TSP Rollover Options for Kansas City Federal Employees

When you leave federal service, your Thrift Savings Plan balance can stay where it is, pay you in installments or partial withdrawals, buy an annuity, move to an IRA or another plan, or some combination, and the right mix depends on your FERS annuity, your age at separation, your spouse's rights and what the money has to do.

Why the TSP is its own decision

Most of what is written about rollovers assumes a private-sector 401(k). The Thrift Savings Plan shares the broad shape, but several features change the calculation for federal employees, and some of them only matter at the moment you separate.

A TSP balance rarely stands alone. It sits beside a FERS basic annuity, possibly a FERS supplement until age 62, survivor elections made at retirement, FEHB coverage and Social Security. What the TSP needs to produce depends on what those already cover. A federal retiree whose annuity and Social Security cover essential spending is asking a different question of the TSP than one relying on it for most of their income.

So the order that works is the same one we use for every retirement income question: decide what income you need and when, account for what federal benefits already provide, then decide what the TSP should do. Our federal employee retirement planning starts there.

Your options when you separate

The TSP offers more flexibility after separation than it once did, including combinations of the options below. The table describes each in general terms. Confirm current rules, forms and elections with the TSP before acting.

Fees, investment options, services, withdrawal rules, protection from creditors, required minimum distribution rules and the early withdrawal exceptions available to you differ between the TSP and an IRA. Compare them against your own situation before deciding. This is general information, not a recommendation to roll over, transfer or distribute any account.

The rules that make this different

The age of separation

Withdrawals from an employer plan before age 59 and a half are generally subject to an additional 10 percent tax. There is an exception for employees who separate from service in or after the year they turn 55, and for certain public safety employees, including federal law enforcement officers, firefighters and air traffic controllers, the age is 50. That exception applies to withdrawals from the plan itself.

Money moved to an IRA generally loses it, because the IRA rules have their own, narrower exceptions. For someone retiring in their mid-fifties who may need the money before 59 and a half, that alone can argue for leaving at least part of the balance in the TSP. Confirm your eligibility with the TSP or your CPA.

Traditional and Roth balances

Many federal employees hold both. Traditional balances are generally taxable when withdrawn. Roth balances can be withdrawn tax-free when the requirements for a qualified distribution are met. Under current law, Roth balances in employer plans are no longer subject to required minimum distributions during the participant's lifetime. Traditional balances are, starting at age 73 for most people approaching retirement now, or 75 for those born in 1960 or later.

Which balance funds which year is a tax question, not an investment one, and it interacts with Social Security taxation and Medicare premium surcharges. That sequencing is the work described in our tax-efficient retirement planning.

Your spouse's rights

Married FERS participants generally need their spouse's consent, or a waiver, for withdrawal elections other than a specified joint and survivor annuity. This is a protection for the spouse, and it means the TSP decision is a joint one whether or not both names are on the account. Build that conversation in early. Confirm the current consent rules and forms with the TSP.

Outstanding loans

If you have a TSP loan when you separate, it generally has to be repaid within the period the TSP allows. An unpaid balance is generally treated as a taxable distribution, and it may be subject to the additional tax if you are under the applicable age. Check your loan status well before your separation date.

If you do move money out

A direct transfer sends money from the TSP to the receiving account without passing through your hands. A distribution paid to you first is generally subject to mandatory 20 percent federal withholding, which you then have to replace from other funds within 60 days to complete a full rollover. Missing that window, or not replacing the withheld amount, generally turns the shortfall into a taxable distribution.

The mechanics are the same as for any employer plan, which we cover in more detail in Social Security and 401(k) rollover planning. What differs for federal employees is what you give up: the separation-age exception, the TSP's own cost structure, and the ability to buy a TSP annuity later. Moving money into the TSP from an IRA or another eligible plan is also permitted, which is worth knowing if you are consolidating.

How it fits with the rest of your federal benefits

The TSP is usually the most flexible piece of a federal retirement, which makes it the piece that fills gaps. If you retire before Social Security begins, it may fund the bridge years. If you delay Social Security to increase the benefit, it may fund those years too. If your survivor election reduces your FERS annuity to protect a spouse, the TSP may need to make up part of that difference while both of you are living.

That is why the TSP decision is rarely just an investment decision. It sits inside a year by year income plan alongside the FERS annuity, the supplement, Social Security timing and FEHB. Our retirement income planning puts those on one page before anything moves.

For what to look for in an advisor who does this work, our guide to choosing a federal retirement advisor in Kansas City covers FERS, FEHB and survivor elections in more depth.

Serving federal employees across the metro

Kansas City has a substantial federal workforce on both sides of the state line, and Kansas and Missouri treat retirement income differently. Our office is on West 94th Terrace in Prairie Village, a short drive from Overland Park, Leawood, Mission, Fairway, Roeland Park and Mission Hills. We also work with clients in Shawnee, Lenexa, Merriam and Olathe, and across the line in Kansas City, Missouri. See the communities we serve across the Kansas City area.

LaMont Chandler holds FINRA Series 7, 24 and NASAA Series 63, 65 registrations, CRD 2794744, and has been registered in the securities industry since 1996. He is registered in Kansas, Missouri, Texas and Idaho. Securities and advisory services are offered through Madison Avenue Securities, LLC, member FINRA and SIPC, and a registered investment advisor. CFG Wealth Management Inc. and Madison Avenue Securities are not affiliated companies. His record is available on FINRA BrokerCheck.

Common questions

Where this connects

• Federal employee retirement planning covers FERS, TSP and how they coordinate
• Federal retirement advisor in Kansas City: what to look for
• Social Security and 401(k) rollover planning covers transfer mechanics in more detail
• More retirement planning insights