Considering the bewildering array of Thrift Savings Plan withdrawal options and the complexity of the associated tax treatment, it is no surprise that a lot of people simply choose the easiest TSP withdrawal strategy, regardless of their specific needs. However, it can be wise to seek out good TSP advice and then possibly make use of a combination of withdrawal options that will provide you with optimum benefits for the way in which you plan to spend and/or invest your savings.
One of the most common factors that TSP beneficiary participants think about includes immediate spending, tax deferral for as long as possible, monthly payments, and a guaranteed lifetime income.
For example, a common need for federal retirees is relocation or purchase of a vacation home in another city. In this case, you may need a large chunk of your TSP account balance (in cash) to pay for the down payment on the property.
Thrift Savings Plan Withdrawal Strategies and Investments
Note that this full or partial TSP withdrawal strategy could be subject to federal income taxes, and possibly state and local taxes. It may also be subject to the 10% early withdrawal penalty, depending on your age at the time of separation. So a withdrawal for an immediate spending need will not be helpful if you’re focused on tax deferral on the earnings and contributions for as long as possible.
In this case, what you may consider is accessing your available Roth TSP balance. Distributions from the Roth balance are not taxed since the tax is paid up-front with your contributions.
The point here is that if you need the money in your TSP for immediate spending after separation from service, then you should plan for it in advance by considering Roth TSP investments. To be specific, you pay taxes on the contributions in a much lower tax bracket at an early age, instead of being taxed as you take distributions.
There are far too many TSP Withdrawal strategies to discuss all of them here and each of them is unique to the TSP participant. But each strategy has a unique set of benefits and drawbacks and each strategy can be tailored to meet your specific needs. Contact us today if you’re considering your Thrift Savings Plan withdrawal options, or if you’re seeking TSP advice. Our initial consultation is always free of charge and we are here to help.