Don’t Withdraw From Your TSP Until You Understand How These Options Impact Your Tax Bill and Timeline

Key Takeaways

• Your TSP withdrawal strategy directly affects your taxes, retirement income longevity, and when you must begin drawing from the account. Planning ahead in 2025 can prevent avoidable tax shocks.

• There are several withdrawal methods, and each has different implications for required minimum distributions (RMDs), taxation, and estate planning. Understanding these details before withdrawing helps protect your savings.

Timing Matters: When You Withdraw Can Increase or Reduce Taxes

If you’re approaching retirement, it’s tempting to start drawing from your Thrift Savings Plan (TSP) as soon as you separate from service. But the timing of your first withdrawal can have major consequences for your tax liability and long-term financial security.

The Age Milestones That Matter

• Age 55: If you separate from federal service in the year you turn 55 or later, you can take penalty-free withdrawals from your TSP. This rule applies only to traditional TSP accounts and only if you don’t roll the funds into an IRA.

• Age 59½: This is the general age where the IRS no longer imposes the 10% early withdrawal penalty on retirement accounts.

• Age 73: Required Minimum Distributions (RMDs) kick in at age 73 in 2025. This means you must begin taking annual withdrawals from your traditional TSP, whether you need the money or not.

Starting too early can shrink your future income. Delaying too long can lead to large forced distributions that push you into a higher tax bracket.

How Your Withdrawal Type Affects Your Tax Bill

There are multiple ways to access your TSP savings in retirement, and each option has tax consequences.

Single Withdrawals

You can request a one-time withdrawal of any amount, but this triggers income tax on the amount withdrawn. If it’s a large sum, it could push you into a higher tax bracket in that year. If you withdraw from the traditional TSP, it’s taxed as ordinary income. Roth TSP withdrawals are tax-free if they meet the IRS requirements (account held for at least five years and age 59½ or older).

Monthly Payments

Monthly payments give you predictable income, but these are also taxed as ordinary income if drawn from a traditional TSP. You can:

• Choose a fixed dollar amount, or

• Allow TSP to calculate payments based on your life expectancy.

Both options are flexible, but the IRS still monitors your withdrawals to ensure they meet the annual RMD requirement once you turn 73.

Life Annuity

You can convert part or all of your TSP balance into a life annuity. While this creates guaranteed lifetime income, it’s irrevocable once set up. Income from a traditional TSP annuity is fully taxable. The annuity can reduce RMD worries but limits flexibility.

Required Minimum Distributions Are Unavoidable

As of 2025, you must begin RMDs the year you turn 73. The TSP will calculate the required amount and notify you, but it’s your responsibility to take it. Missing the RMD deadline comes with a 25% penalty on the amount you should have withdrawn (reduced to 10% if corrected quickly).

RMDs are taxed as income and can disrupt other tax strategies. If you have both traditional and Roth TSP balances, RMDs only apply to the traditional portion. Roth IRAs are not subject to RMDs while you’re alive, which is why some retirees roll over Roth TSP funds to Roth IRAs.

Tax Implications of Rolling Over Your TSP

Rolling over your TSP to an IRA or another employer plan may seem attractive, but this move has implications:

• Traditional TSP to Traditional IRA: No immediate taxes, but RMDs still apply at age 73.

• Traditional TSP to Roth IRA: This is a Roth conversion and is fully taxable in the year of the conversion. It can be strategic if you expect future tax rates to rise, but it can cause a large tax bill upfront.

• Roth TSP to Roth IRA: This is tax-free if done properly and can eliminate future RMDs.

Always review rollover timing and amounts. A large rollover in one year could impact not only your federal income tax but also Medicare premiums and Social Security taxation.

How State Taxes Can Catch You Off Guard

While federal taxes apply to traditional TSP withdrawals, state income taxes vary. Some states do not tax retirement income at all. Others fully tax it as regular income. And some states only exempt pension income from specific sources.

Before deciding when and how to withdraw, you should understand your state’s tax treatment of:

• TSP distributions

• Annuity income

• IRA rollovers

Planning to move in retirement? Factor in how that move could increase or reduce your overall tax burden.

How Withdrawal Sequence Affects Longevity of Funds

The order in which you withdraw from different accounts can significantly affect how long your money lasts. For many retirees, it’s better to spend taxable brokerage assets first, then traditional TSP, and finally Roth TSP or Roth IRA assets last.

This strategy:

• Delays taxes on tax-deferred accounts

• Allows Roth balances to grow longer tax-free

• Helps control your annual taxable income

However, the right order for you depends on your tax bracket, future RMDs, and income needs. Consider a withdrawal strategy that balances current income with long-term tax efficiency.

Choosing Between Pro-Rata and Source-Specific Withdrawals

The TSP allows you to make withdrawals proportionally from your traditional and Roth balances. That’s the default. But since 2022, you can choose to withdraw only from traditional or Roth separately.

Here’s how each impacts your tax situation:

• Pro-Rata: Withdrawals are automatically split based on the proportion of traditional and Roth in your account. This could lead to paying taxes on the traditional portion even if you only needed a small sum.

• Source-Specific: You can choose to withdraw from only Roth or traditional. This allows better tax control, especially if you’re trying to minimize taxable income in a particular year.

If you haven’t updated your withdrawal preferences, check your TSP settings before initiating a withdrawal.

Watch Out for Withholding Surprises

The TSP automatically withholds 20% of most single withdrawals for federal income tax. This doesn’t mean it covers your entire tax bill. If you’re in a higher tax bracket, you may owe more come tax time.

You can adjust the withholding on monthly payments and annuity options, but it’s your responsibility to ensure your withholding matches your total tax liability. Underpayment can lead to IRS penalties.

Avoiding Common Mistakes That Create Tax Shocks

Several oversights can lead to unexpectedly large tax bills:

• Taking large withdrawals without checking the tax bracket

• Forgetting about RMDs and missing the deadline

• Failing to coordinate with Social Security start date

• Not reviewing state taxes before moving or withdrawing

• Ignoring the impact of Medicare IRMAA (income-related surcharges)

Every decision impacts more than just your TSP account. The ripple effects touch taxes, healthcare, and income stability.

The Role of TSP in Your Broader Retirement Income Plan

The TSP is only one piece of your income in retirement. It works alongside your FERS or CSRS pension, Social Security, and possibly other savings. Integrating all these sources requires:

• Understanding how withdrawals impact each other

• Creating a timeline that aligns pension, Social Security, and TSP access

• Minimizing tax overlap and maximizing net income

For example, delaying Social Security while drawing moderate TSP income can reduce long-term taxes and increase lifetime Social Security benefits. But this varies case by case.

Make Informed TSP Moves That Work for You

The way you withdraw from your TSP in retirement isn’t one-size-fits-all. The choices you make now will affect your income, taxes, and peace of mind for years to come. Planning your withdrawals with care gives you more control and helps protect the savings you’ve worked decades to build.

Talk with a licensed professional listed on this website to review your specific situation and build a tax-smart withdrawal plan tailored to your needs.