Think you're ready to tap your TSP? Here's what you might be missing

When you retire under the Federal Employee’s Retirement System (FERS), you may need all three parts of FERS to fully retire. FERS was designed as a three-part retirement system which includes the FERS Basic Retirement Benefit, Social Security, and the Thrift Savings Plan (TSP). Employees who retire before age 62 with an unreduced FERS basic retirement benefit are entitled to a FERS Special Retirement Supplement to bridge the gap between their retirement and qualifying for Social Security.  

But what about the rules for using your retirement savings? There are a few key ones—and some good rules of thumb—you’ll want to keep in mind when you're thinking about taking money from your TSP so you can finally stop working and fully retire.

First, once you leave the federal government, you’ll no longer be able to make employee contributions to your TSP account. However, you can still change your investment mix, transfer eligible money into your account, and continue to enjoy the low administrative expenses of maintaining your retirement savings in the TSP.  As you prepare to leave federal service, here are some important things you must do: 

• Make sure the TSP always has your current address. 

• If you have any TSP loans, decide if you want to pay them off, keep them open and set up monthly payments, or allow them to be foreclosed and accept the outstanding balance and accrued interest as taxable income. 

• Read the TSP booklets Distributions and Tax Rules about TSP Payments to fully understand your options and their consequences. 

In the meantime, let’s revisit some general principles about tapping into your TSP after retirement. Here are a few things to think about before making a post-separation withdrawal election: 

You may want to delay your request if you don’t need the money. If you plan to go back to work after you retire, you probably won’t need to begin using your retirement savings. Many employees who retire under FERS (as well as the Civil Service Retirement System) may not be financially ready to fully retire. Others may simply want to work in another capacity for a few more years. If your plan is to go back to work on Monday after you retire on Friday, then you may benefit from allowing your retirement savings to continue to grow. 

Remember that while you can’t add money to your account (other than transferring other retirement funds into the TSP), your investment will continue to be allocated among the various funds in the plan according to the way you have designated. There’s an old principle called the Rule of 72 that can help you estimate how quickly your money will double based on the anticipated rate of return. To apply it, simply divide the rate of return into 72. So, for example, if your investment earns a 6 percent rate of return, your money will double in 12 years (72/6 = 12). No one knows exactly what the future rate of return will be, but even at a conservative 4%t rate, your money will double every 18 years (72/4 = 18). Remember that if you continue to work, you cannot only have growth in your existing balance, but you will also continue to add new money to your account that will also continue to grow. 

You must pay income tax on traditional TSP withdrawals. If you receive a TSP distribution or withdrawal before you reach age 59½, in addition to the regular income tax, you may have to pay an early withdrawal penalty tax equal to 10% of any taxable portion of the distribution or withdrawal not rolled over. The additional 10% tax generally does not apply to payments made after you separate from service during or after the year you reach age 55. 

Also, 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.  Although there are other exceptions to the 10%t early withdrawal penalty tax, VERA and DSR retirements when retiring under age 55 are not among those exceptions.   

If you are not planning to go to work after you retire, consider taking installment payments over your life expectancy to avoid the early withdrawal tax penalty, but be sure to know the rules. The penalty can be applied retroactively if you do any of the following within five years of beginning your installments or before you reach age 59½, whichever comes later: 

• stop your life-expectancy-based installments 

• switch them to installments of a fixed dollar amount 

• take a distribution from your TSP account in addition to your life-expectancy-based installments  

Doing any of those things in that period will make you liable for the penalty tax on the installments you previously received. 

Are you considering using your retirement savings to pay off your mortgage?  You may no longer be able to deduct the mortgage interest from your taxes. For many taxpayers this may not matter since you must have enough deductions to be higher than the standard deduction. For single taxpayers and married individuals filing separately for tax year 2025, the standard deduction is $15,000 for 2025 and for married couples filing jointly, the standard deduction is $30,000. 

Remember, you still must pay federal and, in most cases, state income taxes on your TSP withdrawal. A large lump sum withdrawal may cause some of your income to be taxed at a higher marginal tax rate.  Marginal rates. For tax year 2025, the top tax rate remains 37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly). The other rates are: 

• 35% for incomes over $250,525 ($501,050 for married couples filing jointly). 

• 32% for incomes over $197,300 ($394,600 for married couples filing jointly). 

• 24% for incomes over $103,350 ($206,700 for married couples filing jointly). 

• 22% for incomes over $48,475 ($96,950 for married couples filing jointly). 

• 12% for incomes over $11,925 ($23,850 for married couples filing jointly). 

• 10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly). 

If taxes aren’t reason enough not to withdraw enough to pay off your mortgage balance... Also, remember that if you have a mortgage with a low interest rate, you may be giving up savings that will grow at a rate of interest higher than your mortgage interest rate. So, it might not be the best idea to pay off your mortgage. 

 You may have other money in a taxable account. If you’ve been saving for retirement using mutual funds or other investments outside of the TSP, then you may wish to draw on this money before tapping your tax-deferred funds. Even if you need to pay capital gains taxes on these withdrawals, the rate for most people is only 15% (some people pay $0 and those with high incomes pay as much as 20%), not the often-higher marginal rates. 

You might run out of money if you withdraw too much too soon. It’s hard to predict exactly how long your funds will last. There’s that whole life expectancy thing, and rates of return can make a big difference over the long haul. Earning a 6% average return will make a healthy TSP balance last many years longer than a 4% return. It is hard to predict how much you will spend in retirement, but here are a few things to consider: 

• For many of us, our net income is what we live on.  If your only income is your federal salary, then take your biweekly net income and multiply it by 26 and then divide that amount by 12.  This will show you your average net monthly income.  How will your retirement income compare? 

• If you are fully retired, you will have at least 40 more hours per week of “free time” where you may want to pursue new hobbies or travel.  This will require extra money in addition to your normal monthly expenses. 

The adage that money can’t buy happiness is only partially true. The reality is that to be fully retired at a young age may require more money that you anticipated to be financially secure. It is true that many people in retirement can live on less, but for some it is only because they have less to live on.