What to do with Thrift Savings Plan When Separating from Military

Too busy to read this article? Listen to it, instead!

So you retired or separated from the military, but your retirement money is still in the Thrift Saving Plan… Now what?

Thrift Savings Plan logo

After you’ve separated from the military, you will receive a letter from the Thrift Savings Plan (TSP) that provides information about your account balance and account information. This letter will also contain an 8-page booklet called the TSP-536 that discusses your options. You can download this booklet in a PDF format.

Take Action with your Thrift Savings Plan

You have two different options with your savings in the TSP. You can either leave your contributions in the TSP or you can take them out.

Leave contributions in Thrift Savings Plan

If you are leaving your contributions in TSP, no further action is required by you. Opting to keep your savings in the TSP, will allow you to continue to accumulate interest over the years, even if you don’t invest additional money. You will be able to retrieve it without penalty after the age of 59 1/2. Personally, I think this is a great option since the TSP has extremely low maintenance fees - much lower than an IRA or 401k.

Move TSP Contributions

Before considering the way you want to take out your money, consider the type of account you with the TSP.

There are 3 different types of accounts you can have under the TSP:

• a traditional account

• a Roth account or

• a combination of both

Traditional account funds are tax-deferred (meaning money is not taxed until the day it is taken out).

Roths accounts funds are automatically taxed the moment they are deposited; Therefore, when it’s time to withdraw the money, you will not need to pay any additional taxes.

Combination accounts have both types of funds: traditional and Roth. The money that falls under ‘traditional’ will be taxed when you retrieved it and the money that falls under ‘Roth’ will be taxed when it’s deposited.

Thrift Savings Plan: Transfers and Rollovers

Now that we’ve spoken about the differences between a traditional, a Roth and a combination account, we could define what ‘transfer’ and ‘rollover’ mean. There are two ways of ways to take out your contributions, depending on the type of account you have. You can either request a 'transfer' or request a 'rollover'. Different rules apply for requests and rollovers. Let’s discuss the transfers first.

Thrift Savings Plan: Traditional Transfers

A traditional transfer can be used to move your money directly from your TSP account to an IRA or an eligible employer plan (such as a 401k). If you plan to go this direction, you will not be penalized for transferring your money directly to another retirement plan.

The TSP recommends that prior to starting the process of moving your money, verify if the company you’re with will accept a TSP transfer - some banks don’t accept transfers.

Thrift Savings Plan: Roth Tranfers

Traditional and Roth transfers are virtually the same - both transfers must be deposited directly to another retirement plan. However, a Roth transfer may be subjected to a 10% early withdrawal penalty if the amount is withdrawn before you reach the age of 59 1/2. This means that if you withdraw your money from the TSP with the intention of placing it into your personal bank account, you will be penalized. This clause could be better understood as a rollover.

Thrift Savings Plan: Traditional Rollovers

In a traditional rollover, your contributions are deposited directly to your personal bank account. You are in charge of depositing the money into the retirement plan of your choice. Since the payment is being directly deposited into your personal account, the TSP withholds 20 percent of your payment for federal income tax purposes.

There are two different ways to pay the 20 percent. You can either allow the TSP to take out the 20 percent directly from your TSP funds, or you can pay using a different payment source.

To avoid further penalties with a rollover, remove all of your money from the TSP account; otherwise, it will be subjected to taxation and penalization.

Thrift Savings Plan: Roth Rollovers

In a Roth rollover, the money taken out will be deposited directly to your account, just like the traditional rollover. However, you cannot rollover any amount that is tax-free (money from a traditional fund) to an eligible employer plan. You will only be able to rollover your taxed savings and your earnings. If your full withdrawasl does not qualify as a “Roth distribution” the TSP will withhold 20 percent of your earning for federal income tax purposes.

Summarize: Thrift Saving Plan Transfer and Rollover

A transfer is when the TSP deposits money directly to a retirement account or an eligible employer account. This type of money relocation will not be penalized.

A rollover is when the TSP deposits your money into your personal bank account. This type of money relocation will be penalized 10-20 percent, depending on whether your account is traditional or Roth.

If you’re uncertain which type of account you have, or you would like to know more about moving your money to another retirement plan, you can call their number 1-877-968-3778. Every time I called, especially for many questions related to this article, they have been very kind and very informative. Be ready with your account number, social security and home address before you call, they will ask for all of this before you can ask questions.

What are your thoughts on the TSP? Have you already switched to a different retirement plan? Was it a smooth transition? Did you like the switch? Did you regret it? Feel free to comment below!