Before you take money out of your TSP, weigh these trade-offs

The Thrift Savings Plan can be one of the most valuable retirement assets for federal employees (as well as members of the uniformed services), but once you leave federal service, the distribution decision is not just a matter of deciding how much cash you need. There are other important considerations to understand before you can select the dollar amount you will need to make your retirement financially secure. Remember that once a TSP withdrawal is processed, it generally cannot be reversed, so these are all important considerations to understand before deciding on your distribution plan.

If you have a minimum balance of $200, you may keep your money in the TSP. TSP elections for withdrawal include taking a partial distribution (minimum amount is $1,000), electing a total distribution, purchasing a life annuity (must have at least $3,500 to elect this option), setting up installment payments or combining methods.

Keeping money in the TSP may be appropriate if you do not need immediate income, because the plan offers simple investment choices and historically low expenses. Installment payments can create predictable cash flow while leaving the remaining balance invested. A life annuity can provide income for life, but it is typically irreversible and may reduce flexibility for heirs or future emergencies. A lump sum may be useful for a specific need, but it can create a large taxable event and remove assets from a disciplined retirement structure.

Taxes

Traditional TSP withdrawals are generally taxed as ordinary income in the year received. That means the timing and size of distributions can affect your marginal tax bracket, taxation of Social Security benefits, net investment income planning, state income taxes and estimated-tax requirements. Adding additional taxable income may even have an impact on the premiums you will pay for Medicare Parts B and D.

The TSP reports distributions to the IRS and may be required to withhold federal income tax from taxable payments, but remember that this withholding is not the same as the final tax that may be due. In addition to the IRS and federal income taxes, remember that many states will also consider these distributions taxable on the state level.

States that generally do not tax TSP or similar retirement-account distributions include the following states that don’t have an income tax — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — as well as states that generally exempt most retirement distributions, such as Illinois, Iowa, Mississippi and Pennsylvania.

State rules can change and may depend on residency, age, income level and the type of retirement income, so retirees should verify their state’s current rules before making large withdrawals or relocating to a state because of favorable income tax rules. Don’t forget about property tax, sales tax and other taxes that states need to collect to make the state an attractive place to retire.

Retirees should coordinate withdrawals with other taxable income, deductions, charitable giving and any planned Roth conversions.

Required minimum distributions (RMDs) also matter. If you are subject to RMDs, waiting until the first-year deadline may cause two taxable distributions in one calendar year: the delayed first RMD and the current-year RMD. That income bunching can increase taxes and may ripple into other areas, including Medicare premiums.

Roth TSP balances are treated differently from traditional balances under recent rules, but taxpayers should confirm current requirements before making elections. If you were born before 1960 and have left federal service, your RMD is at age 73 and the first distribution is due by April 1 of the year after you turn 73. If you were born in 1960 or later, your RMD age is 75 and your first distribution is due by April 1 of the year after you turn 75 or older and have left federal service.

If you are retiring early, be sure to understand the 10% early withdrawal penalty tax if you plan to take distributions or elect a withdrawal option before you reach age 59½. There is good news for some, since the additional 10% tax generally does not apply to payments made from your TSP account if you separate from federal service during or after the year you reach age 55.

Additionally, if you are a public safety employee as defined in section 72(t)(10)(B)(ii) of the Internal Revenue Code, payments made after you separate from service during or after the year you reach age 50 or have 25 years of service under the TSP are also exempt.

If you elect a life annuity, these payments will not be subject to the 10% penalty. If you elect a distribution of substantially equal payments over your life expectancy, these payments will not be penalized, but you must maintain this election until you reach age 59½.

The penalty can be applied retroactively if you stop your life expectancy installments or take additional money from your account within five years of beginning your installments or before you turn 59½ years old, whichever is later. See the TSP booklet 26, Tax Rules About TSP Payments, for more tax information and additional exceptions. Also, refer to IRS Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits.

Living longer

One reason TSP distribution planning is so important is that older adults are one of the fastest-growing segments of the U.S. population, and more retirees may need their savings to last 25, 30 or even more years in retirement. Many retirees underestimate how long retirement can last.

Taking too much too soon can leave the later years exposed to inflation, medical costs, long-term care expenses or the loss of a spouse’s income. On the other hand, withdrawing too little may lead to unnecessarily large RMDs later or leaving out some of the enjoyment this additional income can add to your early retirement years.

A sustainable withdrawal strategy should consider expected longevity, survivor needs, inflation, investment risk, guaranteed income sources (i.e., Social Security benefits, CSRS, FERS retirement benefits, etc.) and whether it is important to preserve assets for your beneficiaries.

The following examples show why the distribution rate matters as much as the investment return. These are simplified illustrations using a $500,000 TSP balance, annual withdrawals taken at year-end, no additional contributions, no taxes, no inflation adjustment and steady annual returns of either 6% or 10%.

Actual results will vary because market returns are not level from year to year, taxes reduce spendable income and increasing withdrawals for inflation will shorten the timeline.

If you withdraw…

$25,000/year or 5% of your $500,000 balance, your payments can last indefinitely if a rate of return of at least 6% is earned consistently before costs and taxes are deducted.

However, if you increase your withdrawal amount each year by an estimated 3% inflation rate to maintain your purchasing power, your investment will last for only 29 years.

If you withdraw 7% of your balance or $35,000/year, you will run out of money in about 33 years if you earn a consistent 6% rate of return.

Your money may last indefinitely if 10% is earned consistently before costs and taxes.

However, if you add a rate of 3% or 4% inflation, your spending will quickly overtake the growth, and you may run out of money in as little as 26 years.

Unfortunately, if you start taking out lump-sum distributions in addition to the stream of payments, you may deplete your balance much more quickly.

A 10% average return can still produce poor outcomes if losses occur early in retirement, because withdrawals during down markets permanently reduce the number of shares left to recover. This is known as sequence-of-returns risk.

For that reason, retirees should test their TSP election against conservative return assumptions, inflation-adjusted withdrawals, income taxes, Medicare premium thresholds and the possibility of a very long retirement.

These examples do not guarantee these projections or recommendations! Try this calculator from USAA to help gauge how long your savings may last using estimated rates of inflation, your tax bracket and estimated rate of return.

Too much risk? Consider the life annuity

A TSP life annuity converts part or all of your account balance into guaranteed monthly payments for life through the TSP annuity provider. The primary advantage is longevity protection: Payments continue even if you live far longer than expected.

It can also reduce the pressure of managing investments in retirement and may be useful for someone who wants more guaranteed income in addition to a FERS or CSRS pension and Social Security.

There is a big trade-off to these advantages. Once TSP money is used to purchase a life annuity, you give up control. The payment amount depends on the purchase amount, age, interest-rate environment and selected features.

A single-life annuity may pay more each month than a joint-life annuity, but payments can stop at your death unless a qualifying feature is elected. A joint-life annuity can protect a spouse or other eligible joint annuitant, but the monthly payment is usually lower because the insurer may have to pay for two lifetimes.

Inflation is another key issue. Level payments start higher but remain the same, so purchasing power can decline over time. Increasing payments start lower but rise by a stated percentage each year, which may help offset inflation, although the increase may not fully match actual living-cost increases.

Retirees should also understand beneficiary features, such as cash-refund or certain-period options, because adding protection for heirs can reduce the monthly income. Here are some of the options with the key pros and cons:

Single life annuity with level payments provides the highest starting monthly income and the payments will last as long as you do, but there will be no continuing payment to your survivors unless you add additional features, and your purchasing power will be eroded over time since the payments will not increase.

Single life annuity with increasing payments provides a lower starting payment but will increase over time by a 2% annual adjustment that will help reduce some of the risk of inflation. However, these increases may not keep pace with actual inflation.

Joint life annuity with spouse and increasing payments will provide lifetime income for two lives with payments that rise over time. Typically, the lowest starting income of these examples is because it combines survivor protection with increasing payments.

Remember that electing a 50% survivor option will pay 50% of the payment to the survivor (not “your” survivor). Full payment is only paid while you are both living. To keep the payment level over both lifetimes, a 100% survivor election is available with or without the increasing payment option added.

The following illustration assumes $250,000 is used to purchase a single-life, level-payment TSP annuity. There is no payment to your beneficiary regardless of how long you survive after the annuity begins unless you add the “10-year certain” feature or “cash refund” feature, which would reduce these estimates.

This example uses the current August 2026 TSP annuity interest-rate index of 4.95% as the basis for the comparison, but the figures should still be treated as estimates rather than exact quotes. Actual TSP annuity payments depend on the participant’s exact age at purchase, the annuity provider’s factors, the option selected, whether increasing payments or refund features are added and the rate in effect when the annuity is purchased.

If a single life annuity is purchased at age 50, the monthly payment would be $720 and over 30 years, you would receive approximately $259,200. Over 10 years, the annuity would pay only $86,400.

If purchased at age 60, the monthly payment would be $1,095 and over 30 years, you would receive approximately $394,200. Over 10 years, the annuity would pay only $131,400.

This comparison highlights the longevity trade-off. A younger retiree generally receives a smaller monthly payment because the insurer expects to pay for more years. If that retiree lives long enough, the cumulative payments can eventually exceed the original $250,000 purchase amount.

However, if death occurs early and no refund or survivor feature was elected, the retiree may receive far less than the amount used to buy the annuity. Adding refund protection, survivor protection or increasing payments can change the result and usually reduces the initial monthly income.

You can use the TSP Annuity Calculator to try this for yourself.

TSP distributions can also affect Medicare Part B and Part D premiums through the income-related monthly adjustment amount, commonly called IRMAA. Medicare uses modified adjusted gross income from a prior tax year to determine whether higher-income beneficiaries owe surcharges.

A large TSP withdrawal, Roth conversion or RMD year can therefore increase Medicare costs two years later. This does not mean distributions should always be minimized, but it does mean retirees should model the after-tax and after-premium result before taking a large payment.

If your modified adjusted gross income as reported on your IRS tax return from 2024 is above $109,000 if you file an individual tax return or above $218,000 for those filing a joint return, you’ll pay the standard Part B premium of $202.90 (2026) and an income-related monthly adjustment amount.

Estate planning issues after retirement

Estate planning should also be part of the TSP distribution decision. Beneficiary designations generally control who receives the account at death, so retirees should review them regularly and coordinate them with a will, trust, life insurance, pension survivor election and family circumstances.

This review is especially important after marriage, divorce, the death of a spouse, the birth of grandchildren or a blended-family change.

Retirees should also consider whether a surviving spouse or other beneficiary will need continued income. A withdrawal strategy that works during a couple’s joint lifetime may not be sufficient if one spouse dies and household income changes.

Traditional TSP balances are generally taxable when distributed to beneficiaries, so leaving a large account to adult children can create income-tax consequences for heirs, particularly if they are already in high-earning years. A spouse may have more flexibility than a non-spouse beneficiary, and an IRA rollover may offer additional beneficiary-planning tools in some cases.

The TSP annuity election also has estate-planning consequences. Money used to purchase a single-life annuity may no longer be available to heirs unless a refund, survivor or certain-period feature is elected.

Those protections can help address survivor or legacy goals, but they usually reduce the starting monthly income. Retirees should balance guaranteed lifetime income against the need for liquidity, long-term care expenses and the desire to leave assets to family or charity.

Trust planning may be appropriate when beneficiaries are minors, have disabilities, struggle with financial management or are part of a blended-family plan, but retirement accounts and trusts require careful tax drafting.

Charitable planning should also be coordinated, because taxable retirement assets may be better suited for charitable gifts than after-tax assets. In short, the TSP should not be treated only as an income source. It is also an estate-planning asset that should fit with the retiree’s broader tax, legal and family goals.

Should I stay or should I go?

The IRA-versus-TSP decision is rarely all-or-nothing. Leaving money in the TSP may preserve low-cost investment access, the G Fund, creditor protections, simplicity and certain penalty exceptions.

Rolling money to an IRA may provide broader investment choices, more flexible beneficiary planning, qualified charitable distribution options, professional account management or coordinated Roth conversion strategies. However, IRAs can also carry higher costs, sales incentives, more complicated investment choices and different protection rules.

A direct rollover can avoid current taxation when moving traditional TSP money to a traditional IRA, but an indirect rollover, missed deadline or Roth conversion can create taxable income.

A qualified financial professional can help compare TSP distribution choices, but the selection should be made carefully. The right advisor should understand federal benefits, TSP withdrawal rules, the FERS or CSRS pension, Social Security claiming, Medicare premium thresholds, beneficiary planning and the tax impact of traditional and Roth withdrawals.

This is especially important because TSP elections often interact with several other retirement decisions at the same time. Ask whether the professional you are considering acts as a fiduciary, how they are paid, what credentials they hold and whether they have specific experience working with federal employees.

Fee-only, fee-based, commission-based and insurance-licensed professionals may all provide different services, but their compensation structures and potential conflicts should be clear. It is also wise to ask whether the advisor will coordinate with a tax professional or estate planning attorney when the TSP decision involves Roth conversions, RMDs, trusts, charitable planning or large rollovers.

Before hiring someone, consider asking practical questions:

Have you worked with federal retirees before?

Can you compare leaving money in the TSP with rolling assets to an IRA?

Will you provide a written analysis of taxes, Medicare effects, survivor needs and investment risks?

Do you recommend specific products, and if so, how are you compensated? Will I retain access to low-cost TSP options if I move money?

A good professional should be willing to explain both the benefits and drawbacks of each option, not simply recommend a rollover or annuity without showing how it fits the retiree’s broader plan.

Before making an election, here are five questions to consider:

How much income do I need now?

What tax bracket will this distribution create?

Could the distribution increase Medicare premiums?

Will I need penalty-free access before age 59½?

Am I giving up TSP features that are hard to replace?

The best TSP distribution strategy is the one that balances current income needs with tax efficiency, Medicare planning, longevity protection and flexibility. Because the consequences can last for decades, a careful review with a qualified tax or financial professional is often worth the effort before the election is submitted.