TSP Options When You Leave the Military

1. What should you do with your TSP when you separate from the military?
2. Is it best to just leave it alone or should you do something else?

Fortunately there are usually just a few major options to consider and you can typically do more than one if you want.

Leave it

Leaving your money in the TSP keeps everything the same except you can no longer make regular contributions. You get to keep using the low-cost TSP investments and you won’t create any current income tax issues. You’ll even still have the option to roll certain other retirement plans into the TSP. The TSP website contains a lot of information about the benefits of keeping the TSP including this list of questions to ask before moving your money.

Roll it

Another option is to initiate a rollover – either into a new employer’s retirement plan (assuming you have one and it accepts rollovers) or into an IRA. This often appeals to those who want different investment choices and/or those who want fewer accounts to manage. Before taking this step, be sure to compare your potential investment expenses to those in the TSP. If you’ll end up paying more, what are you getting in return? Also, understand the tax implications. Direct rollovers to similarly taxed plans (traditional to traditional, Roth to Roth) typically don’t cause any immediate taxes but if you go from traditional to Roth, or if you receive the money first, you could be in for a tax bill. Finally, it may make sense to leave a very small balance behind so you can transfer assets back into the TSP if you later change your mind.

Take it

The last major option – which is typically a bad option – is cashing out some or all of your plan. While this approach can sometimes produce a pile of unrestricted cash, it can also produce a pile of taxes and possible tax penalties. Plus, cashing out could put at risk your long-term ability to retire for good some day. In short, cashing out your TSP typically shouldn’t be part of your plan.