What You Can Do With Your TSP When You Get Out

in Invest by Lacey Langford, AFC®

Knowing what to do with your Thrift Savings Plan (TSP) when you separate or retire from the military can be challenging. There are different factors that go into the decision. It’s a big decision to make but it might be easier than you think!

Your TSP is your financial future, it’s not just your money, it’s money you’ll need to live on in retirement. Today, I want to talk about what you need to know to make the decision easy, fast, and without losing money unnecessarily.   

Before I go into what the options for your TSP are when you get out, let me give a quick TSP review. The TSP a.k.a, the Thrift Savings Plan is a retirement saving and investing account sponsored by the Department of Defense (DoD). It’s the government’s version of a 401k. This means it’s long-term savings so long term, you can take the money out without taxes and penalty until you are 59 and ½. I have a video,  What the Heck Is The TSP you can watch here plus I have a detailed article on the TSP, I’ll put the link it the description below.

Here are your 3 for your TSP when you get out of the military:

  1. If your account balance is more than $200 you can leave it right where it’s at until you are 70 and ½. But you can no longer make contributions to your TSP account once you leave service.
  1. You can withdraw the money from your TSP account, either fully or partially.
  1. You can transfer your TSP to an IRA or eligible employer plans such as a 401k or 403B plan.

Related: How to Make the Traditional vs Roth TSP Decision

Leaving Your Money in the TSP

In the first option which is leaving it alone,

You are still able to change your investments around. For example, you can take half of the money you have in the S Fund and move it into the F Fund.

You’re able to move money from your IRA or an eligible employer plan into your TSP.

Your TSP account will still have the same low administrative expenses.

Alright now, let me tell you the problems with options 2 and 3.

TSP Withdrawal

In option 2, withdrawing the money either partially or fully will have tax consequences.

If you have the traditional TSP and don’t transfer the money to an IRA or a 401k for example then you can be on the hook for an automatic 20% federal income tax withholding on the amount withdrawn.

Also with option 2,  you may have to pay a 10% early withdrawal penalty. Unless you are 55 or older when you separate from service.

Thrift Savings Plan Transfer

In option 3, yes you can transfer your TSP balance in full or partially to an IRA or a 401k but it could cost you more money in either expenses or loss of return.

It’s important to compare the expenses and average returns of the TSP with those of your new plan to see which one is cheaper and has the better return. Once you do that comparison, more often than not you will find that the TSP is considerably cheaper than other plans with about the same returns. So do your homework before you think about transferring money out of your TSP.

Update Your Address

Don’t forget to keep your address up-to-date with the TSP. When you have a change notify them ASAP.

There are three options for your TSP when separating from service but one of them will most likely have you pay taxes and penalties and the other will probably be more expenses than what you pay in the TSP.

So what the Heck Should I Do with my TSP when I get out of Service, usually, not a darn thing. It’s often best to leave it right where it’s at because of the low expense and wide diversification the TSP funds offer.

If you want to “kickstart” your finances in the military, you can get access to my free Financial Kickstart Kit here.


Featured image by Lance Cpl. Jaime Reyes