Federal Thrift Savings Plan: Basics of Retirement Account Distributions

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Editor's Note: This article is not intended to be and should not be used for tax advice. We have published this to be a source of information and for educational purposes only. Please consult with a qualified tax planning professional for guidance with your personal circumstances.

Update: In November 2017, Congress passed the TSP Modernization Act, which gives Federal Workers more flexibility with their plan withdrawal options. While the legislation has been passed, the Federal Retirement Thrift Investment Board is in the midsts of adapting new policies and procedures into its publications and websites. You can read more about that here. Some of the information below may be subject to change with these new procedures and policies.

As part of the federal civil service or the uniformed services, you may participate in the Thrift Savings Plan (or TSP). According to the Thrift Savings Fund, there were 4.8 million plan participants and approximately $458 billion in plan assets under management, as of December 2015. But while millions of federal employees rely on the plan, many are confused about their TSP distribution options for retirement.

In retirement, you will need access to your money for income. However, it’s prudent to be aware of all implications before you start taking money from your account. The Thrift Savings Plan has a unique framework for withdrawals. Making a withdrawal before knowing everything involved can greatly affect your future money access options.

Here are some basics on different distribution options you may have with the Thrift Savings Plan.

Some Thrift Savings Plan Fundamentals

First, let’s go over the basics. The Thrift Savings Plan is a retirement savings plan that bears some similarity to 401(k) plans for private-sector workers. Personal TSP retirement benefits will vary depending on which retirement system covers you as a federal employee.

Those covered by the Federal Employees Retirement System (FERS) have a three-part benefits package:

  • the Thrift Savings Plan,
  • the FERS basic annuity,
  • and Social Security.

If someone is covered by the Civil Service Retirement System (CSRS), or is a member of the uniformed services, the TSP serves as a supplemental benefit to their CSRS annuity or military retired pay. These are important distinctions going forward.

Basics of Distribution Options for Thrift Savings Plan

After you leave federal service, or you turn age 59.5, you have two options for withdrawing your TSP account. You can elect to take a partial withdrawal or a full withdrawal. Two age milestones are important as they relate to TSP withdrawal rules: age 59.5 and age 70.5. How these two milestones can apply will be discussed below. Let’s go into more details for each withdrawal option.

Basics of Partial Withdrawals

The TSP permits you to take only one partial withdrawal, after which you must leave the remaining sum of money in your account for a later date. Some examples of why you may take out a partial withdrawal may be for costly “one-time” expenses: roof repairs, a roof replacement, purchase of a new car, or purchase of new home appliances are some common instances.

There are certain circumstances you must meet so you are allowed to make a partial withdrawal:

  • You can’t have made a prior partial withdrawal or have one that is currently pending. As mentioned earlier, a partial withdraw is a one-time-only permitted option.
  • You didn’t make an age-based in-service withdrawal while you were part of the federal civil service or a member of the uniformed services. An age-based in-service withdrawal is a one-time-only withdrawal you can make at age 59.5 or later, while you are still actively employed.
  • You have to request a minimum of $1,000, or more, from your account.

There are multiple rules governing in-service withdrawals. For example, among married FERS employees and uniformed services members, their spouse must give their consent to the in-service withdrawal. With married CSRS employees, spouses need only receive notice of the in-service withdrawal. You can learn more about TSP account in-service withdrawals and their particulars by visiting here.

Basics of Full Withdrawals

When you are ready to take all of your money from your account, this is a full withdrawal. You have a number of income options you can choose, or “government distribution options.” You can take a full lump-sum, receive monthly payments over time, or buy an annuity that will give you lifetime payments. You do have the ability to choose any combination of these income options.

Taking all of your money out at once is a lump sum withdrawal. It may be prudent to consider alternatives to cashing out your entire balance, as the income tax implications might be quite severe.

Choosing monthly payments over a period of time is called a systematic withdrawal. With this option, you can specify a certain amount per month, or you can base the monthly amount on your life expectancy, as determined by actuarial tables from the IRS. The TSP will adjust how much you receive each month according to your life expectancy. Whichever you choose, both will start drawing down your TSP account balance until depletion. Note that a systematic withdrawal may come with some limited flexibility.

The third option is purchasing a life annuity, or where you would receive monthly benefits for life. You can take part or all of your TSP account money as a life annuity, so long as the amount used to buy the annuity is $3,500 or more. Why might this be a partial sum? Because you have the ability to use a combination of income options, as we mentioned earlier, and you may choose not to put all of your account balance into the TSP life annuity. TSP purchases the life annuity from the plan provider, MetLife.

By going with this option, you choose to “annuitize” part or all of your TSP account balance with MetLife. Note, should you have a traditional balance and Roth balance, the minimum $3,500 amount applies to each balance separately. You will have different annuitization options, and depending on which you choose, the insurance company may keep your balance once you pass away.

An Important Difference between the Life Annuity and Retirement Annuity

Many federal employees confuse the life annuity option with their retirement package annuity. Please note, these are actually different. A TSP life annuity stands apart from the basic annuity FERS or CSRS workers receive when they retire. If you are a member of the uniformed services, your military retired pay is different from the TSP life annuity, as well.

Tax Exemptions for Uniformed Services TSP Accounts

Say you have a uniformed services TSP account. It may have tax-exempt contributions in your traditional balance, since you served in a combat zone. When you distribute those funds from your TSP account, those dollars are exempt from federal income taxation. But the earnings on them are not, they will be subject to taxation at the time you take a withdrawal.

What if You Choose to Leave Your Money in the TSP Account?

You may elect not to take distributions from your TSP account after you turn age 59.5. This is where the age 70.5 milestone kicks in. If you are retired when you reach 70.5 years old, you will be required to start withdrawing your money the year following the year you turned 70.5.

Say you are still part of the federal service or uniformed services when you reach age 70.5. In that case, you can keep contributing to your TSP account. However, when you separate from the federal service or uniformed services, you will be required to start withdrawals by April 1 of the year following your year of retirement.

Are You Stuck with the Government Distribution Options?

No, you can choose other annuity or income options outside of your government distribution options. These strategies may give you more flexibility or other benefits not otherwise available. You may also choose to rollover your money into another eligible retirement account, like an IRA. But this comes with its own dynamics, rules, and conditions, and should always be carefully considered. You can find more information about rollovers here in this TSP presentation and other rollover information in this TSP Fact Sheet.

However, any rollover decision, or any decision relating to the TSP account for that matter, should be carefully analyzed and evaluated before being done. It’s prudent to consider all possible outcomes and their implications before committing to any decision. Also, consider working with financial and tax professionals who are knowledgeable, experienced, and put your interests first.

If you are interested in evaluating other possible strategies that can benefit your retirement and income security, financial professionals at can help you. Use our Find a Financial Professional section to connect with someone directly. And should you need a personal referral, call us at 877.476.9723.

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