Key Takeaways
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Without a clearly defined Thrift Savings Plan (TSP) withdrawal strategy, your retirement income may not last as long as you do. Taxes, Required Minimum Distributions (RMDs), and market risk can chip away at your savings if not properly accounted for.
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TSP withdrawal rules are flexible but can be confusing. The choices you make in your 60s could directly impact your financial stability in your 80s. Planning ahead is not optional—it’s essential.
TSP Withdrawals Are the Cornerstone of a Retirement Income Plan
If you’re a public sector employee nearing or in retirement, your Thrift Savings Plan (TSP) will likely be one of your largest financial resources. But simply building your TSP balance is only part of the picture. A real retirement plan doesn’t stop when you stop working. It continues with how and when you access those funds.
- Also Read: TRICARE Has Limits—What Civilian Military Employees Must Know Before They Retire
- Also Read: The Special Retirement Supplement for FERS Employees: Why It’s a Game-Changer for Retirees
- Also Read: This Year’s Federal Employee News Isn’t All Pay Raises and Good Headlines—Here’s Why
Understanding Your Withdrawal Options
As of 2025, TSP offers several withdrawal methods:
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Single withdrawals: Take a one-time payment, which can be used to cover large expenses.
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Installment payments: Set a schedule to receive monthly, quarterly, or annual distributions.
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Partial withdrawals: Combine installments with the flexibility of occasional one-time withdrawals.
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Annuities: Convert all or part of your TSP into guaranteed lifetime income.
You can switch installment amounts or frequencies at any time, but only change the withdrawal method once every 30 days. You must also begin withdrawing the required amount starting the year you turn 73 to avoid IRS penalties.
Why Timing Matters More Than You Think
The age at which you begin withdrawing from your TSP can impact your:
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Taxable income
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Medicare premiums (due to income-related adjustments)
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Social Security taxation
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Long-term growth potential of your TSP account
Waiting until age 73 to start RMDs might sound like a good idea if you don’t need the income, but doing so could push you into a higher tax bracket later. A strategy that incorporates small withdrawals starting in your early 60s can help smooth out taxable income and reduce future RMD burdens.
Key Ages to Plan Around
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55: You can withdraw from your TSP without penalty if you separate from service in or after the year you turn 55 (or 50 for law enforcement officers).
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59½: The standard IRS age where you can take penalty-free withdrawals from any retirement account.
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62: Earliest age to claim Social Security benefits.
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65: Eligible for Medicare.
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73: RMDs must begin by April 1 of the following year after you reach this age.
Understanding these milestones allows you to coordinate TSP withdrawals with other income sources, which is vital for tax efficiency.
Taxes Can Undermine Your TSP
Withdrawals from your traditional TSP are treated as ordinary income. If you withdraw large amounts in a single year or start taking large RMDs at 73, you could:
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Move into a higher tax bracket
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Trigger higher Medicare Part B and D premiums
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Increase taxation on your Social Security benefits
Conversely, strategically planned withdrawals beginning in your early 60s, possibly paired with Roth conversions (if applicable), can mitigate these tax hits over time.
Don’t Ignore RMDs
In 2025, RMDs are mandatory starting at age 73. If you don’t take the full required amount, the IRS imposes a hefty 25% penalty on the amount you failed to withdraw (reduced to 10% if corrected promptly).
The amount of your RMD depends on your TSP balance at year-end and your life expectancy according to IRS tables. This is a crucial reason to track your balances annually and coordinate withdrawals with other income.
Roth TSP: Not Exempt From Planning
While Roth TSP contributions grow tax-free and qualified withdrawals are not taxed, the account is still subject to RMDs unless rolled over into a Roth IRA before age 73.
Rolling Roth TSP funds into a Roth IRA avoids RMDs altogether, allowing your money to grow untouched and be passed on to heirs more efficiently. But rollovers must be completed before the year you turn 73.
Market Risk and Sequence of Returns
If you begin taking withdrawals in a market downturn, the impact of losses can be magnified. This is known as sequence of returns risk and can severely shorten the lifespan of your retirement savings.
To reduce this risk:
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Maintain a portion of your TSP in more stable funds (like the G Fund)
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Create a 1- to 3-year cash buffer to avoid selling investments during a downturn
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Adjust your withdrawal amounts annually based on performance
Matching Withdrawals to Real Needs
A TSP withdrawal strategy should reflect your spending needs, not just account balances. Evaluate:
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Monthly fixed expenses (housing, insurance, healthcare)
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Variable discretionary expenses (travel, gifts, hobbies)
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Emergency reserves for unexpected costs
Installment payments from TSP can serve as a paycheck replacement. Many retirees find value in treating TSP like a pension—predictable, monthly income that covers essential costs.
Incorporating Social Security and Pension Income
TSP withdrawals shouldn’t exist in a vacuum. Consider the timing and amounts of your:
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FERS/CSRS pension
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Social Security benefits
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Spousal income sources
Coordinating these income streams can minimize total taxes, avoid Medicare IRMAA penalties, and smooth your lifetime cash flow. For example, delaying Social Security and drawing down your TSP first could lower your tax burden while increasing future Social Security payouts.
Estate Planning and Beneficiary Strategy
Your TSP doesn’t automatically pass through a will. Instead, it goes to named beneficiaries. As of 2025, TSP beneficiaries must deplete inherited accounts within 10 years (unless they qualify for exceptions).
Review your designated beneficiaries regularly. If left to your estate or an outdated individual, delays and tax inefficiencies may follow. Also consider whether to:
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Roll over TSP funds to an IRA for more flexible inheritance options
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Use life insurance or charitable bequests as alternative legacy tools
What If You Leave TSP Alone After Retirement?
You’re not required to withdraw from your TSP immediately after retiring. However, doing nothing until RMD age may leave you unprepared for:
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Sudden tax bracket jumps
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Coordination issues with Medicare and Social Security
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Missed opportunities for lower-tax withdrawals earlier
Passive delay is rarely the optimal strategy. Even small, periodic withdrawals can create a smoother tax and cash flow outcome.
How Much Should You Withdraw Each Year?
There’s no single formula, but a common starting point is the 4% rule—withdrawing 4% of your balance in the first year of retirement, adjusted for inflation each year after. However, this rule may not suit:
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Retirees with higher spending needs
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Market conditions with high inflation or volatility
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Those relying solely on TSP for income
A better approach may involve:
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Dynamic withdrawal strategies based on performance
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Spending floors and ceilings
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Regular reviews with a financial professional
Your Next Move Starts Now
If you’re approaching retirement, the time to plan your TSP withdrawal strategy is now. Start by reviewing your balance, income needs, and the age-related milestones that apply to you. Each decision—from whether to delay Social Security to how much to withdraw annually from your TSP—can have decades-long implications.
Speak with a licensed professional listed on this website to design a personalized plan that ensures your TSP works for you, not against you.
