sponsored retirement plan such as a 401k, or a different qualified plan. The article covers more of these options in better detail.

  16. Great advice! I am a FERS employee and a Reservist. I have a Uniformed Service TSP account and would like to use some of the money to buy-in to my FERS Annuity. Can I do this without having to pay taxes on the money?

    • Sandi, Thanks for sending in this question. To be honest, I’m not sure what the answer is. I recommend speaking with your HR representative in the civil service. They should be able to answer this question.

  17. Ryan
    What happens to all the dividends from the stocks? I have never received one from TSP but I do from my IRA. Where do they disappear to?
    Jason

    • Jason, The dividends don’t disappear. When your funds are in the TSP, they are automatically reinvested for you. If you transfer your funds out of the TSP, then everything is cashed out and you roll the funds into a new investment. Because there are no old funds on the TSP, there is no longer anything that can earn a dividend.

  18. As a retiree can I still contribute to the TSP? I started an IRA when I got out and never thought to ask that question.

    • Dean — No, you are not able to make contributions to your TSP after you separate (retire) from the service. You can leave it invested in the TSP where your “earnings” will be automatically reinvested for you; you can roll it over into your “new” employer’s program; you can roll it over into an IRA; or you can withdraw it. You cannot continue to make contributions to it if you are no longer in service.

  19. Dear Ryan, I want to thank you for this post. I am 33 planing on separating from the Active duty in about 2 years. I’ll have completed 10 years of service by then. I’ve been contributing since I joined and increased my contribution to 22 % in the past 3 years and i also have about 26 months of combat contributions. I always thought of it as a forgotten savings account so I have the G fund which I don’t touch and just recently got a password to access it. Most people keep on telling me that I should pay taxes now so i don’t when i cash out by using a Roth IRA. I am extremely ignorant in the whole investment subject. Should I do that if i am able to? Must I do it before I separate? How do i find a Roth IRA?
    Looking at my emergency fund and learning about the penalties of early withdrawing from the TSP I am wondering should I just decrease my contribution to the minimum and save the money on my bank account (i.e a 2 year USAA CD) to support my post mill and post GI Bill life in case I don’t find a job right away? Also getting ready to PCS overseas (non combat) where I’ll be able to save at the minimum 48 G. How should I invest this saving. I am debt free, no kids and single. Thank you.

    • E, I’m glad you found this article helpful. You have a lot of great questions. I will try to answer a few of them.

      A Roth IRA is a good way to invest because it offers better long term tax benefits for many situations. Here are some differences between a Roth and Traditional IRA. Here are some good places to open a Roth IRA.

      As for investing, you will most likely do much better in the long run if you invest in equities including some stocks. A good way to do that with the TSP is to use a LifeCycle Fund, which is automatically allocated based on your proposed retirement date. This will help you earn better returns in the long run, while maintaining an acceptable level of risk. Here are some tips for beginning investors.

      An emergency fund is a great idea since you know you will be separating in a few years. It’s a good idea to start saving some extra money now.You have a good advantage since you don’t have nay debt. I recommend saving at least 6 months of living expenses, but you might want to have a little more if you know you will be going to school and won’t be able to work much due to course load. You might also want to look into taking classes while on active duty if you are planning on going to school when you get out. Tuition assistance will pay for your classes now, and getting some courses out of the way will save you a lot of time and money in the long run. Here are some tips for taking classes while in the military.

      I hope these tips are helpful. Best of luck, and thanks for your service.

  20. Tom Reifsnyder says:

    Hey Ryan,

    What kind of flexibility is offered with the introduction of Roth TSP? Could someone roll just their ROTH TSP to ROTH IRA and keep their Traditional TSP alone? Can they roll ROTH TSP to ROTH IRA and Traditional TSP to Traditional IRA?

    The ROTH TSP was introduced at the midpoint of my contract, so my funds in Roth and Traditional should be somewhat similar at separation. I’m a big fan of ROTH anything and was thinking of rolling all of my TSP funds into a ROTH IRA. Any thoughts on this, and in general how the Roth TSP changes your separation advice?

  21. 30 years of federal work under FERS, debt free and retiring in 2014. How can i receive and income from interest gain on a monthly basis? So the principal will remain the same. Thanks.

  22. Hi Ryan,

    Great article, thank you for posting it.

    My question is this: I recently came off active duty Army and joined the National Guard. Can I transfer my TSP that I had while on active duty to an IRA or will I have to wait until I have completely separated from the military?

    Thank you!

    • Chris, You need to be completely separated from the military before you can roll your TSP account into an IRA. For example, you could transfer the IRA after you separate from active duty if you have a break in service between joining the Guard. If you go straight into the Guard, you will not be able to roll it into an IRA.

      Also, if you have tax free contributions that you made in a deployment zone, then you need to pay special attention to how you do the rollover. Some IRAs are not able to handle tax-exempt contributions. If this is the case, then your normal contributions would go into the IRA and your tax exempt contributions would be sent to you in a check. You would be able to contribute the tax exempt contributions to a Roth IRA, which is a better long-term option for most people.

      I hope this helps. Best of luck, and thanks for your service!

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