Wray Mathews: Is withdrawing money from TSP Post-Military Service a smart decision?

Wray Mathews: Is withdrawing money from TSP Post-Military Service a smart decision?

Keywords: TSP, Thrift Savings Plan, Military

The day you joined the military, you started contributing to the Thrift Savings PlanAs per Wray Mathews (TSP) for your livelihood. If you are waiting until to come out of your services and grab the money stored in your TSP account, you should invest your savings cautiously. Before withdrawing, you should think twice if you are making a smart decision as per Wray Mathews.

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When you come out of your government services and start living a civilian life, you tend to invest in too many unexpected stuff like new clothes, a new lifestyle, and sometimes medical insurances. It becomes obvious for anyone to look for money from the TSPaccount to pay for them. But we must tell you that that would be one of the worst decisions that you would ever make in your life.

According to experts, taking money out of your TSP (or any other tax-free plan that you started to save for your retirement) before you are eligible for retirement that is 59½, isn’t a smart decision.

Should you keep the TSP?

Well, to begin with, The Thrift Savings Plan is comparatively cheaper. Here are some of the reasons for the experts.

First, when you invest your money in a savings plan, most companies offering investment plans will charge some service fees because nothing comes for free these days. But TSP is cheaper and charges a minimal service fee of 0.04% only, and this is probably one of the lowest fees that you would ever find anywhere else in this world. Surprisingly, some investors claim that index funds are the best investment plans, but they also extend a service fee that is at least two times the service fee charged by the TSP. Most retirement savings plans sponsored by the employers charge three to four times more than the TSP.

Second, keeping the TSP gives you a tax advantage as well. As we said earlier, TSP is a tax-deferred plan, so you are dealing directly with IRS and agreeing not to use the money before your retirement. Further Rules from the IRS state that it won’t tax you on that portion of money in your TSP account. This is one of the biggest USPs (Unique Selling Points) of TSP as compared to other retirement plans readily available in the market these days.

But if you are withdrawing money from your TSP account before your retirement, then IRS will check your tax money and give you a 10% penalty.

Wray Mathews said this penalty is irrevocable. No matter what kind of service (traditional IRA or Roth) you have given to the country, IRS will charge you.

Generally, if you have a traditional IRA and you withdraw the amount after retirement, you will have to pay taxes on the entire money, and this includes your contributions, earnings and other funds similar to that. Well, this may not be a big deal if you are taking only a portion of your money each year. But if you cash out your TSP money before the minimum distribution age of your plan, you will be surprised when you receive a huge lump-sum tax bill for your entire TSP Plan and the penalty, of course.

If you have Roth version of the TSP and you withdraw money after you turn 59½, money withdrawal will be tax-free. But closing your TSP account before that will force you to pay taxes and the penalty on your earnings. That amount can be big and will hit you hard. In this case, the IRS will charge 20% for federal taxes and an additional 10% penalty tax. This doesn’t include state taxes, which could be somewhere between 5% and 10%. So basically, if you plan to cash out your TSP money before retirement, you will end up getting a tax bill of 40% of your total account balance in case of the traditional TSP plan AND 40% of your earnings, in case of Roth.

For example, if you have saved $100,000 in your TSP account, then you may end up paying $40,000 only in taxes!

Available Options for You

The best FINANCIAL ADVICE here is to forget your TSP until retirement, no matter how attractive it looks.

The best part of this account is that once you activate it, you are in even if you leave your services. You can transfer your money from other qualifying retirement plans into your TSP account. In other words, if you get a job with a 401(k) plan, you can transfer the money you have in the TSP into that plan. If or when you get a government job, you can keep rolling money into your TSP.

401(k) plan refers to the IRS tax law that authorized the program, is similar to TSP, and is run by a civilian company.

Do you know that while displacing money from one retirement plan to another retirement plan, you don’t need to pay any taxes? It only needs some form-filling work and talking to finance people who may not be aware of TSP. The detailed info is available on the TSP website.

Once you compare the types of employer retirement plans in this world of civilians’, you would be able to judge that TSP is much better, offers low expenses, and is a good investment opportunity. So, every federal service member should take advantage of the great plan as long as they can.