Your military career is approaching its end, and now it’s time to retire. What should you do with the large sum of money in your TSP (Thrift Savings Plan) that you’ve been paying into since the very beginning?
There will be expenses, of course, that you previously hadn’t had to worry about in such a degree when you were in the military, including important things like health insurance. While the money in your TSP can certainly cover that, you should think twice before you do that.
According to almost all experts in the matter, it is unwise to tap into your TSP (or any) retirement fund before you reach the minimum distribution age of 59 and a half years old.
Firstly, the TSP only charges a low .04 percent service fee for any transaction, which is the lower than you will find with any other investment, even things like index funds which financial advisors all say are good investments as well.
Secondly, the TSP is a tax-deferred program, which means that when you put your money into it and keep it in until your retirement, the IRS won’t impose a tax on it. If you do touch that money early, not only will the IRS take taxes on it, but there’s also a 10 percent penalty fee on top of that, regardless if you’re making Roth or traditional contributions.
After retirement, you will have to pay taxes on the amount you take out, but dipping into it early means you’ll be paying taxes on all of it at once, a large sum, in addition to the 10 percent fee. The same with the Roth, which you normally won’t have to pay taxes on. Unless you tap into it before your 59 and a half birthday, in which case you’ll be paying the government taxes on the whole thing.
And this is no small amount. It’s 20 percent for federal taxes, and the 10 percent extra for penalty. Add in up to another 10 percent in state taxes, depending on where you live, and you’re looking at close to 40 percent of your money getting taken away before you even have a chance to touch it. Let’s say you had 150,000 dollars in your Thrift Savings Plan, and the tax bill would be 60,000 dollars.
So what can you do?
The easiest thing you can do it not touch the money in your TSP. Simple as that.
Even if you left the service before the 59-and-a-half year threshold, the TSP allows you to continue contributing to it, even with money from your IRAs or other civilian retirement plans. And on the other hand, if the 401(k) plan offered by your current employer offers you better options than your TSP, you can easily move the money to that plan without (or with a very small) penalty. Talk to your financial advisor about options and ways to move your money around so that it can work best for you.