After putting money into your Thrift Savings Plan (TSP) account, you will someday want to take distributions from your account. There are three basic situations for taking money out of your account: regular retirement distributions, in-service distributions, and loans (not technically a distribution.)
How and When Do I Get My Money Out?
Withdrawals from a qualified retirement account are called distributions. There are federal laws that govern the distribution of money from qualified investment accounts.
The withdrawal options for TSP accounts include:
- Make a single payment, or “lump sum” withdrawal. You will liquidate your entire TSP account and receive the balance in one payment. Any taxes due on a traditional TSP account would be calculated on the entire sum.
- Set up a series of monthly withdrawals. You can have this figure calculated on your life expectancy, or you may designate a certain dollar amount to be distributed each month. Either way, payments will end when the account is empty. Any tax payments will be spread out over the distribution period.
- Purchase a TSP annuity. An annuity is a contract to provide lifetime income to one or two people in exchange for an initial payment. Under the annuity option, the TSP uses your account balance to purchase an annuity from a private company. This is a permanent decision and can not be changed. Taxability of annuity payments depends on the taxability of the account whose funds purchased the annuity.
- Have any combination of the above.
You must being taking required minimum distributions by the time you reach age 70 1/2.
What If I Need My Money Before I Reach Retirement Age?
TSP has two different programs for accessing your TSP funds before reaching retirement age: TSP loans and in-service withdrawals.
TSP loans can be used for any purpose. There are special terms and conditions if the loan is made for the purchase of a home. The money borrowed is removed from your TSP account. Repayments, including interest, are returned to your account. Repayment must be made via payroll deductions. If you leave federal service, your TSP loan is due in full and must be repaid within 90 days. If it is not repaid, it will be converted to a taxable distribution.
In-service withdrawals are available to TSP participants who are currently employed, either in federal service or in the armed forces. TSP in-service withdrawals are only available for documented financial hardship, or TSP participants over aged 59 ½ may make one age-based in-service withdrawal during their life. In-service withdrawals remove the funds from your TSP account permanently and carry a variety of consequences, including tax issues and reduced ability to make subsequent contributions .
I really love the TSP for its convenience, low costs, and many options. My only regret about TSP is that my husband didn’t start contributing more money earlier in his career. With a limited number of years to contribute, making a larger effort is important for building up a sizable account balance. However, even smaller savings can add up.
This is the last in a series of posts on the Thrift Savings Plan. Additional posts include:
Day Three: How Much Should I Contribute?
Day Four: TSP Funds: One Is Right For You
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