Don’t Let Your TSP Turn Into a Tax Trap—Especially Once You Hit Age 72

Missy E
November 14, 2025

Key Takeaways

Once you reach age 72, Required Minimum Distributions (RMDs) from your Thrift Savings Plan (TSP) become mandatory—and ignoring them can result in a hefty tax penalty.
A poorly timed or unmanaged TSP withdrawal strategy can push you into a higher tax bracket, shrinking your retirement income faster than you might expect.

The TSP and Retirement: A Valuable Tool with Tax Consequences

Your Thrift Savings Plan is one of the most powerful tools in your retirement arsenal as a public sector employee. It allows you to build a nest egg over the course of your career with tax advantages—either deferring taxes until withdrawal (traditional TSP) or paying taxes up front (Roth TSP). But once you retire, especially after age 72, that tax-deferred growth

comes due.

In 2025, the IRS mandates that TSP participants begin taking Required Minimum Distributions (RMDs) by April 1 following the year they turn 72. These distributions are taxed as ordinary income. And the longer you delay strategizing, the harder it can hit your finances later.

What Are Required Minimum Distributions (RMDs)?

RMDs are not optional. They’re the IRS’s way of eventually taxing the money you’ve been growing tax-deferred. Once you hit age 72, each year you must withdraw a certain percentage of your TSP based on your account balance and your IRS life expectancy factor.

Key Features of RMDs in 2025

Start Date: April 1 of the year following your 72nd birthday.
Annual Requirement: Must withdraw each year by December 31.
Calculation Basis: Account balance as of December 31 of the previous year, divided by the IRS Uniform Lifetime Table factor.
Penalty: A 25% excise tax on the amount you failed to withdraw (reduced to 10% if corrected in time).

Failing to take your full RMD can lead to steep financial consequences. While the IRS has reduced the penalty from 50% to 25% (or 10% with correction), the cost is still significant.

The Hidden Risk: Tax Bracket Creep

Many retirees assume their taxes will be lower in retirement. But once RMDs kick in, they often find themselves pushed into higher tax brackets—especially if they have multiple income streams from pensions, Social Security, or other retirement accounts.

How RMDs Can Inflate Your Tax Bill

Stacking Income: RMDs add to your taxable income each year, often on top of FERS annuity, Social Security, and other distributions.
Medicare IRMAA Impact: Higher income from RMDs could increase your Medicare Part B and D premiums through the Income-Related Monthly Adjustment Amount (IRMAA).
Reduced Eligibility for Tax Credits: Credits like the Retirement Savings Contributions Credit may phase out.

Tax bracket creep isn’t immediate—but over time, unmanaged distributions can create a compounding burden.

Strategy Matters: Don’t Wait Until 72

Smart planning means not waiting until age 72 to think about RMDs. Instead, you should start shaping your withdrawal strategy while you’re still in your 60s—or even earlier.

Withdrawal Planning Tips

Consider Partial Withdrawals Early: Start small withdrawals before age 72 to reduce your account balance and future RMDs.
Explore Roth Conversions: Converting portions of your traditional TSP into a Roth IRA in lower-income years can reduce future RMDs and taxable income.
Coordinate with Social Security: Delaying Social Security until age 70 can free up room for taxable withdrawals without triggering higher brackets too soon.
Lump Sum or Life Expectancy Method: If you move funds into an IRA, explore different RMD calculation options for better tax outcomes.

These tactics can help balance your tax exposure while maintaining a stable income.

How the TSP Handles RMDs

The Thrift Savings Plan automatically calculates and distributes your RMD each year. But that doesn’t mean you’re off the hook. You still need to:

Ensure Your Contact Information Is Up to Date
Select a Withdrawal Option that meets or exceeds your RMD
Check the Payment Schedule to avoid multiple taxable events

If you don’t make a withdrawal selection by the required deadline, the TSP will issue the minimum payment on your behalf—potentially at an inopportune time.

Common Missteps to Avoid

Understanding RMDs is only part of the picture. You also need to avoid these common mistakes that could undermine your retirement plan:

Ignoring Tax Withholding: Federal income tax is automatically withheld at 20% for eligible rollover distributions. For RMDs, it defaults to 10% unless you choose otherwise. Make sure it aligns with your bracket.
Failing to Update Beneficiaries: Outdated or missing designations can complicate distributions and create tax issues for your heirs.
Overlooking Other Accounts: RMDs apply to traditional IRAs, 401(k)s, and similar accounts. Consolidating or coordinating withdrawals can reduce complexity.
Assuming RMDs Don’t Apply After Rollovers: If you transfer your TSP to an IRA, the RMD rules follow you there. You’re not avoiding RMDs—you’re just changing the administrator.

Timing Can Work In Your Favor—Or Against You

The IRS gives you until April 1 following the year you turn 72 to take your first RMD. But be cautious—taking two RMDs in one year (your first and second) can spike your taxable income for that year. That’s why many retirees choose to take their first RMD in the year they turn 72, not the year after.

Example RMD Timeline (for someone turning 72 in 2025):

Birthday in 2025: Must take first RMD by April 1, 2026
Second RMD: Due by December 31, 2026
Result: Two taxable distributions in the same year if first RMD is delayed

Avoiding this double hit is a matter of strategic timing.

Spouses and Inherited TSP Accounts

If your spouse inherits your TSP, RMD rules vary. They may:

Roll the balance into their own retirement account (if eligible)
Take RMDs based on their life expectancy
Be subject to accelerated distribution rules depending on age and relationship

Understanding spousal beneficiary rules is essential to avoid unnecessary taxes and ensure continuity of your retirement strategy.

RMDs and Roth TSP Accounts

As of 2025, Roth TSP balances are still subject to RMD rules, unlike Roth IRAs. If you want to avoid RMDs on Roth balances, you may consider rolling them into a Roth IRA after separation from service. This must be done carefully and ideally under guidance from a licensed professional.

What You Can Do Now

Start assessing your situation well before RMDs are required. Questions to ask yourself:

How much of my retirement income will come from tax-deferred sources?
Should I start withdrawals early to reduce my RMD exposure?
Would Roth conversions help lower my lifetime tax liability?
Am I coordinating TSP withdrawals with Social Security and Medicare timelines?
Do I have a professional tax or retirement advisor who understands public sector retirement rules?

You don’t have to navigate these decisions alone, but you do need to act deliberately.

The Bigger Picture: Turning Tax Burdens into Opportunities

When you think about your TSP strategy, don’t just ask how to meet IRS rules—ask how to use them to your advantage. With proper planning, you can:

Reduce lifetime tax exposure
Maintain eligibility for key programs
Increase after-tax retirement income
Avoid unnecessary penalties

This is about making your retirement savings last longer, work smarter, and provide the kind of financial stability you deserve.

It’s Time to Rethink Your Withdrawal Plan

The sooner you recognize that your TSP could become a tax liability, the sooner you can reshape your retirement income strategy. A few smart moves—especially before age 72—can help you stay in control of your finances.

To get personalized help aligning your TSP withdrawal approach with your broader retirement goals, speak with a licensed professional listed on this website.