For military service members and veterans
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Request a conversationUsually yes, the costliest financial mistakes after leaving the military are timing errors, because veterans move or claim money before the rules that protect it switch on. Quick test: before you move or claim anything, write down the age at which each penalty rule ends. That's 55 for the employer plan you leave, 59½ for IRAs, 60 for reserve retired pay and 62 for Social Security. Then act in that order.
Old advice says to consolidate. Out-processing handouts say the same: roll the TSP into an IRA, pick a fund, move on. What that advice skips is that a second career puts a salary, a 401(k) and retired pay in the same tax year, and each has its own rules and its own due date.
At Savant Wealth Management, the plan for a new veteran is a short list of decisions in order of due date, each made with the dollar figures in front of you. This article follows one hypothetical reserve chief through those decisions and compares three ways to get from 58 to retirement.
Quick summary
- Write down the age where each penalty rule ends: 55, 59½, 60 and 62.
- Keep money in the plan of the employer you left at 55 or later if you need cash before 59½.
- Add your TSP and 401(k) deferrals together, because the 2026 limit of $24,500 covers both.
- Price the Survivor Benefit Plan election before you sign anything at out-processing.
- Compare your Social Security estimate at 62, 67 and 70 before claiming.
What veterans believe in the first 2 years
Belief 1: the TSP is just another IRA, so rolling everything together is tidy. An IRA loses the separation-at-55 access that the TSP and a 401(k) give you, so withdrawals before 59½ cost a 10% penalty.
Belief 2: two employer plans mean two deferral limits. The IRS employee deferral limit for 2026 is $24,500, and it covers the TSP and a 401(k) combined. Excess deferrals not removed by the April 15 due date are taxed twice. Another page on the site covers the details.
Belief 3: withholding on retired pay and a new salary sorts itself out. It doesn't. Each payer withholds as if it were your only income, so two incomes often leave you short in April.
Belief 4: the Survivor Benefit Plan is a form to sign at out-processing. It's a one-time election with a cost and a payout you should price first.
What happens if you cash out the TSP early?
A withdrawal before 59½ owes ordinary income tax plus a 10% additional tax. One exception matters: if you separate from an employer in the calendar year you turn 55 or later, that employer's plan (the TSP or a 401(k)) can pay out without the 10% penalty. An IRA cannot.
Cashing out a $100,000 TSP at 45 costs a $10,000 penalty before any income tax. The tax cost lands in the year you take the money, often on top of a full second-career salary, which pushes the withdrawal into higher brackets.
Work through it in this order:
Option 1: Lamar stops at 58 and bridges with the 401(k)
Lamar is a hypothetical household of one: 58, a divorced Navy Reserve chief with 24 good years, now a hospital IT manager with $540,000 across the TSP and a 401(k). A court order divides his future retired pay. He leaves the hospital at 58 and needs $60,000 each year until reserve retired pay starts at 60.
If he keeps the 401(k) in the plan, the separation-at-55 rule applies. The penalty is $0 at 58 and $0 at 59. If he first rolls it into an IRA, each withdrawal before 59½ owes 10%: $60,000 × 10% = $6,000 at 58, and another $6,000 at 59, for $12,000 total.
That mistake of order, rolling over at 58 to tidy up and then drawing before 59½, costs $12,000 in penalties over 2 years. The same withdrawals from the plan cost nothing.
At 60, retired pay of $2,000 each month, less the $500 court-ordered share, leaves $1,500 each month, or $18,000 a year. His draw drops to $60,000 − $18,000 = $42,000. He is past 59½ by then, so either account works.
Savant Wealth Management lays these 3 years out on one page before suggesting any rollover. The due date for each decision sits next to its dollar figure. Investing carries risk, and withdrawals from a portfolio can lose value if markets fall.
| Age | Rule that switches on | What it means for Lamar |
|---|---|---|
| 55 | Separation rule for employer plans | 401(k) draws penalty-free once he leaves |
| 59½ | IRA penalty ends | Rollover to IRA is now safe |
| 60 | Reserve retired pay starts | $1,500 each month after court share |
| 62 | Earliest Social Security claim | About 30% smaller check for life |
| 67 | Full retirement age | Earnings test no longer applies |
| 75 | RMDs begin | Born 1960 or later |
- List every account and the employer it came from
- Mark the plan you left at 55 or later
- Estimate cash needed each year until income starts
- Draw from the penalty-free plan first
- Roll over only money you won't touch before 59½
Option 2: work to 60 and skip the bridge
Working 2 more years means no bridge withdrawals at all, and 2 more years of 401(k) deferrals, up to the $32,500 age-50+ total for 2026 (the IRS limit of $24,500 plus the $8,000 catch-up). The price is 2 years of the time he wanted, and only Lamar can value that.
Option 3: work to 62, then claim Social Security
Claiming at 62 instead of 67 (his full retirement age, since he was born after 1960) permanently cuts his benefit by about 30%, according to the SSA schedule. Lamar should treat the earliest claim age as a choice to price, not a default.
If he keeps working and claims before 67, the SSA earnings test withholds benefits once wages pass $24,480 a year (2026 figure). A $120,000-a-year IT salary would hold back most of the check.
Run this checklist against your own accounts:
Which option fits whom? Option 1 suits someone with a penalty-free plan and 2 years of spending in it. Option 2 suits someone whose plan balance is thin. Option 3 suits someone who wants the largest checks later and can live on pay plus pension.
- Separation year from each employer plan
- Any IRA rollovers made after 55
- Total deferrals across all plans this year
- Withholding on retired pay and on the salary
- SBP election paperwork and its cost
- Social Security estimate at 62, 67 and 70
When does an ex-spouse or heir feel the mistake?
They feel it when the numbers are planned on the wrong base. A court order that divides retired pay is paid from the gross amount, so Lamar's net check is smaller than his statement shows. If he plans on the gross figure, he draws down the 401(k) faster, and his adult children inherit less. A non-spouse heir generally must empty an inherited account within 10 years, paying tax as they go.
One limit on all of this: the separation-at-55 exception covers only the plan of the employer you left, in the year you turn 55 or later. This page doesn't interpret your own court order or state tax rules, so read the order itself and check your state's treatment of retired pay.
Common questions on financial mistakes after leaving the military
How much does the 10% early withdrawal penalty cost on a $60,000 withdrawal at 58?
A $60,000 withdrawal at 58 from an IRA costs a $6,000 penalty, which is 10% of the amount, before any income tax. The same $60,000 taken from the plan of an employer you left at 55 or later owes no penalty. Ordinary income tax applies to the withdrawal either way.
What happens if I roll my 401(k) into an IRA at 57 and then need cash before 59½?
Once the money sits in an IRA, the separation-at-55 exception no longer applies, so each withdrawal before 59½ owes the 10% additional tax plus income tax. On $60,000 that is $6,000 for each year you draw. Leaving the money in the plan until you need it avoids that cost.
Is it better to bridge to a reserve pension with 401(k) withdrawals or by claiming Social Security at 62?
For most veterans with a penalty-free plan, bridging with plan withdrawals costs less over a lifetime, because claiming at 62 instead of 67 permanently cuts the benefit by about 30%. Claiming early can make sense with a thin balance or a short life expectancy. Price both before choosing.
Bring these to Savant Wealth Management
Talk with Savant Wealth Management within the first 2 years out, before any rollover or Social Security claim. Bring your TSP and 401(k) statements, the court order on retired pay, your retirement points statement and your Social Security estimate. The fee schedule arrives in writing before your intro call, and the client minimum is $500K in investable assets.
Primary sources
This content is general information and education. It is not individualized investment advice, tax advice or legal guidance. Investing involves risk, including the possible loss of principal. Before making financial decisions, talk to a professional who understands your full situation.