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LEARN MORE ABOUT: Thrift Savings Plans
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The Thrift Savings Plan (TSP) is the government equivalent of the 401(k) retirement plan. It offers federal employees a way to save and invest for retirement. Like any investment plan, eventually, you’ll want to withdraw your money and use it to supplement your income. However, before you can withdraw your money, you should understand the TSP withdrawal options and how they are taxed.
TSP Withdrawal Options
The TSP provides four different withdrawal options: single payment, monthly payments, life annuity, and a combination of the three. Here’s a brief overview of each option:
Single Payment – A full withdrawal in a lump sum.
Monthly Payments – A steady, predetermined payment each month using your TSP account balance.
Life Annuity – A guaranteed income stream paid regularly for the rest of your life.
Combination – A combination of the other three options.
All TSP withdrawals are subject to ordinary income tax. However, the taxation will depend on the option you choose, your contributions, and the investment earnings you’ve earned on that account.
Taxation of TSP Withdrawals
Taxes on TSP distributions are based on the specific type of withdrawal you make. Generally, all withdrawals from a TSP account are subject to federal income taxes. However, there are some exceptions.
If you choose to take a single payment, the entire amount is taxable in the year you receive it. That means if you take a large lump sum payment, it can substantially increase your taxable income for that year. It could also push you into a higher tax bracket and require you to allocate more of it to cover taxes.
If you choose monthly payments, they are taxed as ordinary income, so you will pay taxes each year you receive a payment. The amount of taxes you pay will depend on your tax bracket, but it won’t necessarily result in a substantial tax increase all at once, as with a lump sum payment.
With a life annuity, you will receive payments for the remainder of your life. Because these payments are spread over your lifetime, the taxes are also spread out. In this case, taxes are based on the portion of each payment that represents taxable income. The amount of each payment that is considered taxable income is determined by the ratio of your contribution amount to the account balance.
Lastly, a combination TSP withdrawal gives you the ability to select either a single payment, a series of monthly payments or an annuity payment. Each of those payments will be taxed in accordance with the tax rules for that type of payment.
In Conclusion
When it comes to withdrawing your TSP money, you have several options to choose from. However, it’s important to recognize that the taxation of each option can vary greatly. You’ll want to consider your long-term goals and overall financial circumstances before making any decisions about what withdrawal option best fits your needs. Consulting a financial advisor or tax expert can also be helpful in navigating the tax implications of TSP withdrawals.
If i have had fehb my entire career and chose 0% death annuity for spouse knowing not on my health care can i add her back on my medical later if i need to after retirement?
When is the TSP going to allow Roth conversion inside the TSP?
Have you ever noticed that when someone says, “Long story short,” it’s usually too late. It’s already too long!!
After 59½ it makes no sense to keep either traditional or roth tsp. The tsp is no longer the low cost option and the withdrawal options are terrible. Not to mention they made the website horrendous to use.
Here's what I don't understand. If we take out a loan, and the repayment is not deferred like how our regular TSP deposits are, how come that loan repayment is not converted to a ROTH?
Thank you for your informative videos! I started monthly automatic TSP withdrawals a few months ago and was surprised that they didn't take out any taxes. Now I'm finding I need to re-adjust my pension taxes in order to compensate (which is fine as far as I'm concerned). Last year when I took money out of the TSP (all at once) they took the 20%. I got a nice refund from the IRS but owed my state most of that. Watch out for those state taxes. Also, be aware that automatic monthly TSP withdrawals are always on the 15th of the month (or the Monday after if it's a weekend). I don't believe you can pick a different date for monthly withdrawals.
This is a great video, I learn a lot watching your videos and it has been helpful to me. Building a steady income is quite difficult for newbies.. Thanks to Mrs. Belinda Owens for improving my portfolio. keep up with the good videos.
Thanks ❤
HELP…Retired ten plus years, everything in G fund and getting RMDs every December, paying taxes twice on this withdrawal. Please, please give me suggestion on what I can do before I run out of my retirement money all together!! Thank you!
Retired at 55 with 34 years of service under a VERA/VSIP in September 2022. I waited until January 1, 2023 then took it all out and used the rule of 55 to avoid an additional 10% penalty. Investing now and doing much better than TSP management.
One more year. That is what I keep saying.
Does the 20% apply on Roth withdraws? Assuming you are over 59
Great video. Very informative! Thanks for your time putting this valuable info out!
I was surprised to hear about the less than 20% if they think it will last more than 10 years… had never heard that before.
Thank you. Your videos are very helpful.
If at retirement your money is in the G Fund (or whatever fund), can you choose Installment Payments and then subsequently, over years, move your money from one Fund to another? For example, if a person retires with everything in the G Fund, and then after retirement, can they move their money into the F Fund or into some other Fund? And, can they keep their money in the TSP until the day they or their spouse (beneficiary) die? Thank you for all the great and informative videos you put out!
The 20% actually helps, because if you live in a state that also taxes your withdrawal (most of us do) of course over time this will be different for those who choose to be in the "ROTH"