Most federal employees and military servicemen are aware of a retirement savings option known as the Thrift Savings Plan (TSP). Much more like other retirement accounts, like 401(k) and IRA, the TSP offers a tax-deferred growth and investment options that lead to a solid retirement financial resource to employees. With this, people actually want to know, How soon can I withdraw my TSP after retirement. It cannot be answered in a line, but it requires a proper understanding of some other related aspects.
A TSP is a retirement savings plan designed especially for federal and military employees that helps them save for retirement effectively. It offers tax-deferred investment options, which help in increasing the money while saving it. Let’s discuss this topic.
When Can You Access Your TSP After Retirement?
It is essential to know the access time for your TSP after retirement. So, the TSP withdrawals can be initiated only after the successful separation of the person from the respective federal or uniformed department. The agency will ensure that the person is separated or left, only after this can you start making distributions from your TSP account.
Separation means the final paycheck is cleared and transferred to the person, and they are not working in the department anymore. The agency will notify the TSP about the separation, which takes 2-3 weeks. Then, after the TSP gets notified then it processes the withdrawal, which again takes up 2 weeks to initiate. After this, the person starts withdrawing the TSP payments.
Similar to the other retirement saving accounts, the TSP takes contributions from the employee’s monthly payroll, and the money will then be invested in various investment options that provide tax-deferred growth. Questions like, How soon can I withdraw my TSP after retirement, are somehow answered here.
TSP Withdrawal Options After Retirement
As mentioned, the TSP plan funds are deposited from the employee’s monthly income. Sometimes the contributions also include the government matching deposits in the employee’s TSP. When you retire and are eligible to withdraw funds, there are multiple ways to do this. Also, there was an act named, TSP Modernization Act of 2017, which offers more flexibility to TSP withdrawals.
Also, the TSP withdrawals are considered as a normal income, which is added to your annual taxable income. Hence, the TSP withdrawals are taxable whenever they are made.
Partial Withdrawals
As the name suggests, the partial withdrawals are made. In this, the retiree withdraws some amount of their need from the TSP funds. And the remaining amount will remain in the account and continue to grow. It allows you to access funds based on your need and does not stop the tax-deferred growth. However, each withdrawal reduces the savings amount.
Full Withdrawal
In this, there are several withdrawal methods available. The one is to make a full withdrawal of funds from the TSP, which eventually clears the TSP account associated with the person, and the complete years of savings and growth will be in your hand. This is not suggested because it deletes the future growth potential of the money.
However, there are some other ways, like withdrawing monthly payments based on life expectancy, and sometimes withdrawing more, and sometimes withdrawing less.
Instalment Payments
You can also set up monthly payments, which are automatically transferred to your bank account. Also, you can set the transaction on a monthly, quarterly, or annual basis with the amount. With this, the retirement savings become more flexible to access, and you can use them for a long time. This is the best option for retirees who want a predictable retirement income.
Life Annuity Purchase
You can convert your TSP to a lifetime monthly payment annuity. With this, you can ensure a fixed monthly or timely income for life. But this process is irreversible, which means once you opt for this, you cannot get control of your money. It is suitable for those who want a simple monthly income but not for those who want more flexibility over their retirement savings.
How soon can I withdraw my TSP after retirement? You can access funds after the separation, as mentioned. Retirement savings accounts like TSP are a crucial part of our lives. If you want to withdraw the full amount, then there is another option you may have. Invest the money into an IRA or Roth IRA to get more control over the money while it grows tax-deferred over time.
What are the Penalties in TSP Withdrawals?
Like the other retirement saving options, the TSP applies some penalties for early withdrawal. If you make any hardship withdrawal before the age of 59½ years, then you need to pay a 10% early withdrawal penalty. So, it is advised to wait at least till this age to avoid any further reductions in the savings.
However, there is a rule called the rule of 55. It states that if you retire at or after the age of 55 years, then you can withdraw money from the TSP account without facing the 10% early withdrawal penalty. Also, for military personnel, this age is 50 years, which means if they retire at or after this age, they can start making distributions from their TSP without the penalty.
Exceptions to this penalty
There are some exceptions where this rule may differ. The exceptions are:
- Permanent disability status.
- Substantially Equal Periodic Payments (SEPP) under IRS Rule 72(t).
- Beneficiary withdrawals in case of death.
- Certain medical expense withdrawals exceeding IRS thresholds.
As in the question, how soon can I withdraw my TSP after retirement, it is essential to plan for the withdrawal and retirement according to the rules and regulations to avoid any penalties.
Required Minimum Distributions (RMDs)
The required minimum distributions are like a rule. It says that the person with TSP cannot always keep savings in this account. Once you have reached the age of 73 years (for people born between 1951–1959) and 75 (for people born in or after 1960), you should start making distributions before these ages. If someone fails to RMD will need to face significant penalties, which causes serious money loss. However, it is not valid for Roth TSP.
It is also important to know that the contribution to the TSP is made from pre-tax income of the employee, and the withdrawals are taxable. In Roth TSP, the contributions are made from after-tax income, and the withdrawals are not taxable.
Conclusion
How soon can I withdraw my TSP after retirement? The answer to this question is that you can start withdrawing from your TSP account just after the verification of separation from the agency is completed. The TSP is one of the most common retirement saving options among federal and uniform retirees. This helps in making a decent saving while having a tax-deferred growth of the saved money.
It is required to make a pre-planned strategy for retirement and saving distributions to avoid any penalties and empower the overall retirement income. With long-term planning and structured withdrawal, you can get the most out of your thrift savings plan.
Frequently Asked Questions
Can I withdraw from TSP as soon as I retire?
When you retire, the agency will notify the TSP about your separation means your last paycheck. This will take up to 2-3 weeks, then the TSP takes 1-2 weeks to allow you to access the saved money in the account. So, after all this has been done, which overall takes 3 to 5 weeks, you can start making distributions from your TSP.
What is the best thing to do with TSP after retirement?
TSP is a retirement savings plan just like the 401(k) and IRA. You can set a monthly payment from this account to yourself, which helps in managing the monthly expenses and could last for a long time if the setup is done based on life expectancy.
At what age can you draw from your TSP without penalty?
At a minimum, if you are 55 and have retired from your federal agency in or after this age, then you can start making distributions from your TSP without facing any penalty. The age threshold for military servicemen is 50 years. Also, after 59½ years, you can make penalty-free withdrawals while still working if the department allows you.
