You Can Withdraw From Your TSP—But There’s a Big Difference Between Can and Should

Key Takeaways

• Just because you’re eligible to withdraw from your TSP doesn’t mean it’s the best financial move at that moment. Timing and tax strategy matter.

• Making informed decisions about TSP withdrawals can protect your long-term income, minimize tax burdens, and support your retirement goals.

You Have Options When You Separate from Service

When you separate from public service, whether you retire or resign, the Thrift Savings Plan gives you flexibility. You can:

• Leave your money in the TSP

• Take a partial or full lump sum withdrawal

• Set up installment payments

• Purchase a life annuity

The fact that you can access your funds doesn’t mean you should rush to do so. The choices you make now can shape your financial security for the next 20 to 30 years.

Eligibility to Withdraw Doesn’t Guarantee It’s Smart

You’re eligible to begin penalty-free withdrawals from your TSP at age 59½. If you separate from service in the calendar year you turn 55 (or 50 for special category employees like law enforcement officers), you may withdraw earlier without the IRS 10% early withdrawal penalty.

That said, just because the penalty is off the table doesn’t mean taxes or long-term consequences disappear. Many retirees withdraw too early, or in the wrong way, and find themselves paying more in taxes or running short later.

Required Minimum Distributions Start at Age 73

In 2025, the required minimum distribution (RMD) age is 73. This means that if you turned 73 in 2025, you must begin withdrawing a minimum amount from your traditional TSP by April 1, 2026. After that, annual RMDs must be taken by December 31 each year.

If you delay your first RMD until April 1 of the following year, you must take two RMDs in one year, which could bump you into a higher tax bracket.

The Tax Consequences Are Often Underestimated

TSP withdrawals are considered ordinary taxable income if taken from the traditional TSP. This can affect:

• Your federal tax bracket

• State taxes (if applicable)

• Taxation of Social Security benefits

• Medicare Part B and D premiums (due to IRMAA thresholds)

Roth TSP withdrawals are tax-free if you’re at least 59½ and your Roth account is at least five years old. Otherwise, you could owe taxes on earnings.

This is why the method and timing of withdrawals matter just as much as the amount.

Installment Payments Aren’t Automatically Lifetime Income

If you choose monthly, quarterly, or annual installment payments from your TSP, you can:

• Select a fixed dollar amount, or

• Choose to have payments based on IRS life expectancy tables

However, these payments are not guaranteed for life unless you convert your TSP into a life annuity. If your balance runs low or markets drop significantly, your payments could end prematurely.

Leaving your funds in TSP gives you access to low-cost investment options and allows you to change payment settings once per calendar month. But don’t mistake installment payments for a true pension replacement.

Timing Your Withdrawals Can Help You Reduce Taxes

Some retirees intentionally delay withdrawals from their TSP until age 73 to minimize taxes. Others begin early, before claiming Social Security, to fill up lower tax brackets and reduce future RMDs.

In between retirement and RMD age is what’s often called the “tax planning window.” During this period, you may:

• Convert portions of traditional TSP to Roth IRAs

• Take strategic withdrawals to reduce future taxable income

• Coordinate with other retirement income sources

This period usually spans from your retirement date (often mid-to-late 50s or early 60s) until you turn 73. The window can be a powerful tool, but only with a coordinated withdrawal plan.

Annuities Provide Security but Come With Trade-Offs

The TSP allows you to use all or part of your account to purchase a life annuity. This guarantees monthly income for life, but it is irrevocable once chosen.

Types of annuities include:

• Single life

• Joint life with spouse

• With or without cost-of-living adjustments

Pros:

• Predictable income for life

• Protection from outliving your savings

Cons:

• No access to the lump sum once annuitized

• Less flexibility if financial needs change

An annuity may be right if you prioritize income security and want a fixed monthly amount. But it’s critical to assess whether you’re sacrificing growth or flexibility.

Roth vs. Traditional: Withdrawal Rules and Strategy

Your TSP may include both traditional and Roth contributions. The withdrawal rules differ:

• Traditional TSP: Withdrawals are taxable as income.

• Roth TSP: Tax-free withdrawals only if you’re 59½ and the Roth account is at least five years old.

Importantly, all withdrawals come proportionally from both sources unless you transfer funds to an IRA and separate them.

Roth accounts can be powerful in retirement, especially if your future tax rate is expected to rise or if you’re aiming to reduce taxable income in your RMD years.

Don’t Withdraw Just Because You Can

There are cases where retirees withdraw from their TSP without needing the money, sometimes to “play it safe” or because they don’t trust markets. While risk management is essential, withdrawing without a strategy can:

• Lock in losses during market downturns

• Trigger unnecessary taxes

• Shorten the lifespan of your savings

Sometimes, doing nothing is the better move. If you don’t need the money, leaving it in the TSP (or rolling it to an IRA) can help preserve growth and flexibility.

Spousal and Beneficiary Considerations

If you’re married, TSP requires spousal consent for certain withdrawals, including life annuities and full account withdrawals. Consider how your decisions affect survivor benefits.

Upon your death, your TSP can:

• Transfer to a spouse via a beneficiary participant account

• Be inherited by non-spouse beneficiaries and subject to the 10-year rule for full distribution

Make sure your beneficiary designations are current. TSP does not follow wills or trusts when distributing funds.

Withdrawal Timing Impacts Medicare and Social Security

Your TSP withdrawal strategy can impact more than just taxes. It can also influence:

• When you should claim Social Security

• Whether you cross IRMAA thresholds for Medicare

For example, a large TSP withdrawal could push your income above the $106,000 IRMAA threshold (2025) for individuals, raising Medicare Part B premiums two years later.

Strategic withdrawals can help you:

• Delay Social Security and earn higher monthly benefits

• Reduce taxable income in high-RMD years

Aligning your TSP strategy with your Medicare and Social Security timelines ensures that you aren’t caught off guard.

Know Your Rollover Options

You can roll over your TSP to an IRA or another eligible plan. Reasons to consider a rollover include:

• Access to a wider range of investments

• Control over withdrawal order and timing

• Separating Roth and traditional balances

However, you may lose the TSP’s low fees, simplicity, and strong protections. A rollover isn’t a decision to make lightly, especially if you’re not sure how you’ll manage the funds afterward.

Your TSP Is Just One Piece of the Puzzle

Many public sector retirees have multiple sources of income:

• FERS or CSRS annuity

• Social Security

• TSP withdrawals

• IRAs or other retirement savings

The key is to coordinate these income streams. If you claim Social Security early, delay TSP withdrawals, and rely on your pension, you might leave tax-saving opportunities on the table.

A withdrawal strategy should account for your:

• Age

• Life expectancy

• Marital status

• Health

• Income needs

• Tax picture

Take Time to Build a Withdrawal Strategy That Lasts

A withdrawal strategy isn’t about reacting to headlines or rushing to move your money. It’s about building a timeline that supports:

• Consistent income

• Tax efficiency

• Flexibility for unexpected costs

In many cases, it helps to start planning five to ten years before your retirement date. This gives you room to:

• Do Roth conversions in lower-income years

• Rebalance your TSP allocations

• Decide if and when to move money to IRAs

If you wait until your RMD deadline to take your first withdrawal, you may lose years of planning opportunities. Instead, take a proactive approach.

Your TSP Deserves a Plan, Not Just Access

Withdrawing from your TSP isn’t just a technical process. It’s a long-term decision with financial, tax, and emotional consequences. Before making your move, review your needs, coordinate your income sources, and consider how your choices will look not just today, but 10 or 20 years from now.

If you need help figuring out where to begin or whether you’re making the right withdrawal choices, get in touch with a licensed professional listed on this website.