Can I Leave My Money in My Thrift Savings When I Retire?

Leaving the Thrift Savings Plan, a defined contribution retirement savings plan for federal employees and armed forces members, doesn't mean you must take your money out of the plan. When you retire – or even when you leave the armed forces or merely switch jobs – you have a batch of options for your TSP account, including doing nothing. So, there's no need to feel pressured; consider your options carefully before deciding what to do with that retirement stash.

The $200 Minimum

If your account balance is less than $200 and at least $5, you have no choice. The account will be closed out in one payment. You can either pay the tax on the withdrawal or take up to 60 days to deposit the money in a qualified tax-deferred account, such as an IRA. Amounts less than $5 get forfeited to the TSP.

The Do-Nothing Option

Although you no longer can make contributions to your account, you simply can leave the money invested as is. TSP investment choices are limited, but you're unlikely to find lower plan fees, as of 2012. In addition, TSP assets are protected from creditors in a bankruptcy or from judgments in liability cases. You'll have access to the plan to change investment choices, but you no longer can take a loan from your account. If you stay in the TSP until you turn 70 1/2, you must take required minimum distributions. You also can stay in the TSP for now and pick another option later. Remember, all TSP withdrawals are taxed as ordinary income.

Take It and Run

If you ask for a lump-sum payment, 20 percent will be withheld for tax, plus you'll get hit with a 10 percent tax penalty for an early withdrawal if you're not 59 1/2. Because the withdrawal will be treated as ordinary income, you may get some of the withheld amount refunded after you file your tax return, but you won't get back the penalty. Consider this option only if you have bills to pay and no income.

Rollover Options

You can avoid any immediate tax liability by rolling over your TSP assets into a traditional IRA, a new employer's 401(k) or 403(b) deferred-compensation plan or a tax-qualified deferred annuity. The IRA provides the widest array of investment choices. An employer-sponsored plan has most of the TSP's advantages, though private-sector workplace plans often carry higher custodial fees, which subtly erode your investment growth. Deferred annuities allow you to create a type of private pension: a monthly retirement income payment for as long as you live. However, annuities generally carry higher fees than an IRA or 401(k), and virtually all annuities end when you die with nothing left for your heirs.

Split Decision

You can leave some assets in your TSP account and choose another option with the remainder. For example, you keep the low-fee advantage of the TSP but gain investment flexibility with a partial IRA rollover. If you roll TSP money into an IRA, keep it separate from other IRA assets. That will allow you flexibility to pursue a 401(k) rollover or a deferred annuity later with fewer tax complications. When you choose an annuity, the decision may be irreversible. At the least, getting out of an annuity contract would be extremely costly.

Tax-Exempt Withdrawals

If you deferred combat pay or other earnings while you served in a tax-free zone into your TSP, those contributions are never subject to federal taxes – similar to after-tax deposits to an IRA – even when you withdraw them. Tax-exempt contributions limit your options because 403(b) plans and most 401(k) and tax-qualified annuities won't accept rollovers that include both pretax and after-tax contributions.

Roth Alternative

Check the tax-exempt balance on your TSP statement. If a large portion of your assets are tax-exempt, consider rolling your TSP into a Roth IRA. You immediately will pay taxes on assets that are not tax-exempt, but you'll escape the early withdrawal penalty, and when you reach 59 1/2, all withdrawals will be tax-free with no required minimum distributions. However, even without a Roth rollover, you never need to pay tax on withdrawals up to the proportion of your account made up by tax-exempt contributions.

About the Author

Dale Bye has spent more than 40 years in journalism, including 25 supervising reporters and editors at metropolitan newspapers and eight years as senior managing editor at a national sports magazine. He directed five newspaper-sponsored personal finance fairs. His fields of expertise include business and personal finance, sports, fitness and theater. Bye holds a Bachelor of Journalism from the University of Missouri.