While you’re working, the path is pretty clear. Working = save and invest. Money goes automatically from each paycheck into the investments you’ve selected.
You’ve gotten so used to dutifully saving and investing in your Thrift Savings Plan (TSP) that it might feel strange to envision taking the money OUT to then spend on yourself. Retirement = invest and spend.
If invest and spend sounds a little trickier than save and invest, that’s because it is.
The stakes are high. If you spend too much too soon in retirement, you could find yourself in financial quicksand. Avoiding financial quicksand is what building a retirement plan is all about—but before you can plan, you have to get very clear on your options.
You are welcome to keep your TSP account open until the balance runs down to zero. Don’t believe anyone who tells you otherwise. The investment choices will remain the same as when you were working.
If you need money, you can decide to take single payments or schedule a series of regular payments (such as monthly income). Your checking account at the bank only accepts cash—after all, you can’t pay for groceries with shares of the G, F, C, S, or I Funds—so TSP will need to liquidate (sell) a portion of your investment to fund your payment.
One limitation that TSP has is that you cannot choose which funds they sell to fund your payments. They will sell a bit of each investment proportionately so that the account remains invested exactly as-is. This can be a disadvantage if one or more of your funds have suffered recent losses because selling out of the fund locks in that decrease in value.
You initiate your payments through TSP’s online portal. If that seems daunting, keep in mind that TSP has knowledgeable and friendly representatives standing by who will walk you through the online system with ease. Just give them a call—they are there to help.
Your TSP is considered a “retirement account” by IRS standards. Retirement accounts have special tax advantages which encourage employees to save. When you contribute to your Traditional TSP, that money is not included on your taxable income for the year. But when you take the money out of Traditional TSP, that’s when your taxes are due. The Roth TSP works the exact opposite way: you pay taxes now on the money you put in, and as long as you follow a few simple rules, you won’t owe taxes when you take it out.
The Tax Man is a silent participant in any amounts taken from Traditional TSP. If you have a tax professional, they can help you decide on your tax withholding. Just give them a call—even if it’s the offseason. They would much rather hear from you mid-year than have to clean up a mess next year they could have helped prevent.
If you prepare your own taxes, you’ll need to do the calculation to establish how much you’d like to withhold. Even if you’ve prepared your own taxes for a lifetime, it can be advantageous to hire a qualified tax professional for a few years as you get settled into retirement.
You don’t have to keep your money at TSP if you don’t want to.
You can use all or part of your TSP account to purchase an annuity with TSP’s outside vendor. You give up your money and control of it in exchange for a guaranteed lifetime monthly payment. See the TSP fact sheet on Annuities.
You can also move all or part of your TSP balance to an IRA and/or Roth IRA of your choosing. Remember, if you take money out of TSP and receive it in your bank account, you may owe income taxes on that amount. But you can protect yourself from owing taxes on the transfer by making sure the transaction is completed as a rollover.
You can rollover your funds to an IRA and/or Roth IRA at any given institution. You can choose self-directed where you pick your own investments, or you can pay a financial professional to select the investments for you. Take your time reaching this decision and make sure you thoroughly understand fees and any limitations of the investments you choose.
Meet the TSP Retirement Pivot: the change in investment strategy that savvy investors make as they move from the savings phase to the withdrawals phase (which could last 20+ years). Join us for a live virtual class with illustrated lessons and lots of time for Q&A—we don’t shut down the virtual classroom until ALL student questions have been answered. Nobody gets to retirement without asking a few questions along the way! Click here to register.
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FERS Blueprinttm is an educational division of The Monroe Team, Inc. DUNS Number: 032 057260. CAGE Code: 735L3. NAICS Code: 611710 Educational Support Services. Woman-owned, small business.
FERS Blueprinttm is not affiliated with, endorsed or sponsored by the Federal Government or any US Government agency. FERS Blueprinttm is educational only. No specific financial, retirement nor tax advice is being offered. The material presented is as current as possible, but is necessarily generalized. Facts and opinions are based on research and experience, but are not endorsed by the Federal Government. It is recommended to consult with your personnel office and/or the Office of Personnel Management (OPM) Retirement Office, Thrift Savings Plan, Social Security, Medicare, Internal Revenue Service, your legal, tax and/or other advisor(s).