TSP Options: What Federal Employees Should Consider Before Moving Their Balance
A plan participant leaving an employer typically has four options (and may engage in a combination of these options), each choice offering advantages and disadvantages. For federal employees leaving service, these options are keeping money in the TSP, moving eligible assets to a new employer’s plan, rolling over to an IRA, or cashing out. No single option fits every household. Compare fees, investments, withdrawal rules, tax consequences, and services alongside your pension, retirement timeline, and income needs before deciding.
Leave the money in his/her former employer’s plan, if permitted;
Keeping money in the TSP preserves access to its funds, including the G Fund, and its plan pricing. It also avoids moving the account. The trade-off is continuing to use the TSP’s investment menu and distribution rules rather than another provider’s. Compare those limits with the services and costs available elsewhere.
Roll over the assets to his/her new employer’s plan, if one is available and rollovers are permitted;
A new employer’s plan may consolidate retirement savings with current workplace contributions and retain the money in a retirement account. Acceptance is not automatic. Compare the receiving plan’s fees, investment menu, distribution rules, and services with the TSP before transferring. Moving the full balance also gives up access to the TSP’s G Fund.
Roll over to an IRA; or
An IRA may provide a broader investment menu, withdrawal choices, and access to advisory services. Those features depend on the provider and can involve additional investment, account, or advisory fees. Transferred money loses TSP-specific features, including access to the G Fund and the TSP’s separation-from-service early withdrawal exception. Compare the total cost and services before choosing.
Cash out the account value.
Cashing out makes money available for current expenses without another retirement account’s withdrawal process. The taxable portion generally becomes income in the distribution year, and an additional early withdrawal tax may apply unless an exception is available. The money also leaves the retirement account and its tax advantages. Compare the amount remaining after taxes with the long-term income you would give up.
How a TSP Rollover Works
Direct vs. Indirect Rollovers
A TSP rollover moves money from your TSP account into an Individual Retirement Account. There are two ways to complete one.
In a direct rollover, the TSP sends your funds straight to the receiving IRA custodian. No taxes are withheld, and the move itself is not a taxable event.
In an indirect rollover, the TSP sends the funds to you first, and you have 60 days to deposit them into an IRA. The IRS requires mandatory 20 percent federal income tax withholding on an indirect rollover from a workplace plan like the TSP, even if you intend to complete the rollover¹. To roll over the full amount and avoid the withheld portion being treated as taxable income, you would need to replace it using other funds. If you miss the 60-day window, the distribution is generally treated as taxable income, and, if you are under 59½, it may also trigger a 10 percent early withdrawal penalty².
Traditional and Roth Balances
Your TSP account may hold both traditional and Roth balances. Traditional TSP funds roll into a traditional IRA without immediate tax consequences. Roth TSP funds roll into a Roth IRA. Moving traditional TSP dollars into a Roth IRA is a Roth conversion, a separate, taxable event that is worth planning deliberately rather than treating as an automatic step in a rollover.
Reasons to Keep Money in the TSP
Low Expense Ratios
The TSP’s administrative expense ratio has consistently ranked among the lowest of any retirement plan in the country. In 2025, the TSP’s net administrative expense ratio was approximately 0.034 percent, or 3.4 basis points³. That is a meaningful cost advantage to weigh against any potential benefits of moving to an IRA.
The G Fund
The G Fund is a government securities fund available only within the TSP. It invests in short-term Treasury securities issued specifically to the plan, and its principal is backed by the federal government⁴. No comparable option exists in the retail investment marketplace, which is one reason many federal employees are reluctant to give it up.
Creditor Protection
TSP accounts carry federal anti-alienation protection under 5 U.S.C. 8437, which generally shields the account from execution, levy, attachment, and garnishment, with limited exceptions such as child support, alimony, and certain federal enforcement actions⁴. IRA creditor protection is instead governed by state law, and the extent of that protection varies by state.
The Age-55 Rule
Federal employees who separate from service in or after the year they turn 55 generally are not subject to the 10 percent early withdrawal penalty that otherwise applies to distributions taken before age 59½². This can matter for someone retiring early, since IRA withdrawals before 59½ do not carry the same exception. Moving money to an IRA before that age could remove access to this provision for the funds transferred.
Reasons a Rollover May Be Worth Considering
Investment Flexibility
The TSP offers five core funds and a series of lifecycle funds, along with a mutual fund window for an added fee. An IRA opens access to a broader universe of investments, including individual securities and additional fund structures that may fit a specific strategy.
Withdrawal Flexibility
TSP withdrawal options have expanded in recent years, but they remain more structured than what is available from most IRA custodians. An IRA can offer more control over the amount, timing, and frequency of withdrawals, which may matter for someone drawing income in a specific sequence.
Roth Conversion Planning
Converting traditional TSP dollars to Roth generally means first moving them into a traditional IRA. This makes an IRA a practical starting point for certain Roth conversion strategies, particularly for higher-balance households considering multi-year conversion planning around lower-income years.
Consolidation
Federal employees who also hold old 401(k) balances, IRAs, or other retirement accounts from prior employment may find it easier to manage a single consolidated account rather than several separate ones.
Coordinated Planning
An IRA held with a wealth management firm can be integrated directly into a broader financial plan, including tax-efficient withdrawal sequencing, investment management, and coordination with a pension and Social Security.
Considering a New Employer’s Plan
Before requesting a transfer, ask the new plan administrator whether the plan accepts your specific traditional or Roth TSP balance and which distributions qualify. Obtain its fee disclosures, investment lineup, and withdrawal rules. A direct rollover of eligible pre-tax money to an accepting pre-tax employer plan generally preserves tax deferral. Confirm the destination and tax treatment before authorizing the transfer.
Compare the Receiving Plan With the TSP
Consolidation may simplify statements, investment monitoring, and account administration. It does not automatically lower costs or improve investments. Compare investment expenses, administrative charges, available services, access to money, and applicable creditor protections. The new plan’s rules govern the transferred funds. Consider whether losing the G Fund or changing withdrawal access fits your needs, and whether a partial transfer would leave useful features in place.
Considering Cashing Out
A cash distribution may meet an immediate spending need, but the amount received is not necessarily the amount available after taxes. Request an estimate of withholding and the taxable portion before deciding. Withholding is a prepayment of tax, not necessarily your final tax bill. Traditional TSP money generally adds to taxable income; Roth distributions have separate qualification rules. An early withdrawal may also incur an additional tax unless an exception applies.
Compare Immediate Cash With Future Income
Weigh current liquidity against the retirement income the withdrawn balance would otherwise support. Cashing out can reduce future tax-advantaged growth and may affect other income-based calculations. Consider the amount actually needed rather than assuming the entire balance must be withdrawn. Compare a full cash-out with a partial distribution and with keeping or transferring the remainder. The appropriate combination depends on spending needs, other assets, taxes, and plan rules.
Combining Your TSP Options
You may be able to combine these options rather than move or withdraw the full balance. For example, retaining part in the TSP can preserve access to its features while eligible amounts move to a new employer’s plan or an IRA, or a portion is taken as cash. Each portion follows the applicable plan, rollover, and tax rules. Compare the costs, services, withdrawal access, and tax consequences of the combined approach before deciding.
Tax and Timing Considerations
FERS Supplement
Federal employees retiring before age 62 with an immediate, unreduced annuity may be eligible for the FERS annuity supplement, a temporary payment from OPM that approximates the Social Security benefit earned during federal service⁵. The supplement is subject to an annual earnings test based on wages and self-employment income. TSP or IRA withdrawals do not count toward this test, but the timing of your retirement relative to this benefit is still worth factoring into an overall income plan.
IRMAA
Withdrawals from a traditional TSP or traditional IRA count as income for determining Medicare’s Income-Related Monthly Adjustment Amount, or IRMAA, once you reach Medicare eligibility. Large distributions, including required minimum distributions or Roth conversions, can push income above IRMAA thresholds and increase Medicare premiums two years later. This exposure applies whether the funds sit in the TSP or an IRA, though the two accounts may offer different withdrawal tools for managing it.
RMDs
Required minimum distributions generally begin at age 73 for those born between 1951 and 1959, and at age 75 for those born in 1960 or later². Both the TSP and traditional IRAs are subject to RMD rules. Households holding both a TSP balance and separate IRAs may find the RMD calculation easier to manage after consolidating into fewer accounts.
Sequencing With Your Retirement Date
The timing of a rollover relative to your retirement date can affect several of these considerations at once, including access to the age-55 provision, the FERS supplement earnings test, and your first opportunity for Roth conversion planning. Coordinating the timing of a rollover with your broader retirement date is worth doing well in advance rather than deciding in isolation.
Frequently Asked Questions
What should I do with my TSP?
You generally have four options, and may combine them: leave money in the TSP, if permitted; roll eligible assets to a new employer’s plan, if one is available and accepts rollovers; roll over to an IRA; or cash out the account value. Keeping the TSP retains its funds and plan rules. A new employer’s plan may simplify workplace savings but has its own fees and restrictions. An IRA may expand investment and service choices but can add costs and removes TSP-specific features. Cashing out provides immediate access but may trigger income tax and an additional early withdrawal tax, while reducing retirement savings. Compare each option’s advantages and disadvantages against your full financial picture before deciding.
What is the 60-day rule for a TSP rollover?
If you receive an indirect distribution from the TSP, the IRS requires you to deposit it into an IRA within 60 days to avoid the funds being treated as taxable income¹. A direct rollover avoids this deadline because the funds move directly between custodians.
Will 20 percent be withheld if I roll over my TSP?
Only if you choose an indirect rollover. The TSP is required to withhold 20 percent of the taxable amount for federal income tax on an indirect rollover, even if you plan to complete the rollover within 60 days¹. A direct rollover is not subject to this withholding.
Can I roll over only part of my TSP balance?
Yes. A partial rollover lets you move a portion of your balance to an IRA while keeping the remainder in the TSP, which can preserve certain TSP features for part of your balance.
When do I have to start taking RMDs from the TSP or an IRA?
Under current law, RMDs generally begin at age 73 for those born between 1951 and 1959, and at age 75 for those born in 1960 or later. This applies to both TSP and traditional IRA balances².
Talk Through Your TSP Decision
Decisions about your TSP often intersect with your pension, Social Security, and overall wealth picture in ways that are worth reviewing together. Our DC/McLean office works with senior federal employees and recent retirees on questions like these. Schedule a Federal Employee Retirement Planning consultation to talk through all of your options with your TSP and what it could mean for your situation.
References
- Internal Revenue Service. “Topic no. 413, Rollovers from retirement plans.” irs.gov.
- Internal Revenue Service. “Retirement topics – Significant ages for retirement plan participants.” irs.gov.
- Federal Retirement Thrift Investment Board. “TSP Annual Review of Administrative Expenses for 2025.” frtib.gov, January 27, 2026.
- Federal Retirement Thrift Investment Board (TSP.gov). G Fund program description; 5 U.S.C. 8437(e) anti-alienation provision.
- U.S. Office of Personnel Management. “Benefits Administration Letter 25-103: Understanding the Impact of Reemployment on the FERS Annuity Supplement.” opm.gov, November 28, 2025.
- Internal Revenue Service. “Retirement topics – Termination of employment.” https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-termination-of-employment
- U.S. Department of Labor. “Retirement and Health Care Coverage…Questions and Answers for Dislocated Workers.” https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/questions-and-answers-for-dislocated-workers
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
