When federal employees leave government service, whether through early retirement or voluntary separation, they have the option to roll over their Thrift Savings Plan (TSP) funds into another eligible retirement account. This process ensures continued tax-deferred growth and prevents unnecessary penalties.
Here’s how it works:
Timing of Rollover
Upon Separation or Retirement
After separating from federal service, you can roll over your TSP balance into an eligible retirement account, such as an Individual Retirement Account (IRA) or a new employer’s 401(k). The rollover typically becomes available after your final paycheck has been processed and your TSP account has been officially closed or transferred. ¹
Required Minimum Distributions (RMDs)
If you are age 73 or older (as of the latest IRS guidelines for RMDs), you must begin taking Required Minimum Distributions (RMDs) from your TSP, regardless of your employment status. ² If you plan to roll over your TSP funds, you must arrange the transfer before RMDs take effect to avoid tax penalties.
Types of Rollovers
Direct Rollover (Recommended Option)
A direct rollover transfers funds directly from your TSP account to a new IRA or employer-sponsored retirement plan without you handling the money. The advantages include:
- No tax withholding – The funds move seamlessly into the new account.
- No penalties – Since you never take possession of the funds, you avoid early withdrawal penalties.
- Simple process – You can initiate the transfer through your TSP account management portal. ³
Indirect Rollover (60-Day Rule Applies)
With an indirect rollover, the TSP funds are first distributed to you, and you have 60 days to deposit the full amount into another qualified retirement plan or IRA. Important points to note:
- Mandatory 20% Tax Withholding: The IRS requires TSP to withhold 20% for taxes when distributing funds directly to you. ⁴
- Potential Tax Penalties: If you fail to roll over the full amount within 60 days, the distribution may be taxable and subject to a 10% early withdrawal penalty (if under age 59½). ⁵
- Replenishing Withheld Taxes: To avoid taxes, you must use personal funds to replace the 20% withholding before rolling over the full amount.
Early Retirement (Under Age 59½) and Penalties
If you separate from federal service before age 59½, you should carefully plan your rollover to avoid early withdrawal penalties. Consider the following:
- No Penalty for Rollovers: Rolling over your TSP balance into a traditional IRA or a new employer’s 401(k) avoids penalties.
- Early Withdrawals Are Taxable: If you withdraw funds (instead of rolling them over), any pre-tax contributions and earnings are taxable, plus a 10% penalty (unless you qualify for an exemption, such as the Rule of 55). ⁶
- Roth TSP Considerations: If you roll over a Roth TSP balance, it must go into a Roth IRA to maintain its tax-free status. ⁷
Key Considerations for TSP Rollovers
TSP vs. IRA/401(k): Which One Is Best?
While TSP accounts offer low fees and a simple investment structure, rolling over to an IRA or 401(k) can provide:
- More investment options (stocks, mutual funds, real estate, etc.).
- Better estate planning flexibility for beneficiaries.
- Easier withdrawal flexibility (varies by provider).
However, some federal employees prefer to keep their TSP due to its lower expense ratios and access to the G Fund, which offers stable returns. ⁸
Roth TSP vs. Roth IRA
If you have Roth TSP contributions, rolling them into a Roth IRA keeps your contributions and earnings tax-free in retirement. However, rolling a Roth TSP into a 401(k) or traditional IRA could trigger unintended tax consequences. ⁹
Other Considerations for Early Retirement Packages
If you’re taking an early retirement package or separation incentive, you should also consider:
Severance Pay & TSP Access
- If your buyout package includes severance pay, it does not count as TSP income but may affect your overall tax bracket.
- If you cash out your TSP instead of rolling it over, be prepared for tax implications.
Age & Withdrawal Options
- If you separate before age 55, you may be subject to the 10% penalty on early withdrawals (unless rolling over).
- If you leave after age 55 but before 59½, you may qualify for penalty-free withdrawals under the Rule of 55 (if you leave your TSP in place instead of rolling it over). ¹⁰
When to Take Action
- You typically have 90 days after separation to decide how to handle your TSP funds.
- Before 90 days:
- Decide whether to roll over your TSP to an IRA or 401(k) or keep it in the TSP.
- If required, submit the necessary forms to request a direct rollover.
- After 90 days:
- If no action is taken, you may be required to start taking distributions or move funds into another retirement plan based on your balance and IRS rules.
Final Thoughts
Rolling over your TSP balance is a major financial decision that impacts your retirement savings, tax liability, and long-term wealth strategy. Whether you choose to keep your funds in TSP, roll them into an IRA, 401(k), or Roth IRA, understanding the rules will help you avoid penalties and maximize your retirement benefits.
📞Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. To sign up for our newsletter with the latest economic news, click here.
This information is for educational purposes only and should not be considered financial, tax, or legal advice. Investment decisions, including TSP rollovers, should be based on your individual situation. Consult a qualified professional before making any financial moves. All investments involve risk, including potential loss of principal. Rules and regulations are subject to change—refer to official sources for the latest updates.
Sources:
[¹] TSP Withdrawal Options – Federal Retirement Thrift Investment Board[²] IRS Required Minimum Distributions (RMDs)
[³] Taking Money from Your TSP Account
[⁴] IRS Publication 575: Pension and Annuity Income (Mandatory 20% Withholding)
[⁵] IRS Publication 590-B: Distributions from Individual Retirement Accounts
[⁶] IRS Tax on Early Distributions
[⁷] Roth TSP Overview – Federal Retirement Thrift Investment Board
[⁸] Federal Retirement & TSP Plan Overview – U.S. Office of Personnel Management
[⁹] IRS Rules for Roth IRA Rollovers
[¹⁰] FERS Retirement Eligibility & Rule of 55 – U.S. Office of Personnel Management
