I’ve written before about ways to navigate the rules for making TSP Withdrawals after Separation from Federal Service. Unlike an IRA (or most employer-sponsored 401k plans) the Thrift Savings Plan (TSP) has strict rules on when and how you may withdraw from TSP – Each one of these TSP Withdrawal events is like using up a ‘Silver Bullet’ from your retirement savings arsenal.
I’ve read many posts here lamenting how inflexible TSP is in allowing withdrawals.
Faithful Gubmints readers, know that there are technically FOUR ways to perform partial withdrawals from your TSP Account.
1st Partial Withdrawal – the ‘Freebie’ – TSP Loan Rollover at Separation.
Kudos to Tammy Flanagan over at GovExec for revealing this Oolie.
Strategy: There is technically a ‘Backdoor’ Partial TSP Withdrawal available to Feds just before they resign or retire. It involves taking a TSP loan at the last minute before you head out the door.
This one’s not for the faint at heart – There are some treacherous tax land mines here, and I’d consult a Tax Professional prior to executing this strategy.
But since there are so many restrictions on when and how you can withdraw from TSP, this loophole is worth mentioning because it is a ‘freebie’ withdrawal – If executed properly.
Example: Quinn Quitter is resigning from federal employment in July at age 43 with a TSP balance of $150,000. In June, Quinn takes a TSP loan for $50,000. Quinn may either
- Pay back the TSP Loan,
- Pay Taxes and Penalties (roughly HALF of the TSP Distribution/Loan amount) on an Early TSP Distribution and keep what’s leftover, OR
- Quinn has 60 days from the TSP Loan Distribution Date to roll the $50,000 over to an IRA Account (or new employer’s 401k plan) and pay no penalties.
Quinn takes the third option. In Mid-July, Quinn rolls his $50k TSP loan disbursement funds from his checking account to a new Rollover IRA Account at Schwab. Quinn has $100,000 left in his TSP.
*** (Gubmints’ note: If you are resigning from federal employment before Eligible Retirement Age, this is a brilliant strategy to take a ‘free’ Partial TSP Withdrawal. I wish I had known about this prior to Separation(!)) ***
2nd Partial Withdrawal – The ‘Textbook’ Partial Withdrawal.
Strategy: At some time after separation, you may fill out Form TSP-77 for a one-time partial TSP Withdrawal.
Example : Quinn Quitter resigned 2 years ago and is now age 45. The markets have moved sideways, and his TSP account balance is still the same as it was at age 43 ($100,000). Quinn fills out TSP Form 77 to have $50,000 rolled over to his Schwab IRA Account. Quinn has $50,000 left in TSP.
3rd Partial Withdrawal – aka the First ‘Full’ Withdrawal.
Strategy: The TSP allows you to do another Partial Withdrawal ‘Chunk’ when you elect to do your ‘Full’ TSP Withdrawal.
Example: Roll the clock forward 15 years. Quinn Quitter is now 60 years old and due to gains in his TSP account, his remaining TSP balance has grown from $50,000 (what was left in TSP at age 45 after his 1st Partial Withdrawal) to $110,000.
Using Form TSP-70, Quinn Elects to take a ‘Full Withdrawal’ of $40,000 from TSP, with the remaining TSP balance of $70,000 spread out over payments totaling $2,400 per year (or $200 per month).
4th Partial Withdrawal – aka the ‘Final’ (Close-out) Withdrawal.
Strategy: This is the Last ‘Partial’ TSP Withdrawal you can make- The one you decide to make when you close out our TSP Account.
Example: Quinn is 62 and wants a ‘do over’ on his ‘Full Withdrawal’ that he did at age 60. Due to solid returns in the G Fund, Quinn’s account balance has remained steady at $70,000 (even though Quinn has taken a total of $4,800 from TSP in 24 periodic monthly payments of $200 to cover some living expenses).
Quinn Fills out form TSP-79 to close out his TSP account and withdraw the remainder of his TSP Balance ($70,000). He chooses to take half as a taxable distribution (a $35,000 check to Quinn Quitter) and rolls the other half ($35,000) to his Schwab IRA Account.
Gubmints Takeaway : If you’re a working Fed, know that these 4 TSP Partial Withdrawal Methods are available to you now and in the future. If you’re retired or separated, you’ve only got 3 ‘Partial TSP Withdrawal’ bullets left.
For More Reading: See TSP Publication 536 (Payments from your TSP Account).
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