This New TSP Withdrawal Strategy Is Gaining Traction With Retirees Who Want More Flexibility and Less Risk

Key Takeaways

• A growing number of retirees in 2025 are using a phased TSP withdrawal approach to reduce tax exposure and gain more control over their retirement income.

• This strategy emphasizes scheduled partial withdrawals, Roth conversions, and flexible monthly payments to align with market conditions and personal financial needs.

Why Traditional TSP Withdrawals May Fall Short

For years, retirees have relied on required minimum distributions (RMDs) or lump-sum withdrawals to tap into their Thrift Savings Plan (TSP) accounts. While straightforward, these traditional methods can lead to unintended tax burdens, limited flexibility, and exposure to market volatility.

• Lump-sum withdrawals can push you into higher tax brackets in a single year.

• RMDs, which begin at age 73, offer no control over timing or amount once they start.

• Scheduled monthly payments often lack the flexibility to adjust for emergencies or shifting needs.

This is where a more adaptive approach becomes valuable.

The Rise of the Phased Withdrawal Strategy

The phased TSP withdrawal strategy is quickly gaining ground in 2025. It allows you to draw from your account in smaller, planned increments while layering in techniques like Roth conversions and dynamic rebalancing. The goal is to preserve your assets longer, keep your tax liability manageable, and give you greater control.

Rather than waiting until you’re forced to begin RMDs, you take a proactive approach starting as early as age 59½ when penalty-free withdrawals become available.

How the Strategy Works in Practice

Here’s a detailed breakdown of how the phased TSP withdrawal strategy operates and why it’s becoming popular:

1. Start Early with Penalty-Free Withdrawals

Once you reach age 59½, you can begin making withdrawals from your TSP without incurring the 10% early withdrawal penalty. Rather than waiting until age 73 for RMDs, consider:

• Taking small withdrawals annually between ages 60 and 72.

• Spreading the income over several tax years to stay in a lower tax bracket.

• Using the funds to cover living expenses while delaying Social Security to increase future benefits.

2. Incorporate Roth Conversions Gradually

Between retirement and the start of RMDs, many retirees experience a “tax valley,” where their income is relatively low. This period is ideal for strategic Roth IRA conversions:

• Convert portions of your TSP into a Roth IRA each year.

• Pay taxes on the conversion at potentially lower rates.

• Roth IRAs are not subject to RMDs and can grow tax-free.

3. Set Up Flexible Monthly Payments

TSP allows you to set monthly payments based on either a fixed dollar amount or your life expectancy. The phased approach encourages choosing the fixed amount option:

• You can adjust the amount annually.

• You have the option to pause or modify payments within TSP rules.

• This gives you income predictability without sacrificing access to the rest of your funds.

4. Use One-Time Withdrawals as Needed

Another tool in this strategy is the use of additional one-time TSP withdrawals:

• Ideal for unexpected expenses, like home repairs or medical costs.

• Keeps your regular income plan on track without requiring loans or selling investments at a loss.

In 2025, TSP rules still allow up to four partial post-separation withdrawals per year, in addition to your monthly payments.

5. Avoid Large Tax Surprises

By carefully managing how much you withdraw each year and layering Roth conversions, you avoid spiking your Modified Adjusted Gross Income (MAGI), which could otherwise:

• Push you into higher federal tax brackets.

• Trigger Medicare IRMAA surcharges (which start if MAGI exceeds $106,000 for individuals or $212,000 for couples).

• Affect the taxation of your Social Security benefits.

6. Time Withdrawals Around Market Performance

This strategy gives you flexibility to time larger withdrawals when your TSP balance is higher due to strong market performance. Conversely, during market downturns, you can:

• Reduce your withdrawal amount.

• Rely more on outside income or Roth IRA funds (which are not tied to required distributions).

• Minimize losses by avoiding forced sales of depreciated assets.

7. Coordinate With Other Income Sources

This strategy works best when integrated with your other retirement income sources:

• Pension (such as your FERS annuity)

• Social Security (which can be delayed for higher payments)

• Other savings or IRAs

You can design a withdrawal timeline that fills income gaps while preserving tax-deferred growth for as long as possible.

Key Considerations Before Starting

Before you begin using this strategy, take into account these factors:

• TSP withdrawal rules: While flexible, TSP does require that you follow its structure for scheduled payments and limits on partial withdrawals.

• Tax implications: Every withdrawal and Roth conversion counts as taxable income.

• Medicare coordination: Higher withdrawals can increase your MAGI, affecting your Part B and D premiums.

• Legacy goals: If you plan to leave assets to heirs, consider how Roth conversions and lower RMDs can support that.

When to Begin the Phased Approach

The ideal time to begin this strategy is in the early years of retirement or as you approach age 59½. Some milestones to consider:

• Age 55: If you separate from service during or after the year you turn 55, you can make penalty-free withdrawals from your TSP.

• Age 59½: Universal eligibility for penalty-free withdrawals from TSP and IRAs.

• Ages 60 to 72: Prime window for phased withdrawals and Roth conversions.

• Age 73: RMDs begin, limiting your flexibility.

Starting early gives you nearly a decade of planning opportunities.

How It Compares to the Traditional Approach

The traditional strategy involves deferring withdrawals until RMDs begin and using a fixed income stream or periodic lump-sums. Here’s how the phased strategy offers more control:

• Tax Flexibility: Instead of facing large tax bills from delayed lump-sum RMDs, you spread income over time.

• Market Timing: You have more control over when and how much you withdraw, reducing forced sales.

• Income Smoothing: You can create a more even income stream throughout retirement.

• Custom Planning: You’re not boxed into a one-size-fits-all monthly payment.

Common Missteps to Avoid

As this strategy becomes more popular, some retirees may misuse or miscalculate. Be cautious of:

• Withdrawing too little and falling short on income.

• Converting too much to Roth in one year, triggering a high tax bill.

• Forgetting about the impact of MAGI on Medicare and Social Security.

• Failing to rebalance TSP holdings to match changing risk tolerance.

Why It’s Catching On in 2025

In 2025, the investment climate, tax rules, and retirement timelines all make this strategy more appealing:

• Market volatility continues to make retirees cautious about large lump-sum withdrawals.

• Increased awareness of Medicare IRMAA thresholds has made retirees more tax-conscious.

• TSP flexibility allows more retirees to customize their withdrawal plans.

• Longer lifespans mean retirement income needs to last 25–30 years or more.

The phased approach offers a dynamic way to manage this challenge.

Aligning Your Strategy With Retirement Goals

This strategy is not about withdrawing less; it’s about withdrawing smarter. It’s designed for retirees who want to:

• Preserve principal for as long as possible.

• Stay in control of how and when they take income.

• Minimize taxes and reduce Medicare cost surprises.

• Ensure long-term financial security.

You’ll need to review your plan annually, make adjustments based on market conditions and income needs, and coordinate with your broader retirement income picture.

Work With a Professional to Personalize It

While this strategy offers more flexibility, it also requires careful coordination. Getting guidance from a licensed professional can help ensure you:

• Don’t accidentally create large tax consequences.

• Take full advantage of Medicare planning windows.

• Create a withdrawal timeline tailored to your specific income, savings, and life goals.

A Flexible Withdrawal Strategy Can Help You Stay in Control

If you’re entering retirement in 2025 or have already retired, now is the time to take a fresh look at how you approach TSP withdrawals. A phased strategy allows for greater control, more flexibility, and potentially less risk over time. It’s not just about how much you withdraw, but when and why.

To explore your options and craft a withdrawal plan that aligns with your retirement goals, speak with a licensed professional listed on this website.