Money on the way out the door

TSP — taking money out after you leave federal service

The Thrift Savings Plan (TSP) is the federal government's retirement savings account, the government's version of a 401(k). This page is about what happens to it the day you separate — what you keep, what you can lose, and what the tax bill looks like.

Taking money out, on TSP's own site
Veterans Crisis Line — dial 988, then press 1. Text 838255. Chat at veteranscrisisline.net. TTY 711 then 988, or 1-800-799-4889. 24 hours a day, 7 days a week. You do not have to be enrolled in VA benefits or health care to connect. Money trouble is one of the hardest weights a person carries. If it has gotten heavy, make that call before you make a withdrawal.
Read this before you pick a separation date. Most of the costly TSP mistakes are made in the last ninety days of federal employment, not after. Two of them — the three-year vesting rule and the year you turn 55 — are decided by the date you walk out, and neither can be fixed afterward.

One scope note. The federal fact sheet this comes from is written for federal civilian employees. If you are separating from the uniformed services under the Blended Retirement System, your automatic and matching contributions and your vesting work differently — use TSP's uniformed services guidance and call the ThriftLine at 1-877-968-3778 before you act. I call out below where the uniformed services rule differs.
The biggest one

Getting the agency 1% is not the same as keeping it

Vesting means the money is legally yours to keep. Some of your TSP is vested the day it lands. Some of it is not.

  • Under FERS — the Federal Employees Retirement System, the retirement system most federal civilian employees are covered by — your agency puts in an Agency Automatic (1%) Contribution whether or not you contribute anything, plus Agency Matching Contributions on what you put in yourself. Both stop when you are no longer in pay status.
  • Your own contributions and all Agency Matching Contributions are vested immediately. They are never forfeited. Nobody can take them back.
  • The Agency Automatic (1%) money is different. Under 5 CFR 1603.3, you are vested in it and in everything it earned only if, as of your separation date, you have completed three years of civilian service.
  • It is two years instead for a non-career Senior Executive Service appointee, an Executive Schedule level IV or V position, a Member of Congress, a congressional employee, or a position excepted from the competitive service for policy-determining reasons.
  • Uniformed services under the Blended Retirement System vest in the Service Automatic (1%) money after two years of service.
If you are not vested on your separation date, the Automatic (1%) money and its earnings are forfeited. Permanently. The only exception is death in service, where they are treated as vested. Nothing on your final paycheck tells you this happened. You find out when the statement comes.
What to do: find your service computation date, count your civilian service, and know exactly where your three-year mark falls. If you are close, ask your human resources office in writing what your TSP vesting date is. A few weeks of staying can be worth more than the pay.
★ Know your three-year date before you name a separation date.
Can you stay?

You can leave the money in the TSP — unless it is under $200

Leaving federal service does not force you out of the plan. A small balance is the one exception, and it is not your choice.

  • You can keep your TSP account after you separate and leave the money invested. You do not have to take anything out until required minimum distributions start (see below).
  • The floor: under 5 CFR 1650.11(c), if your vested account balance is less than $200 when you separate from Government service and you have not submitted a post-employment distribution election, the TSP record keeper automatically pays the whole balance to you in a single payment, mailed to your address of record. You cannot stay in the plan and you have no other payment option.
  • Read that word again: vested. Forfeiting the Automatic (1%) money can push a small account below the $200 line that would otherwise have been above it.
Keep your mailing address current with the TSP through separation and after it. A single payment gets mailed to the address on file, and so does every notice that matters.
★ Small balance, forced payout. Know before it arrives.
Contributions

The door out closes. The door in stays open.

  • As long as you are in pay status in a TSP-eligible position, you can start, change or stop your TSP contributions — in most cases through your agency or service electronic payroll system. (tsp.gov/making-contributions)
  • Agency contributions stop when you are no longer in pay status. (tsp.gov/making-contributions/contribution-types)
  • Once you leave federal service you can no longer make employee contributions. Contributions come out of federal pay, and there is no federal pay.
  • But you can still move money in. After your separation date you can roll money into your TSP account from other eligible retirement plans — a former employer's 401(k), a traditional IRA. (tsp.gov/tsp-basics/move-money-into-tsp)
The 60-day trap on a rollover paid to you. If the money is sent to you first — an indirect rollover — it must reach the TSP within 60 days or it is treated as a taxable distribution. The TSP does not accept an indirect rollover of Roth money, and does not accept a rollover of any kind from a Roth IRA. A direct plan-to-plan transfer avoids the whole problem.
★ Ask for a direct transfer, not a check.
Loans

If you have a TSP loan when you walk out

A TSP loan is you borrowing your own money and paying it back with interest. Separation changes everything about it.

Before you separate — what a new loan requires. You must be currently employed as a federal civilian employee or a member of the uniformed services, be in pay status, have at least $1,000 of your own contributions and their earnings in the account, and not have repaid any type of TSP loan in full within the past 30 business days. Repayment with interest must begin within 60 days of when the loan is paid out. You cannot take a new TSP loan after you separate. (tsp.gov/tsp-loans)

While you are employed and in pay status, you repay by payroll deduction. After you separate, you repay by direct debit, check or money order. At separation you have three choices with an outstanding loan:

  1. Pay it off in full.
  2. Keep it open and set up monthly payments yourself.
  3. Let it be foreclosed and accept the unpaid balance plus accrued interest as taxable income.
Watch for the notice. If you separate with an outstanding loan, the TSP record keeper mails you a notice setting the deadline to repay in full. There is no universal number of days — the deadline is whatever that notice says. Miss it and the unpaid principal and accrued interest are declared a taxable loan offset (the older fact sheet calls this foreclosure) and reported to the IRS. Keep your address current with the TSP so the notice reaches you.

You are responsible for making sure loan payments are correct and on time — including when your agency or service is the one that missed a deduction. Check your own statements.

★ A missed loan payment becomes a tax bill.
The 10% penalty

The age-55 rule, stated correctly

The 10% IRS early withdrawal penalty is an extra tax on top of the ordinary income tax you already owe. Here is the rule, in full, because a narrow version of it costs money either way.

1. If you separate from service during or after the year you reach age 55, the 10% early withdrawal penalty generally does not apply to distributions from your TSP account.

2. If you separate before that year, the penalty applies to most TSP withdrawals taken before age 59½ unless an exception applies.

3. Separately, and regardless of your age at separation: the 10% penalty applies to the taxable distribution of an unpaid TSP loan — a taxed or foreclosed loan — received before age 59½. The age-55 rule and the public safety rule below do not cover taxed or foreclosed loans. A 56-year-old who separates with a loan that gets declared a taxable distribution owes the 10%.
The combat zone rule. The 10% penalty never applies to the portion of any TSP distribution — including a taxed or foreclosed loan — that represents tax-exempt contributions from pay you earned in a combat zone. At any age. If you have combat zone contributions in a uniformed services TSP balance, that portion is protected.
Public safety employees. If you are a qualified public safety employee as defined in Internal Revenue Code 72(t)(10)(B)(ii) — this covers many federal law enforcement officers, firefighters, customs and border protection officers and air traffic controllers — the penalty does not apply if you separate during or after the year you reach age 50, or with 25 years of service, whichever comes first. Veterans move into these jobs constantly. Do not assume 55 is your number.
★ The year you separate can cost you 10% of what you take.
Exceptions

Other ways the 10% penalty does not apply

This is a partial list. The full list is in TSP's booklet Tax Rules about TSP Payments (TSPBK26), free at tsp.gov/publications/tspbk26.pdf.

  • TSP annuity payments
  • Installment payments computed over your life expectancy
  • Total and permanent disability
  • Death
  • Terminal illness
  • Deductible medical expenses over 7.5% of your adjusted gross income
  • Qualified birth or adoption — up to $5,000
  • Domestic abuse — up to $10,000 or 50% of your vested balance
  • Emergency personal expense distributions — up to $1,000 per year
  • Payments made under a qualifying domestic relations court order
  • Automatic enrollment refunds
  • Beneficiary participant payments
  • An IRS levy on your account
  • Certain federally declared disasters
The five-year trap. If you take life-expectancy installments to avoid the penalty and then change or stop them within five years, the 10% penalty can be applied retroactively to the payments you already took. Do not start life-expectancy installments as a short-term fix.
Where the TSP has not implemented one of these newer distribution types, your IRS Form 1099-R will not be coded with the exception. That does not mean you lost it — you claim it yourself on IRS Form 5329. See IRS Topic 558 at irs.gov/taxtopics/tc558, and confirm your own situation with the IRS or a tax advisor before you assume you owe the penalty.
★ Do not pay a penalty you never owed.
Still working

Taking money out before you leave

In-service withdrawals are withdrawals you can make while you are still working for the federal government or serving in the uniformed services. There are two kinds. You can only withdraw money you are vested in.

Financial hardship withdrawal. You must have a financial need that meets certain requirements, and you must certify under penalty of perjury that you have a genuine financial hardship.

What a hardship withdrawal costs. It cannot be rolled over into an IRA or another plan — that money leaves retirement for good. The TSP withholds 10% for federal income tax on the taxable portion by default. If you are under age 59½ you will generally also owe the 10% early withdrawal penalty — and the age-55 rule is no help here, because you have not separated. The minimum is $1,000. A veteran taking $10,000 at age 52 can lose roughly a third of it and cannot undo it.

Age-59½ withdrawal. Available when you are age 59½ or older and still employed by the federal government.

  • Minimum $1,000, or your entire vested balance if that is less than $1,000
  • Up to four age-59½ withdrawals per calendar year
  • Unlike a hardship withdrawal, this one can be rolled over to a traditional IRA or an eligible employer plan
★ Before a hardship withdrawal, price the whole cost.
After you leave

Four ways to take it out — and the minimums that get requests rejected

Once you have separated you have four post-employment distribution options. You can use one of them or any combination of them.

  • 1Partial distribution of an amount you specify Minimum $1,000
  • 2Total distribution — the whole account at once Understand the tax bill before you choose this
  • 3Life annuity purchase — a guaranteed monthly payment for life Minimum $3,500, applied separately to your traditional balance and your Roth balance
  • 4Installments — automatic withdrawals on a schedule Minimum $25 per payment if you choose a fixed dollar amount
The 20% that disappears. Eligible rollover distributions are subject to 20% mandatory federal income tax withholding. Ask for $50,000 and $40,000 arrives. You avoid that withholding entirely by requesting a direct rollover — the TSP sends the money straight to an IRA or an eligible employer plan instead of to you.
Traditional and Roth are not taxed the same. Traditional TSP money was never taxed and is taxed when it comes out. Roth TSP money was already taxed going in. Know which balance a request is pulling from before you sign it. Details in Distributions (TSPBK25) and Tax Rules about TSP Payments (TSPBK26) at tsp.gov/forms.
★ Direct rollover keeps the 20% in your account.
RMDs

When the government makes you start taking it out

A required minimum distribution (RMD) is the amount the IRS requires you to withdraw each year once you reach a certain age. TSP RMDs do not start until you have both separated from federal service and reached your age. You owe none while you are still working for the federal government.

  • Born 1950 or earlier — your required beginning date has already passed. It was age 70½ or 72 under the law in effect then. You should already be taking RMDs. Do not read the ages below as permission to wait.
  • Born 1951 through 1959 — RMDs begin at age 73.
  • Born 1960 or later — TSP's own guidance says age 75. I state that as TSP's guidance because the IRS pages on required minimum distributions state age 73 and do not mention 75. If you were born in 1960 or later, confirm your own date with the IRS or a tax advisor before you plan on waiting past 73.
  • Your first RMD is due by April 1 of the year after the year you reach your applicable age.
  • Roth balances are no longer subject to RMDs before your death. Only your traditional balance counts toward the required amount.
Missing an RMD is expensive. The IRS excise tax on a missed required minimum distribution is 25% of the amount you should have taken, reduced to 10% if you correct it within the two-year correction window. If you have missed one, fix it — do not let it sit. (IRS required minimum distributions)
★ Put your applicable age on the calendar now.
Next step

Who to call and what to read

Everything here is free. There is nothing to buy and nobody to pay a percentage to.

Bring your spouse or whoever handles the paperwork in your Family to the decision. A total distribution and a direct rollover look the same on the form and are not the same for the next twenty years.
★ Call before you sign, not after.