What To Do With Your TSP After Separation

When I separated from the USAF in 2006, I faced 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 and their pros and cons so you can make an informed decision if the need ever arises.

Key Takeaways

• The Thrift Savings Plan is similar to a civilian 401(k) plan. Members contribute pre-tax money to their account and pay taxes only when they withdraw.
• After leaving the military, members have several options to manage their assets. These include keeping them in the account, rolling them into an IRA or employer’s 401(k) plan, withdrawing them as a lump sum, or transferring them to a qualified annuity.
• Each option has advantages and disadvantages. For example, the TSP offers low fees, an IRA offers more investment options, and a lump-sum withdrawal may trigger tax penalties.
  

Can I contribute to the TSP after I leave the military? 

When you leave the military or civil service, you can no longer contribute to your TSP account. However, your account remains active, meaning you have several options for managing your funds. We’ll review five strategies for managing your Thrift Savings Plan after leaving the military, along with the advantages and disadvantages of each. I’ll also share which strategy I chose and why. 

5 Options for Your TSP Account After Separation

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

Let’s take a closer look at the pros and cons of each option.

1. Leave TSP Assets in Your Account

The easiest option is to leave your assets in your TSP account. However, you won’t be able to make additional deposits once you are no longer in the uniformed services or civil service. 

If you leave the money in your TSP account after leaving the military, it continues to grow based on the performance of the investments you’ve chosen. The TSP is also easy to use, and while it offers fewer investment choices, its fees are among the lowest you can find—even lower than most popular index funds. You can always move your funds from the TSP later. Special tax considerations also apply if you invested in your TSP while deployed to a war zone. 

Read more about the advantages of investing in the TSP.

Once you leave the military, you can no longer contribute to your TSP, so you won’t receive matching contributions if you’re a Blended Retirement System member. You also have only five main funds to choose from, plus a few target funds. You also can’t make new contributions or take loans from your old TSP account. Having another account to track can also be a headache for some people. It also means more work when balancing your assets and more paperwork to maintain. 

Read more about the disadvantages of investing in the TSP here.

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 want more investment options. 

Track your TSP and other investments with Empower’s (formerly Personal Capital) free financial dashboard.

2. Roll Your TSP Assets Into A Traditional IRA

An IRA (Individual Retirement Account) is a popular tax-advantaged account designed to help individuals save for retirement. There are two main types of IRAs: traditional and Roth. Like a TSP, you contribute with pre-tax dollars, so you can deduct them from your taxable income in the year you contribute. The money grows tax-deferred, and you pay taxes when you withdraw it in retirement. 

If you enjoy hands-on investments, rolling over your TSP into an IRA can be a great option.  

Perhaps the biggest advantage of rolling your TSP into an IRA is avoiding the 10% early withdrawal penalty, a fee imposed by the IRS when you withdraw money from a tax-advantaged retirement account before the age of 59½. Another advantage of a traditional IRA is that you get total control, meaning you have full authority over how your retirement funds are invested and managed. Unlike employer-sponsored plans like the TSP or 401(k), a traditional IRA typically gives you access to a wide range of investment choices, such as: 

• Stocks
• Bonds
• Mutual funds
• ETFs (Exchange-Traded Funds)
• CDs (Certificates of Deposit)
• Real estate (in the case of self-directed IRAs)
  

An IRA also lets you keep certain tax advantages, such as tax-deductible contributions.

The TSP allows participants to take loans under certain conditions (like purchasing a home or helping with financial hardship) and to repay the loan over time without incurring taxes or penalties. However, a traditional IRA doesn’t offer this option. If you need access to the funds before retirement, you’d have to withdraw them, which could trigger taxes and penalties, making it less flexible for short-term financial needs.

Additionally, traditional IRAs generally have stricter withdrawal rules compared to the TSP. You can make penalty-free withdrawals from a TSP if you leave federal service after age 55, but with a traditional IRA, you must wait until age 59½ to avoid the 10% early withdrawal penalty. 

Verdict: Consider this option if you want total control over your investments, more investment options, your new employer’s 401(k) plan offers limited investment options, or you want to consolidate your holdings into fewer accounts.

3. Roll Your TSP Assets Into Your Employer’s 401(k) Plan

If your new employer’s 401(k) plan has strong investment options and low expense ratios, rolling your TSP into a 401(k) is an especially great option.

When you roll your TSP into a 401(k), your retirement savings stay tax-deferred. This means you won’t pay taxes on the funds during the rollover, and the money continues to grow tax-deferred until you withdraw in retirement. Additionally, rolling your TSP into a 401(k) is typically a penalty-free process as long as you perform a direct rollover, meaning the money goes straight from your TSP to your new 401(k) account without passing through your hands. 

Lastly, unlike a traditional IRA, most 401(k) plans allow you to take loans against your retirement savings. This can be a significant advantage if you ever need access to your funds before retirement for major expenses like a home purchase, education, or medical costs. Typically, you must repay 401(k) loans with interest, but you won’t face the same tax penalties as with early withdrawals.

Like the TSP, a 401(k) offers limited investment options. This is important if your new 401(k) plan has an especially small number of investment options or higher-than-average expense ratios, which cause lower returns. 

Some employers have a minimum waiting period before signing up for their 401(k) plan, so you may have to wait before you can roll over your TSP assets. During this waiting period, your investments may remain stagnant, and you might miss out on potential growth or other opportunities.

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

4. Transfer Your TSP Assets To a Qualified Annuity

A rarer option is to transfer your TSP assets into a qualified deferred annuity. Few people know about this option, and few use it. 

An annuity is an insurance product. In exchange for a lump sum, an insurance company guarantees a steady income, often for the rest of your life. It helps ensure a steady income stream later in life while delaying taxes on your earnings until you start withdrawing funds.

Unlike retirement accounts like a TSP or IRA, which have annual contribution limits, annuities don’t cap how much you can transfer or invest. Many annuities also offer flexible payout options. You can choose to receive payments for a set number of years, for the rest of your life, or even for both your life and your spouse’s life (joint annuity). Many annuities also come with death benefits, ensuring that any remaining funds in the account can be inherited by your beneficiaries, often as a lump sum or a stream of income.

Rolling your TSP into an annuity is final. Once you do, you can’t reverse it. This means that if you later change your mind or find a better investment option, you won’t be able to move your money back into the TSP or another retirement vehicle. You’re locked into the annuity contract, which can limit your flexibility and future financial options. 

Many annuities also come with much higher fees than 401(k) plans and IRAs, and many states charge high tax premiums on annuity plans. These fees can include administrative costs, mortality and expense charges, and commissions paid to the annuity provider or agent. 

Additionally, when you buy an annuity, you’re essentially trading a lump sum for a guaranteed stream of income over your lifetime. However, if you pass away shortly after starting the annuity, you may receive less in payouts than you originally contributed. For example, if your annuity contract doesn’t include specific provisions for a death benefit or payments to beneficiaries, the remaining balance could be lost, leaving little to nothing for your heirs.

In contrast, with a 401(k) or IRA, the remaining balance typically passes to your heirs when you die, and they can inherit the account.

Verdict: Annuities are not necessarily bad, but they 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 hard-sold because they are often extremely profitable for the investment management company.

5. 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 taxes (usually 20%) and early withdrawal penalties (10%). Together, these can eat up nearly a third of your total TSP assets. However, there are scenarios where it would be beneficial.

The biggest advantage of withdrawing from your TSP is having complete control over how and when to use the money. Your assets (minus income taxes and early withdrawal penalties) are available immediately. This can help during unemployment after leaving the military or civil service.

Additionally, if you believe you can invest the lump sum more effectively outside the TSP (e.g., in higher-yield investments), this option could provide greater growth potential. However, that is a big risk.

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

You also pay income tax on the full lump sum in the year you withdraw it. Depending on your TSP balance, this could push you into a higher tax bracket and create a significant tax bill.

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, the 60-day rollover rule lets you roll the money into an IRA within 60 days. However, you are required to come up with the 20% difference to reinvest the entire amount and avoid paying income taxes. You 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 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.

The best option?

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

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 remains tax-free, even when you withdraw it during retirement. I deployed five times while 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? If so, check out this article on options for rolling over a 401(k) account: Should you consolidate 401(k) accounts?

Other Retirement Plan Options

Just because you won’t be able to contribute further to your TSP account doesn’t mean you should stop saving for retirement. It is almost always a good idea to save for retirement. Here are some places you can invest if you plan on saving more for retirement:

Civil Service TSP

The TSP for civil service workers is virtually the same as the plan for military members. Like members of the BRS plan, most civil servants are eligible for employer matching, where the government contributes to your account. The government gives you a small contribution just for participating. Then it matches your contributions up to a certain percentage. Taking advantage of this plan is highly recommended, as the employer match is essentially free money and part of your employer benefits.

Roth IRA

One of the benefits of investing in IRAs is that they are open to anyone who has earned income – even if you are participating in an employer-sponsored retirement plan. It is possible to have multiple retirement accounts as long as you don’t exceed the relevant contribution limits in any given year. You can also have IRA accounts with multiple IRA providers, again, as long as you don’t exceed IRA contribution limits. For easier bookkeeping, however, it is much easier to keep your accounts in as few places as possible.

Self-Employed Retirement Accounts

If you own a business, you may be able to open a self-employed retirement account, such as a Solo 401(k), SEP IRA, Keogh, or another self-employed retirement account. If you are self-employed, I strongly recommend meeting with an accountant to help you determine the best business structure and retirement plan for your needs (your business structure may determine which type of self-employed retirement plan account you are eligible for).

Keep Saving for Retirement

Even if you withdraw from your TSP or transfer it to an annuity, it is a good idea to keep saving for retirement. People are living longer than ever, and the cost of living will continue to rise due to inflation. You may also find that saving for retirement can give you tax breaks now or in the future and offer various ways to manage your investments and, ultimately, your estate.