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TSP Withdrawal Mistakes That Quietly Wreck Retirement Plans—And How to Steer Clear

Missy E
November 14, 2025

Key Takeaways

Withdrawing from your TSP without a clear strategy in 2025 can quietly dismantle even the strongest retirement plans through avoidable taxes, penalties, and longevity risks.
Understanding the most common TSP withdrawal mistakes today can help you make smarter moves that protect your future financial security.

Common TSP Withdrawal Mistakes That Threaten Your Retirement

Thrift Savings Plan (TSP) accounts continue to be the foundation of retirement savings for many public sector employees. Yet even with years of diligent saving, a poorly executed withdrawal strategy can undermine decades of work. If you’re planning to rely on your TSP in retirement, avoiding these common pitfalls is crucial.

Not Understanding Required Minimum Distributions (RMDs)

Since 2025, the rules require you to start taking RMDs from your TSP by April 1st of the year after you turn 73. If you miss an RMD or take too little, you face a significant excise tax, currently 25% of the amount you should have withdrawn.

Plan ahead: Begin RMD calculations well before your 73rd birthday.
Coordinate: Consider how TSP RMDs interact with other retirement accounts.

Taking Lump Sums Without a Plan

Cashing out a large chunk of your TSP might seem appealing, but it can cause unintended problems:

Large tax bills: Withdrawals are treated as ordinary income and can push you into a higher tax bracket.
Depleting savings too fast: Large lump sums shrink your long-term nest egg.

Instead, thoughtful, phased withdrawals help control taxes and preserve your balance.

Ignoring Tax Implications

Every traditional TSP withdrawal you make is subject to federal income tax. Ignoring this reality can leave you with less spending money than you expected.

Estimate tax withholding: TSP generally withholds 20% automatically for taxes on eligible rollover distributions.
Work with a licensed professional: Tailor your withdrawal schedule to your actual tax situation.

Forgetting About the “Rule of 55”

If you separate from service in the year you turn 55 or later, you can take penalty-free withdrawals from your TSP. Many retirees, however, mistakenly roll over their TSP into an IRA and lose this advantage, since IRA withdrawals before 59½ generally trigger a 10% penalty.

Stay aware: Keep TSP funds where they are if you want penalty-free access starting at 55.

Withdrawing Too Conservatively

Being too cautious with withdrawals can backfire. Drawing only minimal amounts without adjusting for inflation risks shrinking your standard of living over a 30-year retirement.

Plan for growth: Withdraw enough to keep up with living costs.
Balance caution with practicality: Over-conservatism can be just as damaging as over-spending.

Overlooking Inflation Adjustments

Inflation in 2025 continues to be a concern, eroding purchasing power over time. If your withdrawal strategy doesn’t account for rising costs, your TSP savings may not sustain your needs for 20 to 30 years.

Review withdrawal amounts annually: Adjust for inflation.
Consider annuities cautiously: Fixed payments may lose value in real terms over decades.

Not Diversifying Withdrawals

Relying solely on the TSP for all income could expose you to sequence-of-returns risk — withdrawing during market downturns can accelerate balance depletion.

Combine income sources: Mix TSP withdrawals with other savings, pensions, or Social Security.
Build a cash buffer: Keep 1-2 years’ worth of expenses in safer, liquid investments.

Failing to Update Beneficiaries

If you haven’t updated your TSP beneficiaries recently, you risk having your hard-earned savings distributed in a way you didn’t intend.

Review beneficiary designations annually: Especially after major life events.
Avoid relying only on your will: TSP pays based on its designated beneficiary form, not your estate documents.

Overpaying for Advice or Services

Some retirees end up paying high fees to move TSP funds into private accounts or insurance products without realizing the long-term costs.

Know your options: TSP offers low-cost investment choices even after retirement.
Seek fiduciary advice: Only consult licensed professionals who put your interests first.

How to Build a Smarter TSP Withdrawal Strategy in 2025

Awareness is the first step. Active management is the second. Here are ways you can protect yourself today:

Understand Your Timeline

Your withdrawal timeline is central to everything else. Consider:

Early retirement (before 59½): Know the penalties.
Mid-career retirement (at 55-59½): Leverage the “Rule of 55.”
Traditional retirement (after 59½): Full penalty-free access.
Mandatory withdrawals (starting at 73): Plan to meet RMDs.

Mapping your expected income year by year is essential to avoid surprises.

Use Multiple Withdrawal Methods

A one-size-fits-all withdrawal approach doesn’t suit most retirees. Mix strategies such as:

Fixed-dollar withdrawals: Set amounts each month.
Proportional withdrawals: Withdraw a set percentage of the balance.
Combination approaches: Fixed income early, proportionate later.

Each has strengths depending on your needs and market conditions.

Coordinate TSP With Other Accounts

If you have an IRA, pension, or taxable brokerage account, coordinate how you tap each one:

Minimize taxes: Withdraw from taxable accounts before tapping tax-deferred ones.
Control Medicare costs: Large withdrawals could raise your income and trigger higher Medicare Part B premiums.
Preserve flexibility: Keep some taxable investments for unexpected expenses.

Plan for Longevity

It’s 2025, and lifespans are stretching longer than ever. It’s realistic to plan for 30 years in retirement.

Use conservative estimates: Plan as if you’ll live into your 90s.
Consider delayed Social Security: Waiting until 70 can increase benefits significantly.
Balance withdrawals: Enough to enjoy life now without jeopardizing later years.

Reassess Regularly

Your withdrawal strategy shouldn’t be set and forgotten.

Annual reviews: Reassess spending, taxes, and market conditions every year.
Adjust based on life changes: Health issues, family needs, or moving can shift your plan.

Adaptability is key to long-term success.

How Minor Missteps Compound Over Time

Making a small mistake today might seem inconsequential. However, the compounding effect of early withdrawals, higher taxes, penalties, or loss of growth opportunities can drain hundreds of thousands over a 20- to 30-year retirement.

Remember:

Missing an RMD one year could cause a penalty that permanently reduces your account size.
Taking too much too early could force drastic lifestyle cuts later.
Paying avoidable taxes now could shrink your lifelong income potential.

Small decisions today define the quality of your retirement decades from now.

TSP Withdrawal Myths to Leave Behind in 2025

A lot of outdated advice continues to circulate. Here’s what to forget now:

“Roll everything into an IRA immediately.” Not necessarily. TSP offers some of the lowest fees in the investment world.
“Withdraw as little as possible to minimize taxes.” Overly conservative strategies may backfire when RMDs kick in.
“You can always fix mistakes later.” Some errors, like missed RMDs or premature rollovers, have immediate irreversible consequences.

Question old assumptions, especially with today’s longer retirements and evolving tax laws.

Setting Yourself Up for a Secure Retirement Journey

Avoiding these TSP withdrawal mistakes doesn’t require perfection — it requires attentiveness. Understand the rules, build a flexible plan, coordinate withdrawals across income streams, and adjust as life evolves.

Your TSP is more than a savings account. In 2025, it remains a powerful retirement engine. How you manage it starting today determines whether it fuels a comfortable, stress-free retirement or leaves you scrambling to adjust later.

If you feel unsure about crafting the right strategy, get in touch with a licensed professional listed on this website for personalized advice tailored to your goals.