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Figuring out how to spend your savings is no easy task. It can be hard to predict when, how often, how long, and how much you’ll need to withdraw—even if you’re confident that you’ve saved enough to live comfortably. In this email, we’ll provide information to consider as you decide between the many withdrawal options available to you.
What are the TSP’s withdrawal options for retirees again?
Remember that when you retire, you don’t have to do anything with your TSP account immediately.* Indeed, among participants who left federal service at age 62 or older, more than one-third haven’t taken any withdrawals after three years.
But whenever you’re ready, the TSP has several options for your retirement income. Just log in to My Account at tsp.gov and select “Withdrawals and Rollovers Out."
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Installments: You can choose to receive monthly, quarterly (every three months), or annual payments from your account. These can be either a fixed dollar amount ($25 minimum) or you can have us calculate the amount based on your life expectancy. To view potential installments without committing to them, log in to My Account at tsp.gov and select “Model Installments” from the “Withdrawals and Distributions” menu.
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Partial distribution of a specified amount: If you need additional amounts now and then, you can request separate payments of at least $1,000. There’s no limit on partial distributions after you’ve left federal or uniformed service—even if you’re receiving installments.
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Annuity purchase: You can use some or all of your account balance to buy a life annuity through our outside vendor. If you opt for an annuity, you give up control of the money used to buy it (for example, you will no longer be able to choose how the money is invested) in exchange for guaranteed lifelong monthly payments.
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Total distribution: You can withdraw your entire account balance as cash or as a rollover to another plan, effectively closing your TSP account.
How do I decide between them?
The combination of options that you choose depends on your individual situation, how much you expect from any pensions and Social Security, and your withdrawal strategy. Even if you’ve been withdrawing for years, it never hurts to reassess whether your approach is still working for you. For example, some participants choose to take partial TSP withdrawals as needed during the first few years after retirement. Others prefer the flexible and regular income of installment payments based on a fixed dollar amount, which they can stop, start, or update at any time.
Participants often ask about choosing between installment payments based on life expectancy or an annuity from our outside provider. Installments allow you to receive payments from your TSP account while retaining control of your savings, so you can adjust the amount and frequency of your withdrawals, change your investments, roll money in, or take partial withdrawals if needed over time. However, installments continue only as long as you have a balance in your TSP account, while annuities guarantee lifelong income. For an idea of what annuity payments might look like, visit our annuity calculator.
How should I think about Roth vs. traditional money when it comes to making withdrawals?
There isn’t a set formula to determine which choice is best for everyone, and your decision may change as your needs vary over time. Here’s the big difference between the two:
- You’ll need to pay taxes on any withdrawals from your traditional balance (except for any contributions made from tax-exempt pay earned while serving in a combat zone).
- “Roth” means you’ve already paid taxes on your own contributions, so they are tax-free when withdrawn. If you meet certain IRS conditions, then the earnings in your Roth balance are tax-free too.**
If you have both traditional and Roth money in your account, you can specify that your withdrawal should come only from your traditional money, only from your Roth money, or proportionally from both. (If 80% of your entire TSP account is in your traditional balance and 20% is in your Roth balance, then “proportionally” means that 80% of your withdrawal would come from your traditional balance, and 20% would be from Roth.)
As one example, you can choose to have installment payments come from your traditional money first or from your Roth money first. You might decide to draw from your traditional balance first, so that your Roth balance can continue to grow tax-free** and to help you meet any IRS required minimum distribution (RMD) amounts, since those only come from your traditional balance. Or, if you are near the top of your tax bracket and want to avoid crossing into a higher one, you might choose to withdraw more Roth money first (or draw proportionally from both) to avoid raising your taxable income. When you run out of money in your chosen source (traditional or Roth), installments will continue from the remaining source.
Remember: These are just examples—a tax advisor can help tailor these ideas to your individual situation.
How much is tax withholding on the different withdrawal options?
As we noted, when you take money out of your TSP account, you will owe taxes on any traditional contributions (except contributions made from tax-exempt pay earned while serving in a combat zone) and the earnings they have accrued. You will also owe taxes on the earnings in your Roth balance if you haven’t met certain IRS conditions.**
While the TSP does not withhold for state or local taxes, here’s what the IRS requires in federal tax withholding.*** (We send amounts withheld for federal income tax directly to the IRS in your name and also report them to you on Form 1099-R each year.) With certain types of payments, you may request that a different percentage be withheld. Usually, you’ll have the option to do this when submitting your withdrawal request in My Account.
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Installments: If you’re taking installments of a fixed dollar amount, then it depends on how long they will last based on your account balance. If they’re set to last for less than 10 years, then there is 20% federal tax withholding. The IRS does not allow you to decrease withholding, but you can increase it.
If your installments are set to last for 10 years or more (or if they’re based on your life expectancy), then the federal withholding is equivalent to what the IRS withholds for unmarried tax filers with 0 exemptions. You can decrease or increase it though.****
This is only a brief summary of tax information. For more detail about tax rules—such as which payments are eligible for rollovers—see our booklet Tax Rules about TSP Payments.
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