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

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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…

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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About Ryan Guina

Ryan Guina is the founder and editor of The Military Wallet. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free Personal Capital account here.

Featured In: Ryan's writing has been featured in the following publications: Forbes, Military.com, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Military Influencer Magazine, Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.

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  1. Thomas Moeller says

    One option is to convert your after-tax contribution into a Roth-IRA. All of my contributions made during my active duty service were “after tax”. Those funds can have maximum investing options.

  2. Troy says

    As of October 3, 2019, I have been separated from the ARNG and will soon be retired from federal service due to my position required I be a member of the NG. Because of a medical condition I have been deemed unfit for duty therefore here we are. I have a Civilian and a Uniformed TSP account. How long does it usually take for someone to receive notice they need to do something with the uniformed account? For one of my E7’s that recently was medically retired it was only three weeks. ??

    • Ryan Guina says

      Hello Troy,

      I’m sorry to hear you will be forced to leave the service. Hopefully, you will be able to find another job within the civil service that will not require you to serve in the military to hold your civilian job. That way you can continue your career and continue to accrue retirement benefits in the civilian sector.

      Regarding your TSP accounts – 

      The TSP does not require members to remove their funds from the TSP when they leave either the military service or civil service.

      You can leave your funds in each of the accounts as long as you would like to do so (or until you reach the age of Required Minimum Distributions, at which point you can still leave the money in the TSP, but you must begin making withdrawals from the accounts). The TSP will not charge you any additional fees to leave your funds in the account, even if you are no longer working for the military of civil service.

      That said, since you will no longer be in the military, you could consider consolidating your military TSP with your civilian TSP. This will reduce the number of accounts you have to keep track of and will make it easier to see everything in one place. It’s also easier when you reach retirement age and will be making withdrawals from your TSP. This becomes even more important once you reach age 70 1/2 which is when the IRS requires retirement account holders to begin taking Required Minimum Distributions, or RMDs. 

      I hope this points you in the right direction. I wish you the best as you transition into your retirement.

      • Ryan Guina says

        Hello Dennis,

        I don’t see why not, if you do a partial rollover, or if you are splitting Traditional TSP contributions into a Traditional IRA and Roth TSP into a Roth IRA.

        But outside of splitting up Traditional and Roth accounts, there is no real downside from putting everything into one account. It’s actually easier to manage a single IRA vs. maintaining and managing multiple IRAs. One IRA requires fewer forms, less time managing asset allocation, and less management when it comes time to take Required Minimum Distributions.

        But, you should be able to do it if you want to.

        Best wishes.

  3. Mary says

    I worked for Fed. Gov for almost 5 years(4 1/2 years exact) I think I was getting 3% taken out of my check every pay period, I was in FERS. I left there 15 years ago. And I stopped contributing any money, I wanted to know, did it accumulate interest over the years? And if so how does it work, is it like $100 a year interest or less? It have been a long time so I wasn’t making that much money, and did they match it? Also can I take the money out? I don’t know how much I had in there when I left I would guess maybe $2,500. I don’t know how to calculate the interest. Or how much It would be every year. Also would It be a good idea to take it out by it may not be that much. I don’t know. Please help
    Thank you

    • Ryan Guina says

      Hello Mary, You will need to contact the Thrift Savings Plan customer service desk – 1-877-968-3778.

      They can help you gain access to your account and determine the account balance. You can decide what to do from there. You can choose to leave the funds in the TSP, which will continue to grow for your retirement, you can roll them into another retirement account or qualified annuity, or you can choose to withdraw the funds. The latter option will incur taxes and possibly early withdrawal penalties if you are under age 59 1/2.

      Generally, the best option, if you do not need the funds right away, is to leave the funds in the TSP or roll them into another retirement account such as an IRA or an employer-sponsored retirement plan such as a 401(k). Best wishes!

  4. Chris Heath says

    If I have TSP as active duty, then separate to a job with a 401K, can I roll those contributions back into the TSP? TSP is king, and I’d like to let it grow at its low expenses rate when I separate, if possible.

    • Ryan Guina says

      Hello Chris, I agree, the TSP is a great retirement account. You can definitely keep it open after separating from active duty. You can also roll over account balances from other retirement accounts without taxes or penalties.

      However, you generally can’t directly rollover contributions directly from your 401k straight to the TSP. Many 401k plans do not allow for in-service withdrawals or distributions, though some plans do. I recommend checking with your employer’s (or future employer’s) 401k plan rules to see if in-service distributions are allowed, and if so, what the limitations are. In some cases, the limits may only allow a certain number of in-service rollovers per year.

      In any case, the answer to your question is maybe, but not always. Some plans may allow it, and if so, there would likely be limitations. And many plans simply will not allow these types of rollovers.

      That said, you can always keep your TSP open without penalties or additional fees, and you can always rollover IRA account balances or 401k plan balances after you leave your employer.

      I hope this is helpful. Best wishes during your transition, and thank you for your service!

  5. Ellen Wycoff says

    My husband retired 15 years ago and is now 71. He is wanting to withdrawl all of his TSP. I am against it, as it will all be taxed. I am still working @ 68.

    Any advice?

    • Ryan Guina says

      Hello Ellen, This is something the two of you will need to work through together. It may not be a bad idea to visit with a fee-only financial planner that can give you both advice on how to manage your investments going forward. This way you have an impartial third-party who can help the two of you review your options and come up with the best solution for your situation.

      Again, I recommend a fee-only financial planner, and not someone who will try to upsell you on their services and expensive investments. All you want is a financial review and some advice, not someone who will try to manage your money and charge a lot of ongoing fees.

      Best wishes to you and your family!

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