What do I do with my TSP?[ Edited ]
I will be retiring from the Federal Government within the next five to seven months. My concern is what should I do with my TSP account without paying a lot of taxes that have been deferred under my TSP.
I'm excited for you...a half year from retirement! There's no time like right now to start mapping out how you are going to position things as you transition to the next phase of life. Because the details were not included in your question, I'm making the assumption that your funds are all in the traditional TSP and that you are retiring from civil service and not working for a new employer. Thankfully, you have options when it comes to the TSP and, for the most part, you should be able to control when you pay taxes on your retirement savings.
In my experience, your decision will depend a lot on how you'll use the TSP to supplement your other sources of retirement income (Social Security, FERS/CSRS, military retirement, etc.). The TSP is important, but it's only one part of your overall retirement plan. So, while you're thinking about the TSP you should also be assessing your overall plan for the coming decades. Okay, off my pedestal, now I'll focus on access and taxes as I review your options with the TSP.
Leave it in the TSP. You can leave the money in the TSP and continue to control and allocate it among the available investment options. Obviously, you will not pay any taxes until you pull money out. The upside here is that you don't have to do anything and the investment options are very inexpensive! The downside is that you won't have a lot of flexibility. You are limited to a single withdrawal unless you sign up for an annuity or systematic payout. A lot of folks I work with periodically tap their retirement savings for big ticket purchases (vacation, car purchase, etc.) , but beyond that, they leave it alone. Because you're limited to a single non-systematic partial withdrawal, this approach will not work if you leave the money in the TSP. On the other hand, the TSP does offer an annuity payout in which you turn the money you've accumulated into a stream of income. There is also the option to make age or dollar based systematic withdrawals. Either of these options may work if you are looking for an additional income stream each month. In either case, the payment would be taxable.
Rollover to an IRA. You can establish a new IRA or rollover your TSP to an existing IRA. As long as you move the money directly from the TSP to your IRA (called a direct rollover), there will be no withholding or tax consequences. Withdrawals from the IRA will be what triggers taxes and you'll control when and how much you withdraw. This approach will give you the most flexibility and options with respect to incorporating the funds into your retirement income plan. You could also rollover to a Roth IRA, but that move would trigger the taxes you're trying to avoid.
Cash it out. This of course would result in mandatory 20% withholding for federal income taxes and the entire withdrawal would be included in your income for tax purposes. If you take the money, you have 60 days to place it in an IRA as a rollover contribution. Unless you make up the 20% withheld for income tax from another source that would still be considered a withdrawal. This option probably does not make sense for someone interested in minimzing the tax impact of their TSP.
Whether you rollover to an IRA or leave the money in the TSP, the IRS makes you begin to withdraw money once you hit age 70 1/2 through what are called Required Minimum Distributions. This is a great article here on usaa.com that addresses your question. Remember, we've got a team of financial advisors that can help you make a decision that works for you, give them a call at 800-771-9960. Good luck.