Understanding Your TSP Withdrawal Options in Retirement

Brandon S. Christy, CPA, PFS
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Now that you have spent a lifetime saving for retirement, how will you access your Thrift Savings Plan (TSP) funds?

There are three main options for TSP withdrawals in retirement.
 
1. Leave the funds in your TSP

Funds may be left in your TSP until April 1st of the year following the year you turn age 70 ½, when Required Minimum Distributions (RMDs) must begin. For example: Tim turned 70 ½ this year. His 2012 year end TSP balance is $100,000 and his first RMD will be $3,650. To calculate your own RMD payment for TSP or IRAs, click here. All subsequent RMDs must be taken by December 31 of each year.
 
2. Partial Withdrawal

You may take a partial withdrawal of at least $1,000 from your TSP account. This is a one-time only option. If you have made a previous partial withdrawal or an in-service age-based withdrawal, you may not choose this option.
 
3. Full Withdrawal

There are three ways to fully withdraw your funds from the TSP. You do not have to select only one; you may elect any combination of all three options. 

Single Payment

This is a lump sum payment. You may have it sent directly to you (beware of taxes!) or transferred into an IRA, 401(k), etc. 
 
Monthly Payments

You may select a certain dollar amount you would like to receive each month from your TSP. You can also let TSP choose the amount for you based on your life expectancy. You may change the dollar amount once per year. If you decide you no longer want monthly payments you may take a lump sum payout. 
 
Life Annuity

This provides guaranteed monthly payments for your lifetime. You must annuitize at least $3,500. There are many options available under the life annuity, consult a professional before choosing this option.

When withdrawing funds from the TSP, there is generally a mandatory Federal tax withholding of 20%. This withholding does not apply when transferring funds to an IRA, 401(k), etc. If you owe more or less taxes on the amount withdrawn from your TSP, it will be settled when you file your taxes for the year.
 
Important Note: If you retire in the year you reach age 55 or later, you can withdraw from your TSP before age 59 ½ and avoid the 10% penalty. The 10% penalty will apply on IRA withdrawals before
age 59 ½.
 
While the TSP provides a strong platform for saving towards retirement, the restrictive nature of the withdrawal options often leads retirees to move funds to IRAs. The IRA can allow for full flexibility of distributions, tax withholding and planning, and investment options.

About the Author

     Brandon S. Christy, CPA, PFS, is president of Christy Capital Management (CCM) and founder of the Retirement Benefits Institute (RBI).  RBI has provided benefits and retirement training sessions to thousands of federal employees. For a schedule of upcoming no-cost training, click here.  CCM offers retirement analyses for federal employees. For a no-cost consultation or other planning needs, call 866-331-7749 or click here.

Posted: 09/24/12

Disclaimer
The information contained in this article should not be used in any actual transaction without the advice and guidance of a tax or financial professional who is familiar with all the relevant facts. The information contained here is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals' specific circumstances or needs and may require consideration of other matters.