Critical Loan Deadline: 90 Days!
If you have an outstanding TSP loan upon separation, you generally must repay it in full within 90 days of your separation date. Failure to repay will result in the loan balance being declared a taxable distribution, potentially subject to taxes and penalties.TSP Account Status After Separation
When you separate from federal service due to RIF, your TSP account remains yours, but some rules change:
- Contributions Stop: You and your agency can no longer contribute.
- Account Remains Open: Your balance stays invested and subject to market changes.
- Investment Changes Allowed: You can still move money between TSP funds (interfund transfers).
- Loans: No new loans. Existing loans must be addressed (see below).
- Withdrawals: New withdrawal options become available.
Account Management Options After RIF
You have several primary choices for your TSP funds after leaving federal service:
Keep your money in the TSP until you need it (or until Required Minimum Distributions start, typically age 73).
Pros:
- Benefit from TSP's extremely low administrative fees.
- Utilize simplified core investment funds (G, F, C, S, I, L).
- Retain ability to make interfund transfers.
Cons / Considerations:
- Investment choices are limited compared to outside options.
- Market Risk: Funds in C, S, I funds are subject to market fluctuations and potential loss of value.
- Inflation Risk: Funds solely in the G fund provide principal protection but may lose purchasing power over time if returns don't match inflation.
- No new contributions allowed.
If your new employer's plan accepts rollovers, you can transfer your TSP balance.
Pros:
- Consolidates retirement accounts in one place.
- May offer different investment options or features (e.g., specific company stock).
Cons / Considerations:
- New plan's fees are likely higher than TSP fees.
- Investment options may be better or worse than TSP's core funds.
- Requires checking if the new plan accepts rollovers from TSP.
- Use a direct rollover to avoid tax withholding.
Transfer your TSP balance to a Traditional IRA or Roth IRA (Roth TSP must go to Roth IRA) or an Annuity.
Pros:
- Vastly wider range of investment choices (stocks, bonds, mutual funds, ETFs, etc.).
- Access to specialized investment vehicles, including annuities like Fixed Indexed Annuities (FIAs), which may offer principal protection against market downturns, potential for indexed interest crediting, and options for guaranteed lifetime income streams.
- Potential for professional management by an advisor.
Cons / Considerations:
- Fees (account fees, advisor fees, investment expense ratios) are generally higher than TSP.
- Requires more active management or reliance on an advisor.
- FIA specifics: Features like principal protection and income guarantees come with complexities such as surrender charges, caps or spreads limiting growth potential, and specific contract terms that must be carefully understood.
- Direct rollover is crucial to avoid tax issues.
Carefully evaluate the features, fees, risks, and potential benefits of any specific IRA investment or annuity product before rolling over.
Take partial or full withdrawals after separation.
Withdrawal Types:
- Partial Withdrawal / Full Withdrawal (Single Payment, Monthly Payments, Life Annuity).
Tax Implications & Penalties:
- Traditional TSP withdrawals taxed as ordinary income.
- Qualified Roth TSP withdrawals are tax-free.
- **Early Withdrawal Penalty (10%):** Generally applies if under age 59½, **UNLESS** you separate in or after the year you turn 55. This "Age 55 Rule" is a key benefit for TSP participants separating early.
- Mandatory 20% federal tax withholding on distributions eligible for rollover if not directly rolled over.
Use Caution
Cashing out TSP should be a last resort due to taxes and loss of future growth. Explore other options first.Choosing Your Path: TSP Considerations
Selecting the right option requires balancing TSP's advantages against potential benefits elsewhere:
- Simplicity & Low Fees (TSP): Ideal if you prefer low costs and don't need complex investments.
- Market Exposure (TSP - C/S/I): Offers potential for higher growth but comes with the risk of market downturns.
- Safety (TSP - G Fund): Protects principal but may lag behind inflation, eroding purchasing power.
- Investment Flexibility (IRA/Annuity): Access to thousands of options, potentially including strategies for principal protection (like FIAs) or specific market sectors, but usually with higher fees and complexity.
- Guaranteed Income (Annuities within IRA/external): Some products outside TSP can offer guaranteed lifetime income streams, appealing for retirement security but involving contract specifics and fees.
- Need for Funds & Tax Impact: Assess immediate needs vs. long-term growth, considering taxes and penalties for withdrawals.
Get Personalized Guidance
Is the simplicity and low cost of the TSP best, or do you need the broader options, potential protections, or income guarantees available through an IRA or annuity like an FIA? Your risk tolerance, timeline, and income needs are unique. We can help you analyze these complex trade-offs. Contact a Specialist →TSP Loan Considerations After RIF
Outstanding TSP loans require immediate attention upon separation.
90-Day Repayment Window
You must generally repay your TSP loan in full within 90 days of separation. If not repaid, the balance becomes a taxable distribution (plus potential 10% penalty if under 59½ and age 55 rule doesn't apply).Options for Outstanding Loans:
- Repay in Full: Avoids taxes and penalties.
- Taxable Distribution (Default): Loan balance taxed as income + potential 10% penalty.
Recommendation: Repay the loan if possible to avoid adverse tax consequences.
TSP G Fund Depletion Estimator (Simplified)
This calculator estimates how long your TSP might last if invested solely in the G Fund (assuming a fixed 2% annual return) and taking fixed monthly withdrawals. It also shows the initial withdrawal suggested by the "4% Rule" for comparison.
TSP Resources and Forms
Use these official resources for detailed information and actions: