TSP offers plenty of options for those retiring early

Q: My ques­tion is on retire­ment. I cur­rently for the gov­ern­ment and I have put 5% of my pay into the Thrift Sav­ings Plan (TSP) for the last 8 years. I don’t want to work until I am 62 year old so what should I do with the TSP if I retire early, like 58 or 59??

–Lucy, Vir­ginia Beach, Virginia

A: There’s a lot of good news here. If you’re a FERS employee and have put 5% of your pay in the TSP, the gov­ern­ment has been dou­bling that up by adding an addi­tional 5%. That’s a very nice deal. Keep on saving!

When you retire, you’ll have a num­ber of options. First, you could leave the money in the TSP untouched. Sec­ond, you could set up monthly pay­ments or even annu­ity pay­ments from the TSP. Finally, you could rollover the TSP into a self-directed IRA account. Here’s a link to a TSP brochure that dis­cusses the details of your var­i­ous options.

While all your with­drawals from the TSP will be tax­able as ordi­nary income as long as you sep­a­rate from gov­ern­ment ser­vice in the year you are age 55 or older your TSP with­drawals will not be sub­ject to any addi­tional penal­ties. Here’s the TSP pub­li­ca­tion on taxes.

The one aspect of with­draw­ing money from the TSP that some of my clients don’t like is that there is not a lot of flex­i­bil­ity when it comes to with­drawals. For exam­ple, you are only allowed to make a sin­gle par­tial with­drawal. Beyond that, you have to do a full with­drawal of all of the funds or set up monthly pay­ments either of a spe­cific dol­lar amount or based on your life expectancy.  So, if you envi­sioned tap­ping the TSP once a year to fund a vaca­tion, think again. This lack of flex­i­bil­ity may lead you to con­sider a tax-free rollover to an IRA. Within an IRA you’ll be able to with­draw money when and how you wish. One cau­tion: if you’re going to retire at 55 and want the option to uti­lize your TSP funds before 59 ½ mov­ing the money to an IRA will elim­i­nate your abil­ity to tap the TSP with­out incur­ring a 10% penalty in addi­tion to taxes. There are ways around this, but gen­er­ally if this is your sit­u­a­tion, stay­ing put may make sense.

The bot­tom line is keep up the good work as you build your nest egg know­ing that you’ll def­i­nitely have plenty of options at what­ever point you decide to retire.