There are a few reasons to avoid making a TSP withdrawal and common TSP withdrawal mistakes that federal employees make. Primarily, the decision whether to take a TSP withdrawal or not comes down to whether or not you need current income, and whether or not you’re satisfied with the options the TSP makes available to you. If you are afraid that your TSP share prices will decline substantially during the next economic slowdown or if you want to explore options outside of the TSP may push you in one direction or the other, but the TSP is a good qualified plan and you should consider keeping your money it, unless you can find alternatives that offer you more of what you are looking for. We always recommend that a person considering a TSP withdrawal should first consult with a knowledgeable TSP expert before they make any decisions.
The simple fact is that (except for certain tax-exempt contributions and Roth balance withdrawals), any withdrawal taken from a qualified plan will be subject to federal income taxes, and perhaps state and local taxes too. TSP withdrawal mistakes can be concerning, not to mention the 10% early withdrawal penalty you could pay for withdrawals before separation from federal service, or before you have reached a certain age.
On the other hand, by leaving the funds in the TSP account or by rolling your TSP account balance into an IRA, contributions, and earnings can continue to grow tax-deferred. You can continue to do this if you don’t need the money until you are forced to receive the Required Minimum Distributions (RMDs) at age 70½. At that time, you would have to start paying income tax on the distributions that you receive. You may also find that there are numerous options outside of the TSP that can provide you a greater level of retirement income than the TSP Lifetime Annuity.
Avoid TSP Withdrawal Mistakes and Tax Strategies
If you have reached age 70½ or above, you may have mandatory distributions from your Thrift Savings Plan or IRA. These Required Minimum Distributions (RMDs) are traditionally taxable as ordinary income. It may be possible to reduce the hit by taking only the RMD amount and leaving the rest within your IRA to continue to grow but you should talk with your CPA about how specifically this may impact you.
Making a full withdrawal (not an IRA rollover – but a withdrawal to your checking or savings account) could also have negative consequences. Making a full withdrawal without subsequently rolling the funds into an IRA or other qualified accounts (depending on your age) could create both penalties and rather significant income taxes. Always seek good TSP advice before you engage in a TSP withdrawal.