Federal employees and members of the military have access to the Thrift Savings Plan, a retirement vehicle specifically designed for government workers. The TSP was created in 1986 as part of the Federal Employees Retirement System Act. Public sector workers may contribute to a TSP account, but the specific agency or government organization they work for may also contribute on their behalf.
TSP Account Definition
A TSP account is nearly identical to a 401k, except for the fact that it is maintained and managed by the federal government. Deposits into a TSP result in an income tax deduction, and any growth accumulates tax-deferred. Additionally, contribution maximums remain the same for TSP account holders and 401k participants alike. Within the TSP, account owners can diversify contributions among a handful of investment options, each with its own unique goal and risk level.
When you retire from government service and are eligible to begin collecting benefits from your TSP account, you have three basic options -- you can leave your money in the TSP portfolio, transfer your assets into an IRA or other employer-sponsored plan, annuitize the account, or walk away with a lump sum. Each of these options carries its own pros and cons, and your individual situation should determine the most appropriate choice. Regardless of how you proceed, you must file the proper paperwork and provide necessary documentation to initiate a transfer or withdrawal. Once received, your request will be processed and the changes initiated, typically within two to three weeks.
You have the option of closing your TSP account and requesting a check for the full balance, but this is not typically a recommended course of action. Unless your financial situation is in such dire straits that no alternative exists, cashing out your TSP in a lump sum is not in your best interest. However, if you make such a request, your investment positions will be liquidated at the current market rate and the value converted to cash, followed by the issuance of a check for that amount.
If you cash out your TSP, you will not receive the full value that was in your account. IRS regulations require the TSP to withhold 20 percent of the distribution amount for income tax purposes. Plus, the advantages of tax-deferred growth disappear when you close your account. Unless you have other qualified retirement accounts still open, cashing out your TSP leaves you with no money earmarked specifically for your future.