When you retire, your Thrift Savings Plan account may be the largest source of income you draw from. You’ll want to avoid these mistakes to ensure you maximize your retirement income.
It may be easy to forget about doing this, but not doing so, could have a significant impact on you. These beneficiary forms override any beneficiary stated in your will. If you pass away before updating these forms, TSP pays out in the following order:
If you need to select a new beneficiary, or change who it is, submit a TSP-3 form. This new form will supersede the old one.
If you leave federal service and have an outstanding TSP loan balance, you can pay it back within 90 days of the date of your separation. If you fail to do this, the IRS will declare it as a taxable distribution, which may make you subject to the IRS 10% early withdrawal penalty.
If you want to change how your contributions are going into your TSP, do a Contribution Election change; to change your allocation, do an Inter-Fund Transfer; and to change your existing TSP allocation and your contribution election, do both. The major mistake here is most people who want to change how money is allocated only do a Contribution Election.
You decide how much to contribute (up to IRS limits), what type of account (Traditional or Roth) is best, and how your funds are allocated. There is no formula for knowing what your “TSP annuity” will be at retirement.
If you retire at age 55 or older and withdrawal from your TSP, there is no early 10% withdrawal penalty. Contrary, if you withdrawal from an IRA prior to age 59 ½, you will be subject to the 10% early withdrawal penalty. Transferring to an IRA requires you to leave enough room in your TSP to cover any withdrawals needed before age 59 ½.
If you roll over your TSP funds to an IRA and later decide you want to roll them back to your TSP, you won’t be able to. You must leave a minimum of $200 in your TSP to be able to do this.
A Roth TSP taxes your money upfront, which means you pay tax now in today’s known tax environment. Who knows what it will be in 10, 20, or 30 years!
If you separate from service prior to 55, you can take life expectancy withdrawals and avoid the 10% early withdrawal penalty. This payment is locked for the longer of 5 years or reaching age 59 ½.
Life expectancy payments are payments made in all 12 months and recalculated each year based on your age and year-end account balance from the previous year. Your age and TSP balance determine the payments. Here’s an example of a trap many people fall into:
Your TSP plays a major role in your retirement years. It’s important to understand everything TSP has to offer and how not following the rules could hurt you. Try not to make these mistakes with your TSP account.