What Happens to Your TSP When You Leave Federal Service?

The Thrift Savings Plan is one of the best retirement accounts available to anyone in the federal workforce. Low expense ratios, simple fund choices, and — for FERS employees — up to 5% in agency matching contributions. But what happens to that account when you separate from federal service, whether by retirement, resignation, or reduction in force? The answer depends on your age, your balance, and what you decide to do next.

Your TSP Account Doesn't Disappear

When you leave federal service, your TSP account stays open. You don't have to do anything immediately. Your money remains invested in whatever funds you've chosen, and it continues to grow tax-deferred. The TSP will send you a separation notice with your options, but there's no deadline that forces an immediate decision.

What you lose is the ability to make new contributions. You can no longer contribute to the TSP as a separated participant, and you no longer receive agency matching. The account is frozen in terms of contributions but fully active in terms of investment.

Option 1 — Leave It In the TSP

This is often the smartest choice and the one most overlooked. The TSP's expense ratios are among the lowest of any retirement account in existence — around 0.042% as of recent years. Most IRA providers and all retail mutual funds charge significantly more. If you're happy with the TSP's fund lineup (G, F, C, S, I, and L funds), there is no financial reason to move the money.

You can leave your balance in the TSP indefinitely as long as it's above $200. You can still manage your allocation, rebalance, and eventually withdraw under normal retirement rules.

Option 2 — Roll It Into an IRA or New Employer Plan

If you're moving to a private sector job with a 401(k), or if you want access to investment options beyond what the TSP offers, a direct rollover is a clean solution. A direct rollover moves the money from TSP directly to your new account without you ever touching it — no taxes withheld, no penalties, no taxable event.

Never take an indirect rollover (where the check is made out to you) unless you understand the consequences. TSP is required to withhold 20% for federal taxes on indirect distributions. You then have 60 days to deposit 100% of the original amount — including the 20% that was withheld — into a qualifying account. If you can't cover that 20% out of pocket, you'll owe taxes and potentially a 10% early withdrawal penalty on the shortfall.

Option 3 — Cash It Out

This is almost always the worst option and worth understanding exactly why. If you're under 59½ and you take a full distribution, you'll owe ordinary income tax on the entire amount plus a 10% early withdrawal penalty. On a $60,000 TSP balance, that could easily cost $18,000–$22,000 in taxes and penalties depending on your bracket. That's money you worked years to accumulate, gone in a single transaction.

There are limited exceptions — separation from service in the year you turn 55 or later (age 50 for certain public safety and military positions) avoids the 10% penalty, but ordinary income taxes still apply.

Required Minimum Distributions

Once you reach age 73, the IRS requires you to start taking minimum distributions from your TSP whether you want to or not. The TSP will calculate your RMD annually and distribute it automatically if you haven't set up your own withdrawal schedule. Failing to take your RMD triggers a 25% excise tax on the amount you should have withdrawn — one of the steeper penalties in the tax code.

If your TSP balance is large, RMD planning in your 60s matters. A Roth conversion strategy before RMD age can reduce your taxable distributions significantly, though TSP itself does not allow Roth conversions — you'd need to roll to an IRA first.

The Special Case of the Roth TSP

If you made Roth TSP contributions, those dollars were already taxed. Qualified distributions — meaning you're over 59½ and the account is at least five years old — are completely tax-free, including the earnings. If you roll a Roth TSP to a Roth IRA, note that the five-year clock may reset depending on whether you already have an established Roth IRA.

The Bottom Line

Most separated federal employees should leave their TSP alone unless they have a specific reason to move it. The fees are unbeatable, the account is protected, and there's no urgency. If you do move it, always use a direct rollover. If someone is pressuring you to cash out your TSP to invest in something else, that is a red flag.

Still contributing to TSP and wondering how much you actually need? See our TSP target balance guide for FERS employees retiring in their 60s.