What Will Happen to My TSP When I Quit My Job?

by Michael Keenan

Thrift savings plans help federal employees save money for retirement by offering employer matches and tax benefits. But, most people will change jobs at least once during their career. What happens to your TSP after you leave your job is usually up to you, unless your TSP is particularly small when you stop working.

Automatic Cashout

If your TSP account is worth less than $200, you will be automatically cashed out when you leave your job, even if you're under 59 1/2 years old. However, you can still avoid early withdrawal penalties and taxes on the withdrawal if you roll over the distribution into another tax-deferred qualified retirement plan, such as a traditional IRA, within 60 days. If not, the withdrawal counts as taxable income and, if you're under 59 1/2, it gets slapped with an extra 10 percent tax penalty.

Leaving Money in TSP

If your TSP balance is more than $200, you have the option to leave the money in your TSP even after you leave your job. This allows you to maintain the tax-sheltered growth of the money and take advantage of the TSP's low administration rates. Plus, if you're under 59 1/2 years old, you won't have to worry about any early withdrawal penalties if you leave the money where it is. If you choose to keep the money in the TSP, you must start taking distributions by the year you hit 70 1/2 years old.

Withdrawal

Once you've left your job, you're allowed to take out your money, but it will count as taxable income. There's no special tax rate for TSP withdrawals; it just gets added to your taxable income for the year so it's taxed at your marginal rate. If you're under 59 1/2, you're usually hit with a 10 percent additional tax penalty. However, since you're leaving your job, you can escape the penalty if you're 55 or older when you check out. For example, if you leave at age 56, you can take distributions penalty-free. However, if you leave the job at age 54, you're stuck waiting until 59 1/2 before you can avoid the penalty.

Rollover

You can also roll the money from your TSP into another tax-sheltered retirement account, like an IRA or a plan sponsored by your new employer. As long as the plan is a tax-deferred account, you won't owe any taxes. If you roll it to a Roth account, you'll pay taxes, but not penalties, on the conversion amount, but your eventual distributions can come out tax-free. If you want to move the money, consider using a direct transfer, where the TSP administrator moves the money straight to the new plan without paying you first. If you receive a check, the TSP withholds 20 percent for federal income taxes and you'll have to make that portion up from your own funds if you want to roll over the entire amount. For example, say you have $100,000 in your TSP when you leave service. If you do a rollover, you only get a check for $80,000. If you only roll over the $80,000 you receive, the last $20,000 counts as a permanent distribution, subject to income tax and any penalties that apply.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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