TSP or Thrift Savings Plan is a savings and investment plan that is specially created for Federal Employees of the United States of America, along with all members of the uniformed services and the Ready Reserve. Established in 1986 by the Congress under the Federal Employees’ Retirement System Act, it is important that every Federal employee working for the American government knows the right TSP Withdrawal Options before they retire.
Under this act, the Federal employees get the same tax benefits and savings scheme as any other private corporations, which make the new TSP Withdrawal rules easy to understand. The Federal Employees’ TSP is also a Defined Contribution Plan; this means that the retirement income after your TSP will be based on the amount you, or your agency, used to earn during your service years.
This makes it much easier for a federal employee to maintain their lifestyle after retirement because their income after retirement will be calculated according to what they earned during service.
Accessible TSP Withdrawal Methods
There are a number of TSP Withdrawal options to choose from after retirement, but it is also for the best if you give your TSP Plans some serious thoughts way before you have to decide what to do. Three different kinds of TSP Withdrawal methods are described here that will definitely help you to choose the right one for you.
Option 1: Full Withdrawal
One of the TSP Withdrawal Options is Full Withdrawal, which means that you can withdraw the whole saved amount from your TSP account. This can be done all at once or in parts, i.e. you can withdraw the whole amount at one time, or over a period of time. You can also choose to purchase an annuity that will give you a certain amount of payment all through your life.
Alternatively, you can create and choose a combination of all three of these payment options. There are mainly three options for you to withdraw your whole savings.
The first option, of course, is a full withdrawal of your savings as a single payment. This Thrift Savings Plan Withdrawal option is also referred to as a “lump sum payment”.
The second option, on the other hand, allows you to withdraw your savings in a number of payments over a period of time. This format of payment is usually withdrawn per month. For your monthly payment, you can again choose one from two options.
One, you can choose to get a “Specific Dollar Amount” every month. Two, you can request a specific amount of payment by calculating your “Life Expectancy”, i.e. your age and your account balance will be taken into consideration and monthly payment amount will be calculated based on that.
The third option is “Full Withdrawal as a Combination of Options”, which is a combination of different TSP Withdrawal plans – monthly, single payment, life annuity, etc.
Option 2: Partial TSP Withdrawals
Partial Withdrawal is one of the most important New TSP Withdrawal rules to consider. This is an option that allows you to make a single one-time-only withdrawal after retirement, leaving the remaining of your money in your TSP account to be taken out later. This is one of the most popular and practical TSP Withdrawal Options chosen by Federal Employees’ at Retirement.
If this is an option you want to consider, you need to fill up a Form TSP-77 which is available on the TSP website. This form has to be filled in advance if this withdrawal plan is the one you want after your retirement.
A partial withdrawal can be made only under some specific circumstances.
- If you haven’t made any partial withdrawal prior to the first withdrawal, or that you don’t have a payment pending;
- If you had never made an age-based withdrawal when you were in service under the U.S. Government; or,
- If you request a sum of $1,000 or more from your TSP account.
Option 3: Tax Exempt Balance, Created Especially for Uniformed Services
If you had been a Federal employee under the Uniformed Services, you must have a special Uniformed Services TSP account. At the same time, if you have ever served in a combat or been employed under a combat zone, your TSP account will include a tax-exempt contribution. For employees stationed in combat zones, these contributions have always been exempted from Federal Income taxes.
However, if you are going to choose this particular TSP withdrawal option after retirement, it means that you will be subjected to tax when you withdraw any amount from your TSP account. Since this amount is a little hard to calculate, you can use a TSP retirement calculator to find the exact amount you are going to get after retirement.
At the same time, if you are using an uninformed service account, your withdrawal will be made in a form of prorata, which means the withdrawal will be proportional, to both nontaxable and taxable amounts.
Question & Answer on TSP Withdrawal Options with Rules
Do TSP contributions reduce taxable income?
Taxable income is reduced by TSP contributions, which is known as Roth Contributions. In other words, Roth contribution refers to the after-tax contributions because the contribution will be taxed during your current tax-year. However, the amount you had contributed to your TSP fund will be tax-free. You won’t have to pay any amount of taxes on the contributions or on your earnings after your retirement.
Do you pay taxes on TSP Withdrawal?
TSP contributions are always tax-exempt payments. When you are withdrawing any amount from your TSP fund, you will always be exempt from any kind of federal income. However, with non-Roth payments, i.e. the earnings on your traditional contributions are subjected to tax, but only when you are making a withdrawal.
On the other hand, any earning you make on a Roth contribution from tax-exempt pay is not subjected to any form of tax.
At what age can you withdraw from TSP without penalty?
If you have decided to retire before you are 55 years old, all your withdrawals from your TSP fund ill face a 10% early withdrawal penalty. This will only continue on all withdrawals prior to when you are 59½ years old. However, there will be no penalty if you happen to withdraw your funds based on your projected life expectancy.
What happens if I withdraw my TSP early?
If you have withdrawn any amount of money from your TSP account before you have gone into retirement, i.e. when you were still in service under the Federal Government, you cannot repay the amount to the savings. Neither can you return the money or convert it into a loan.
The portion of money you have withdrawn becomes a taxable portion. At the same time, if this was a withdrawal that you have made before you are 59½ years old, you will also have to end up paying 10% penalty tax for an early withdrawal.
Can you contribute to TSP after separation?
If you have decided to separate from Federal service before you have reached the age of retirement, i.e. while you were still in service, you have to stop making your regular contributions to the TSP account. However, you can still go on transferring 401k and pre-tax IRA money into your TSP account. A good idea would be to go on contributing to your previous employer’s 401k plan; later, you can transfer the amount to your TSP account when you finally decide to leave your current job.
Can you deduct TSP contributions on your taxes?
It is not possible to deduct any kind of contributions from traditional TSP accounts. This is because traditional TSP accounts are directly deductible from paychecks. However, your taxable income won’t be included in your TSP contributions when you have been send your W-2 form by your current employer.
How can I withdraw from my TSP?
There are a number of options to withdraw from your TSP account. You can withdraw the whole amount at one time, or partially over a certain period of time. You can choose a certain amount that will be paid to you every month. At the same time, you can choose to withdraw the amount as a life annuity, but the amount must be more than at least $3,500.
How much can you borrow from your TSP to buy a house?
If you are looking forward to buying a house with your TSP fund, you need to be a Federal Employee under the United States government and borrow from the amount you already have in your account. Only if you qualify for a loan from your TSP account, you can borrow a maximum sum of $50,000 – given that you have this amount in your account.
The minimum amount you can borrow from your account is $1,000. If you want to know what amount you can borrow from your TSP account, you can visit the TSP website to know the details from the “My Account” section.
What is the current G Fund rate n TSP?
From October 2018 onward, the Interest rate on TSP Fund has been decided at 3.000%. This rate is always calculated afresh every month, and it is based on the average yield of the United States Treasury security, at least every 4 years or more until maturity. However, the interest rates have been rising over the last few years, and it may rise in the near future, too.
Can you roll a traditional TSP into a Roth TSP?
Yes, you can roll all your assets from a traditional TSP into a traditional IRA, and you won’t be subjected to any taxes. The same thing happens if you roll your assets, contributions and earnings from a Roth Account to a Roth IRA.
However, if you want to roll all your assets from your traditional TSP to your Roth TSP, you will have to pay a tax. The amount of tax to be paid will be determined on the amount you are converting from one account to another.
TSP Withdrawal rules are not very hard to understand. However, if you are not familiar with some of the terms, you might want to start looking into all the options way ahead of your actual retirement year. It is always better to be prepared with a decision well ahead.
Of course, you will want to know all the options you might have of withdrawing your TSP account after leaving federal services. Your TSP account gives you three different options to choose from, which can be a big help if you have a specific reason in mind. You can withdraw the whole amount if you want to buy a house after retirement, or a partial amount for a luxurious car or a vacation. If you want to continue your present lifestyle, you can choose to get a specific amount every month for the rest of your life.
Understanding everything about TSP withdrawal options will help you make a better decision about your retirement, so it is immensely helpful if you know everything beforehand.