Military · veteran

What should you do with your Thrift Savings Plan (TSP) when you separate from the Uniformed Services?

I just retired from the USAF this past April (2016).  But before I separated I was faced with a decision regarding my Thrift Savings Plan (TSP) account. Because I was choosing to retire/separate, that eliminates me from continuing to contribute to your TSP.  Decisions? I decided to make a full withdrawal before I separated from service, but I’ll go over some of the options TSP allows you to do with your account.

TSP logo

TSP is comparable to a civilian 401(k) plan. Members contribute pre-tax money into their TSP account and only pay taxes when they withdraw the money. When your employment ends with the military, you can no longer contribute to your TSP account, you are faced with several decisions regarding your TSP account.

There are several options for you to look over:

  1. Leave the money in your TSP account.
  2. Roll your TSP money into an IRA.
  3. Roll your TSP money into your new employer’s 401(k) plan (if you are looking for civilian employment).
  4. Withdraw your TSP money in a lump sum.
  5. Transfer your TSP money to a qualified annuity.

1. Leave the money in your TSP account.

The easiest thing to do is leave your money 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 service.

Pros: TSP is a great place to invest for your 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 warzone. Refer to TSP’s website for further information.

Cons: 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 money, but you also must maintain more paperwork.

2. Roll your TSP money into an IRA.

Rolling your TSP money 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.

Pros: The leading advantages of rolling over your TSP into an IRA are avoiding the 10% early withdrawal penalty. Total control allows you to limit your expenses and maintain full control of your investment. Also note that rolling your TSP money into an IRA does not mean it is final – you may be able to roll it into your new 401(k) plan later.

Cons: 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.

3. Roll your TSP money into your new employer’s 401(k) plan (if you are looking for civilian employment).

This is a good option if your new employer’s 401(k) plan has strong investment options and low expense ratios.

Pros: Your retirement money preserves the 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.

Cons: You are restricted to your new plan’s investment options. This is important if your new 401(k) plan has a limit on 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 money.

4. Withdraw your TSP money in a lump sum.

Withdrawing your TSP money in a lump sum is not usually recommended because you will be assessed with taxes (usually 20% at the end of the tax year you will receive a 1099) and early withdrawal penalties (mandatory 10%). Together, these can eat up nearly a third of your total TSP money.

Pros: Your money (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 service.

Cons: 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.

5. Transfer your TSP money to a qualified annuity.

The final option is to transfer your TSP money into a qualified deferred annuity. This is 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 money into an IRA or 401(k), the money will remain tax deferred and you will not pay early withdrawal penalties.

Pros: 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.

Cons: 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.

In my opinion, the best option will be to transfer your TSP money to your new 401(k) plan, an IRA, or leave your money in the TSP account. Please base your decision on your own personal situation.

401k

What did I do with my own TSP account?

I decided to take the full withdrawal.  However, I chose to do the In-Service Withdrawal. I chose this option because I got the most out of my money. If you wait to withdrawal after you separate.  I was preparing for unemployment and a possible delay in my retired pay (which did happen for 3 months).

I hope this information helps you.   Please use this to make the best decision for you and your family (if applicable).

DISCLOSURE: These are my own opinions from the research I have done using the TSP website. This is also my personal experience related to the In-Service withdrawal I discussed above. I am not associated with TSP.  Please contact TSP for further information regarding your personal accounts at the Thrift Line 1-TSP-YOU-FIRST (1-877-968-3778).

References: www.tsp.gov

 

 

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