What Departing Federal Employees Can (and Cannot) Do With Their TSP Account

The Thrift Savings Plan (TSP) recently issued a fact sheet for federal civilian employees who are leaving federal employment and own a civilian TSP account consisting of the traditional TSP and Roth TSP. This column discusses what departing employees can and cannot do with their TSP accounts after they leave federal service.

It should be noted that a federal employee who is on administrative leave remains in federal service and is on pay status until the day the employee departs. The employee therefore has the status of an active TSP participant and can continue making contributions to the TSP via payroll deduction.

Departing employees can leave their TSP account with the TSP when departing federal service. They are not required to take any money from the TSP until they reach the age when they have to start taking annual required minimum distributions (RMDs) from their traditional TSP. All Roth TSP participants should be aware that effective January 1,2024 that the Roth TSP is not subject to annual RMDs.

Contributions to the TSP

1. Employee contributions. Upon leaving federal service, an employee can no longer directly contribute to their TSP. This is because all direct contributions made to the TSP are made via payroll deduction.

2. Agency contributions. FERS-covered employees who are in pay status receive an Automatic Agency (1 percent of their adjusted Basic Pay, as shown on their Form SF 50) contributions. FERS-covered employees also get Agency Matching Contributions on their own TSP contributions. Both types of agency contributions stop when a FERS-covered employee leaves federal service.

3. Moving money into a TSP account. While direct contributions cannot be made by a departed employee into his or her TSP account, indirect contributions into a TSP account can be made into a TSP account. Indirect contributions consist of direct rollovers of traditional IRAs and traditional qualified retirement plan accounts (such as traditional 401(k), traditional 403(b) and traditional 457 retirement plans) into the traditional TSP. Direct rollovers can be made into the Roth TSP from Roth 401(k) and Roth 403(b) retirement plans. Note that Roth IRAs cannot be directly rolled over into the Roth TSP.

TSP Loans

There are two types of TSP loans. The loans are (1) A TSP general purpose loan; and (2) A TSP primary residence loan. TSP participants who have either or both types of TSP loans repay the loan (including interest) in regular repayments through payroll deduction while they are in federal service. Once a TSP participant separates from federal service, a TSP loan must be paid back by direct debit, check or money order.

A federal employee who has a TSP loan and who separates from federal service must decide whether to immediately pay off the TSP loan(s), keep the loan(s) open and to set up monthly repayments, or to allow the loan(s) to be foreclosed and accept the outstanding loan balance and accrued interest as taxable income.

Departing employees with TSP loans should be aware that failure to make loan repayments in accordance with their TSP Loan Promissory Note can have serious financial consequences, especially if the departed employee plans to continue working.

Withdrawals and distributions from a TSP account

With the exception of Special Provision employees, those federal employees who separate from federal service before the year they become age 55 are subject to the IRS’ early withdrawal penalty. The IRS early withdrawal penalty applies to most TSP withdrawals and all loan distributions received before a TSP participant becomes 59.5.

A recent column entitled: “Pre-age 55 Penalty-free TSP Withdrawals; TSP Annuity and TSP Monthly Payments Based on Life Expectancy.” discussed how TSP participants who leave federal service before the year they become age 55 can make penalty-free pre-age 55 withdrawals from their traditional TSP accounts.

Those federal employees who remain in federal service and are at least age 59.5 can make penalty-free withdrawals from both their traditional TSP and their Roth TSP accounts. There are two types of TSP in-service TSP account withdrawals. They are: (1) Financial hardship withdrawals and (2) Age-based (age 59.5) withdrawals. Both withdrawals are explained.

Financial hardship withdrawal

To qualify for a financial hardship withdrawal, a TSP participant must have a financial need that meets certain requirements. The TSP participant must also certify under penalty of perjury that the participant has a genuine financial hardship.

Age 59.5 in-service withdrawal

Age 59.5 in-service withdrawals are withdrawals that a TSP participant can make from the participant’s account when the participant is age 59.5 or older and still employed by the federal government. The TSP participant can withdraw funds from the TSP participant’s vested TSP account balance. A TSP participant’s vested account balance includes: (1) All contributions made via payroll deduction and associated earnings; (2) Agency Matching contributions and associated earnings; and (3) Agency Automatic 1 percent of annual salary (adjusted Basic Pay as shown on an employee’s Form SF 50) and associated earnings (for employees with at least three years of federal service). The vested account balance must be at least $1,000.

Fact sheet:  Information for TSP Participants Leaving Federal Employment  (PDF)