TSP withdrawal options for military retirees, planned by Savant Wealth Management

When does the TSP start to look like a bank account?

The TSP starts to look like a bank account the day you separate, but it still charges for early use. If you separate before the calendar year you turn 55, any withdrawal before 59½ carries a 10% IRS penalty on top of ordinary income tax, unless an exception applies.

The belief is common: once you separate, the TSP is simply your money to use. The household that acts on it is usually in its 40s, with a pension, a second-career salary about to start and no home after several moves. In the example later on this page, Ramon separates at 43 with a $380,000 TSP, the biggest and easiest pot to reach. TSP loans stop at separation, and a loan left unpaid afterward becomes a taxable distribution.

Savant Wealth Management puts each cash need on the list with its due date. Ramon's 3-month gap before a $120,000 job starts goes in month 1. The house has no fixed due date, so it sits lower.

Know the 4 TSP withdrawal options

You can take partial withdrawals after separation, as often as once every 30 days. You can set up installment payments, monthly, quarterly or annual, as a fixed dollar amount or based on life expectancy, and you can change them later. You can buy a life annuity, which is irrevocable once bought. Or you can mix these. Every withdrawal comes pro rata from the funds you hold, and you choose whether it comes from the traditional balance, the Roth balance or both proportionally. A single payment you don't roll over has 20% federal tax withheld.

Same question at 43 and 66, 2 answers

Both households ask the same thing: should we start taking money out of the TSP now? Both assume more cash is safer. The answers differ.

A hypothetical household: Ramon, 43, and Keiko, 41, want $35,000 for their first down payment and plan a $50,000 partial withdrawal from his $380,000 traditional TSP. Ramon separated this year, so the 10% penalty is $5,000. At a 20% combined income tax rate, assumed for illustration, the tax is $10,000. That leaves $35,000.

The other path is slower. They save $1,500 each month from his retired pay for 24 months, which is $36,000, and leave the TSP alone. Assuming 5% growth a year, for illustration, the $50,000 they took out would have grown to $52,500 after year 1, $57,881 after year 3 and $63,814 after year 5. After 5 years the TSP holds $484,987 instead of $421,173 (the $330,000 left after the withdrawal, grown at the same 5%).

Compare the TSP balance after 5 years ($421,173 vs $484,987) and the house purchase date (month 3 vs month 24).

Troy and Olga (hypothetical), 66 and 63, get the opposite answer. There's no penalty at their ages and 2 pensions already pay, so monthly installments that cover only the gap in their budget make sense now. Premium-tier planning has its own page.

Saving for 24 months means renting 21 months longer, and home prices may move in that time. Yes, waiting has a cost. The penalty and the lost growth are the larger, known numbers. If the tax rate is 24%, the tax becomes $12,000 and the cash falls to $33,000; if growth is 3%, the balance gap shrinks but doesn't close. All investing carries risk, and the balance can fall as well as grow.

Before Savant Wealth Management suggests any withdrawal, it writes the penalty, the tax cost and 5 years of lost growth on one page.

Line up taxes, Social Security and the TSP-3

Many new retirees believe the 20% the TSP withholds covers the tax. It doesn't. The withdrawal is ordinary income on top of Ramon's retired pay, 9 months of his $120,000 salary and Keiko's pay. The 10% penalty isn't withheld at all, so in the example $5,000 is still owed in April. Retired pay withholding has its own page.

Social Security is more than 20 years away for Ramon. Every year the TSP is left alone, the balance grows, and that growth is part of what later lets him delay his claim. Savant Wealth Management records that link now and leaves the claiming decision for later.

The TSP-3 beneficiary form controls who receives the TSP, even if a will says something else. After 7 moves, check that it names Keiko and lists contingent beneficiaries. The children are 9 and 12, so naming a minor needs a guardian or trust arranged with an estate attorney. The Survivor Benefit Plan election is a separate form with its own page.

Reopen the plan every January

Once a year, in late January, when the TSP 1099-R and the W-2s arrive, we recheck the list with you and put the next due date on top. Extra reviews start sooner for a job loss at the contractor, a signed home contract, a federal civilian job that restarts TSP contributions, separating from the 401(k) employer in the year he turns 55 or later, reaching 59½, and the RMD due at 75.

What happens if you trust the homebuyer exception?

You pay the penalty anyway. The $10,000 first-time homebuyer exception covers IRAs only, not the TSP, so Ramon and Keiko's $50,000 withdrawal at 43 still costs a $5,000 penalty, including $1,000 on the $10,000 they thought was exempt. Careful people make this error because the exception appears in most articles on early withdrawals.

A full withdrawal is the second trap. Taking all $380,000 in one year brings a $38,000 penalty alone, and the whole amount is taxed on top of a $120,000 salary.

Third, a life annuity bought at 43 to create income. The purchase is irrevocable, and the payment is fixed for decades. Before you submit any TSP withdrawal form, write down the penalty, the tax and 5 years of lost growth on one page.

• $5,000 penalty on a $50,000 withdrawal
• $38,000 penalty on a full withdrawal
• Annuity payment locked in for decades

When should you bring your TSP to Savant Wealth Management?

Bring it now if you expect to pull cash from the TSP within 12 months, have a separation date set, or face a job gap or a home purchase. If none of these apply, a later check is enough. That's the quick test.

One limit: for a 43-year-old with a new salary, the plan often says to leave the TSP alone for now. Most of the work then concerns due dates years away. With no job gap, no home purchase and no withdrawal planned within 2 years, a short check later on usually covers it.

Next, send the request form. Savant Wealth Management sends the written fee schedule before the intro call, which takes place by screen-share video or phone. The firm's minimum is $500,000 in investable assets. Bring these:

• Latest TSP statement
• Retirement orders
• Job offer letter showing the 401(k) match
• Most recent tax return