Thousands of federal employees have left or will be leaving federal service sometime between now and the end of 2025. The “deferred resignation program” (DRP) was established by the Trump administration to allow employees to continue in federal service, getting paid and then voluntarily resign sometime before September 30, 2025. Reductions In Force (RIFs) are also underway across many federal government departments and agencies.
If any of these employees were eligible for immediate or early retirement, then they could retire immediately. But if an employee was not eligible for immediate or early retirement, then the employee simply resigned from federal service. This column discusses the options a separating employee has with their Thrift Savings Plan (TSP) traditional and Roth accounts.
A federal employee who leaves federal service can stay with the TSP. There is no requirement to withdraw any money from his or her TSP accounts until the departed employee and TSP participant reaches his or her TSP required beginning date (RBD). The RBD is April 1 following the year the TSP participant becomes age 73 for TSP participants born between January 1,1951 and December 31,1959 who have left federal service. The RBD is April 1 following the year a TSP participant becomes age 75 for TSP participants born after December 31, 1959. All TSP participants should be aware that only the traditional TSP account is subject to RMD. Effective January 1,2024 the Roth TSP account is not included in the calculation of the TSP RMD. This means that the Roth TSP account does not have to be withdrawn at any time during the Roth TSP participant’s lifetime.
While a TSP participant’s money remains in the TSP, the money continues to grow. The TSP participant always has secure access to manage his or her investments online in MyAccount.
Contributions to the TSP
1. Employees contributions. Upon leaving federal service, a TSP participant can no longer contribute to the TSP. For more information about making TSP contributions, participants should go to https://www.tsp.gov/making-contributions/.
2. Agency contributions. While in pay status, TSP participants who are covered by FERS receive Agency Automatic contribution (one percent of current year SF 10 salary) and Agency Matching Contributions on their own TSP contributions. Agency contributions stop a TSP participant is no longer in pay status. For more information about agency contributions, participants should go to: https://www.tsp.gov/making-contributions/contribution-types/.
Moving Money into a TSP Participant’s Account
Upon leaving federal service, a TSP participant cannot make direct contributions to the TSP. But a TSP participant can still make indirect contributions to the TSP by making rollovers from other eligible retirement plans and traditional IRAs. For more information about rollover contributions to the TSP, participants should go to: www.tsp.gov/tsp-basics/move-money-into-tsp.
TSP Loans
A TSP participant who has a TSP loan – general purpose TSP loan or a primary residence loan – must decide if the participant wants to immediately pay off the loan, keep the loan open and make monthly loan payments, or allow the loan to be foreclosed and accept the outstanding balance and accrued interest as taxable income.
Failure to make loan payments in accordance with a TSP participant’s Loan Promissory Note can have serious financial consequences. A TSP participant who has a loan is responsible for ensuring that their loan payments are correct and submitted on time. For more information, TSP participants should go to: https://www.tsp.gov/tsp-loans/.
Withdrawals and Distributions from TSP Accounts
If a TSP participant separates from federal service and is younger than age 55 in the year he or she separates, then the participant will have to wait until he or she is age 59.5 to make penalty-free withdrawals from the traditional TSP. In addition to owing federal and state income taxes on traditional TSP withdrawals, a TSP participant who makes a pre-age 59.5 withdrawal will be subject the IRS’ 10 percent early withdrawal penalty tax.
A TSP participant who leaves federal service before age 55 and is need of income from the traditional TSP will not be subject to the 10 percent IRS penalty by using one of the following three TSP withdrawal options:
1. TSP annuity. The participant requests that a portion of the participant’s TSP account be used to purchase a TSP annuity. The TSP has made arrangement with a private insurance company to annuitize the participant’s TSP account. Once the account is annuitized, the TSP participant will receive taxable but penalty-free monthly payments for the participant’s life. The TSP annuity purchase is irrevocable and cannot be reversed.
2. Monthly payments based on life expectancy. A TSP participant can request TSP computed monthly installments payments based on IRS life expectancy tables Life expectancy installment amounts are calculated using a TSP participant’s entire traditional TSP account balance. Monthly payments are recomputed each year based on the participant’s age and account balance at the end of the preceding year. Monthly payments ae subject to federal and state income taxes, but no early withdrawal penalty, and must continue for the later of five years or age 59.5.
3. Rollover to traditional IRS for 72(t) payments. A TSP participant can request that a portion of his or her traditional TSP account be directly rolled over to a traditional IRA. Once the funds are in the traditional IRA, the TSP participant can request from the IRA custodian that IRA distributions based on Internal Revenue Code (IRC) Section 72(t) be made. There are three payment options: (1) Life expectancy; (2) Amortization; and (3) Annuitization. Payments based on amortization will likely result in the highest monthly payments. With any payment options, full federal and state income tax payments will have to be paid but no 10 percent early withdrawal penalty. Under IRC Section 72(t) monthly payments must continue for the later of five years or age 59.5.