When you retire, you can leave your money in the Thrift Savings Plan (TSP) and let it grow. But if you want more control or flexibility, it’s important to know what the TSP doesn’t allow you to do.
In-Plan Roth Conversions Aren’t Allowed
A Roth conversion lets you move money from a pre-tax account to a Roth account, so your withdrawals in retirement are tax-free. Unfortunately, the TSP doesn’t allow in-plan conversions. This means you can’t move money from your Traditional TSP to a Roth TSP. Instead, you’ll need to move your funds to an IRA first, then convert to a Roth IRA.
You Can’t Choose Which Funds to Sell for Withdrawals
When you take money out of your TSP, you can’t pick which funds to sell. Withdrawals are made based on the proportions of your balance. For example, if 50% of your money is in the G Fund and 50% is in the C Fund, your withdrawal will come from both funds in that same 50-50 split. This makes it harder to rebalance your investments over time.
You Can’t Control Tax Withholding on TSP Withdrawals
The TSP has to withhold at least 20% of any taxable part of your withdrawals that aren’t directly transferred. This can be a problem if your tax bracket is less than 20%. You’ll get a refund when you file your taxes, but at the time of the withdrawal, you’ll need to cover the extra amount for taxes. The only exception is if your installment payments are set to last more than 10 years.
You Can’t Make a Qualified Charitable Distribution (QCD)
A Qualified Charitable Distribution (QCD) allows retirees to give money directly to a charity from their account without paying income tax on it, and it counts toward your Required Minimum Distributions (RMDs). While this is allowed with traditional IRAs once you turn 70½, it’s not allowed under TSP rules.
The TSP is a great tool to save for retirement, especially with matching contributions from your employer. But if you want more flexibility after you retire, talk to a financial advisor about other options you might have.
