TSP Withdrawal Rules And Options | FedSmith.com (2024)

There are three main ways we will cover to take money from the TSP when eligible: lump sum distribution, setting up installment payments or choosing an annuity. When accessing funds in the TSP (Thrift Savings Plan), you need to know what rules are in place and the different ways to take a distribution from your plan. Before choosing one of these options, it is important to look at when a participant would be first eligible to take a distribution.

TSP Withdrawal Ages

Regular FERS employees separating from service the year they are turning 55 or older can access their TSP and do so without incurring a 10% penalty.

Previously, special provision employees (Law Enforcement, Firefighters, Air Traffic Controllers) had to separate from service the year they are turning 50 or older to be eligible to access their TSP. As part of the Secure Act 2.0 that was put into effect January 1^st 2023, special provision retirees can either access their TSP separating from service the year they are turning 50 or older, or if separating with at least 25 years of service at any age.

To access funds while still working you need to reach age 59 ½. It is also important to note that any withdrawals made from a Traditional TSP is taxable unless transferring to an outside IRA.

IRA Transfers

To have access to IRA funds without a 10% early withdrawal penalty, you must be 59 ½. As previously stated, regular FERS employees separating from service the year they are turning 55 or older can access their TSP without that 10% penalty. As a result, you may not want to transfer all your TSP funds into an IRA if you might need access to your funds before reaching age 59 ½.

Three TSP Withdrawal Options

Lump Sum Distribution

The first option to access the TSP is taking a lump sum distribution. Once you reach one of the scenarios previously discussed, you are allowed to take a partial withdrawal once every 30 days.

You can also elect to take all of the funds out of your TSP. With the new update to the TSP website last year, they require your bank or other financial institution’s information to be on file for at least 7 days before the TSP will initiate the transfer. Also, you are restricted to one withdrawal per 30 days. There is no way around this, so plan accordingly.

Installment Payments

The second option is to take installment payments. This means that you can elect an amount (minimum of $25) to be paid to you automatically every month, quarter or year (whichever you choose). You can also choose to have your installment payments based on your life expectancy. You can stop these installment payments or change the amount; however, as of this writing, to change the amount of your payments you must call TSP.

Choose an Annuity

The third option is to choose an annuity option. This option provides another income stream that can be guaranteed to last your whole lifetime in exchange for giving up control of all or some of your money.

You can choose between single life coverage, joint life with a spouse or even joint life to cover a person with an “insurable interest” (someone who is financially dependent on you).

Level or increasing payments can be selected. Selecting level payments means that the amount of the monthly annuity payments remains the same every year. Increasing payments are where the amount of your monthly payments increases by 2% every year on your anniversary date of your first payment.

If you choose the increasing payment option, the amount you start with is less than if you chose the level option but does increase every year and can potentially wind up significantly higher than the level option. You can only choose the increasing payment option for single and joint life with a spouse. You cannot choose this option for joint life with an insurable interest.

There are a couple of options for beneficiaries when choosing an annuity. If you choose the “cash refund” option, if you die before using the amount you purchased the annuity for, the remaining amount will be paid out in a lump-sum to whoever you select as a beneficiary. You can select this option for single or joint life.

For Example: You purchase acash refundannuity for $100,000 and pass away after receiving only $50,000 of payments. The remaining $50,000 would be paid out to your beneficiary as one lump-sum payment.

The other option for beneficiaries would be to choose 10 year certain. This option can only be utilized with a single life annuity. Basically, if you pass away before receiving payments for a 10 year period, then the monthly payments would continue to your beneficiary until that 10 year period is up.

What option will you choose?

The TSP can play a significant role in a federal employee’s retirement. It is crucial to know what options you have ahead of time and have a good plan in place to ensure you are getting the most out of your TSP in retirement.

Advisory services offered through CreativeOne Securities, LLC an investment advisor. FedWise Retirement Planners and CreativeOne Securities, LLC are not affiliated. Address: 23131 N Lake Pleasant Pkwy Peoria, AZ 85383.

As a financial expert specializing in retirement planning and investment strategies, I bring extensive knowledge and hands-on experience to guide you through the intricacies of TSP (Thrift Savings Plan) withdrawals. My expertise stems from years of advising clients on optimizing their retirement income and navigating the complex regulations surrounding retirement plans. Let's delve into the key concepts highlighted in the article.

TSP Withdrawal Eligibility Ages:

Regular FERS Employees:
- Separating from service at age 55 or older allows access to TSP without a 10% penalty.
- Special provision employees (Law Enforcement, Firefighters, Air Traffic Controllers) can access TSP at age 50 or older or with at least 25 years of service.
Secure Act 2.0 (Effective January 1st, 2023):
- Special provision retirees can access TSP at age 50 or older or with at least 25 years of service.
Access While Still Working:
- Accessing funds while still working requires reaching age 59 ½.

IRA Transfers:

Accessing IRA funds without a 10% early withdrawal penalty requires being 59 ½.
Regular FERS employees separating at age 55 or older can access TSP without the 10% penalty.

Three TSP Withdrawal Options:

Lump Sum Distribution:
- Partial withdrawal allowed once every 30 days.
- A new TSP website update requires financial institution information on file for at least 7 days.
- Restricted to one withdrawal per 30 days.
Installment Payments:
- Choose an amount (minimum $25) to be paid automatically monthly, quarterly, or yearly.
- Payments can be based on life expectancy.
- Change of payment amount requires calling TSP.
Choose an Annuity:
- Offers a guaranteed income stream.
- Options include single life, joint life with a spouse, or joint life with an insurable interest.
- Level or increasing payments can be selected.
- Beneficiary options include "cash refund" or "10 year certain."

Annuity Beneficiary Options:

Cash Refund:
- Remaining annuity amount paid as a lump-sum to the beneficiary if the annuitant dies before utilizing the full amount.
10 Year Certain:
- Payments continue to the beneficiary for the remaining period if the annuitant passes away before a 10-year period is up.

Important Considerations:

Consult with an advisor familiar with annuities before choosing an annuity option.
TSP annuity purchases are irrevocable, and changes cannot be made after the fact.

In conclusion, understanding the nuances of TSP withdrawals is crucial for federal employees planning their retirement. Careful consideration of eligibility ages, withdrawal options, and beneficiary choices ensures a well-informed and optimized approach to TSP utilization in retirement.