After you leave the Service, you have options to consider regarding your TSP. As with most financial situations, there is no right or wrong option, just the option that makes the most sense for your life.
An important consideration should be keeping your retirement accounts limited to as few as possible over your working lifetime. This can help hold down costs, simplify your financial situation and maintain a workable span of control for managing your accounts.
Option 1: Leave Your TSP Where It Is.
You don’t have to do anything with it. You can’t contribute to it from a paycheck since you aren’t an employee. But you can hold your investment in it. As a former Service member or a retiree, the TSP allows you to manage the funds by moving your money among the fund choices. Though you can’t contribute to your TSP after you leave the Service, you can roll money from other retirement accounts back into the TSP.
Good reasons to keep your TSP include:
- Cost. The TSP is the cheapest investment account you’ll ever own.
- Simplicity. You have 6 investment options.
- Use the TSP as your base retirement account. Roll money from other retirement accounts (future ex-employers’ 401ks for example) into the TSP to keep your retirement investments consolidated in one sock, so to speak.
Option 2: Roll Your TSP Out Into Another Retirement Account
The other retirement account would be your Individual Retirement Account (IRA) or your future employer’s 401k account. This will close your TSP account for good unless you rollover a partial amount of your TSP account which is also an option. Should you ever go back to work for the federal government, you’ll open a new TSP account.
Good reasons to roll your TSP funds out and close the account include:
- To maintain only active accounts. Keep the accounts that you actually contribute to. Drop accounts that are out-of-sight and out-of-mind. Helps simplify your retirement account management. This assumes you don’t use your TSP as your “base camp” for retirement assets.
- Better/more investment options. You won’t be limited to the 6 TSP options.
- Maintain fewer accounts. You’ll essentially own only two retirement accounts; your active IRA and your current employer’s account. Your IRA serves two purposes; repository for dead employer accounts as you change jobs and a place to contribute extra money for your future after maxing out contributions to your employer’s account.
Option 3: Withdraw Your Money From the TSP to Use It Now
Big mistake. The only time this option makes sense is when you have severe financial hardships and you need money now to handle the problems. To use this retirement account early, prior to age 59½, you pay both regular income taxes on the amount withdrawn and a 10% tax penalty (plus possible state income taxes). What’s worse is that you rob your future of the assets you could have after compounding the investment over the decades. This option is a last resort.