Many federal employees assume their TSP is completely off-limits until retirement. However, that’s not always the case.

Once you reach age 59½, the TSP allows age-based in-service withdrawals, a little-known option that can create meaningful planning flexibility when used thoughtfully.

Age-Based TSP Withdrawals: What You Need to Know

The purpose of the Thrift Savings Plan (TSP) is to build long-term retirement wealth, slowly and steadily, over the course of your federal career. One foundational rule of retirement planning is simple: avoid touching these funds before retirement unless absolutely necessary. But, like most rules, there are exceptions.

Federal employees may be surprised to learn that under certain conditions, the TSP actually allows you to withdraw money penalty-free while still working. These are known as age-based in-service withdrawals, and they can be incredibly useful when used strategically.

Here’s what you need to know.

What Is an Age-Based In-Service Withdrawal?

Generally speaking, your TSP money is off-limits while you’re still working in your government position. However, an age-based in-service withdrawal allows you to take money out of your TSP while you’re still working, as long as you have reached age 59½.

In addition to being old enough to qualify, you also need to meet a few additional requirements:

• You can only withdraw from funds in which you are fully vested (i.e., you have enough years of service to do so).
• You must withdraw at least $1,000.
• If you have less than $1,000 in your TSP, you must withdraw the entire amount.
• You can make a maximum of four age-based withdrawals per year.

What’s the Catch?

If you choose to take an age-based withdrawal as a distribution, federal law requires the TSP to withhold 20% for taxes on traditional funds. Roth earnings may also be taxable if the withdrawal is not “qualified.”

However, you can avoid taxes and withholding entirely only when rolling your TSP funds into another pre-tax retirement account, such as a traditional IRA or another eligible employer plan.

If instead you choose to roll funds into a Roth IRA as part of a Roth conversion, you will owe income tax on the amount converted. While the conversion is still penalty-free, it is not tax-free. The benefit, however, is that once the money is in a Roth IRA, future qualified withdrawals are tax-free, and Roth IRAs are not subject to Required Minimum Distributions (RMDs), within your lifetime.

What’s the Advantage?

The TSP is a great benefit, but your investment options are pretty limited. Right now you can only choose from five different index funds, and you’re stuck managing that money yourself. This means that when you retire, it will be your responsibility to make sure your investments are well-balanced and that you time selling shares and taking distributions to minimize your taxes and make sure your money is invested as wisely as possible.

That’s a tall order, especially if you’d rather relax during your retirement than worry about your money.

If you roll over your TSP funds into a private IRA, though, you can let an investment fiduciary take charge of managing your money. For some people, this may come as a relief. It allows you to streamline your retirement management and get advice to help you manage your TSP money in an economic downturn. It can also give you the freedom to invest in a much broader range of ETFs, mutual funds, stocks, bonds, annuities, and more — anything that you and your advisor decide is right for your plan is now available outside the confines of the TSP.

An age-based withdrawal also provides you with the opportunity to convert a traditional TSP to a Roth IRA. A Roth conversion will require you to pay taxes on the money you roll over, but once you do, you’ll never have to pay taxes on the funds and future earnings. Additionally, Roth IRAs are not subject to Required Minimum Distributions (RMDs). For retirees who want to preserve their accounts as long as possible—or leave a tax-free asset to heirs—this can be a major advantage.

What’s Next?

Age-based withdrawals are often overlooked, but they can be a powerful planning tool. If you’d like to explore your rollover options, discuss whether an IRA or Roth conversion is right for you, or understand how these decisions affect your long-term plan, we’re here to help.

Connect with one of our experienced advisors to build a strategy designed specifically for federal employees.

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