How to close your thrift savings plan?

If you have separated from your employer and you want to close your Thrift Savings Plan account, there are several things that you need to know. In this article, we explain the steps that you can take to withdraw your funds and close your account and the tax implications of closing down your account.

If you want to close your Thrift Savings Plan account, you must first submit a withdrawal request by logging into your TSP account or by calling TSP via ThriftLine at 1-800-968-3778. Once your withdrawal request is processed, your account will be closed and you will no longer be able to contribute to the plan. However, there may be tax implications associated with cashing out your TSP account.

Why you may want to close your Thrift Savings Plan account

There are a few reasons why you may want to close your Thrift Savings Plan account. One reason may be that you are no longer a federal service employee. In this case, you won’t be able to make contributions to your TSP account and there would be no point in keeping it open.

Another reason may be that you are nearing retirement and you would like to access your funds to use them for other purposes. Since you will no longer be able to contribute to the plan, you can decide to make a full withdrawal, or roll over the funds to an IRA where you can manage your retirement money.

Whatever the reason may be, closing your TSP account is a simple process that can be completed by following simple steps.

How to withdraw money from your TSP after separation

Once you leave the federal service, you have several options for your TSP account. You can leave your money in the TSP, withdraw it all at once, or set up a withdrawal plan known as a "lifetime annuity."

If you elect to take a lump-sum withdrawal, you will receive one payment that will include both your TSP contributions and any earnings on those contributions. You will owe income taxes on the amount of the withdrawal that is considered taxable, and you may also owe a 10% early withdrawal penalty if you are below age 59½.

To take a partial withdrawal, you must first elect one of the TSP's monthly payment options. You will then be allowed to make a one-time withdrawal of some or all of your remaining account balance. The amount of the withdrawal that is considered taxable will depend on the type of payment option you have elected.

Once the withdrawal request is submitted, it will take about two to eight weeks for the withdrawal to be processed and the account closed. If you have an outstanding TSP loan, the unpaid loan balance will be deducted from your account balance, and the balance paid to your bank account.

What are the implications of closing your Thrift Savings?

When you close your Thrift Savings Plan account, you won’t be able to contribute to the plan. Additionally, any funds that are remaining in the account will be distributed via check or direct deposit. This may come with some associated fees such as taxes and account closure fees.

If you have a traditional TSP account, you will owe federal income taxes on the amount you withdraw. However, if you have a Roth TSP account, you won’t pay income taxes if you withdraw the contribution part of your funds; you may still owe taxes on investment earnings or gains. Additionally, early withdrawals before 59 ½ from a traditional TSP or Roth TSP account may be subject to a 10% penalty tax.

Apart from taxes, you should also understand other implications of withdrawing from your TSP account and closing your account. For example, once the request is processed, you will not be able to re-open your account. The account closure is permanent, and you would have to open a new TSP account if you go back to federal service.

Alternatives to closing your TSP account

If you are considering closing your Thrift Savings Plan account, there may be other options that could be more beneficial for you. Here are a few alternatives to consider:

Withdrawing your funds without closing your account

If you are no longer a federal employee, you may be able to withdraw funds from the account, and maintain the account if you leave an account balance of at least $200 in the TSP account. If the TSP account has less than $200, and you are no longer a federal service employee, your TSP account will be automatically cashed out.

Rolling over your funds into another retirement account

You can also roll over your TSP funds into an IRA or 401(k). This can be done by submitting a withdrawal request and choosing the "rollover" option. This option allows you to keep your funds invested and continue growing tax-deferred.

Leaving your funds in the Thrift Savings Plan

If you are not sure what you want to do with your funds, you can also choose to leave the funds in the Thrift Savings Plan. You must have a balance of at least $200 in the account, and the funds will continue to accrue earnings. You can also change how your money is invested by reallocating your funds to the available investment options. If you leave your funds in the TSP plan, you can transfer funds into the plan from a traditional IRA or an eligible employer plan.

Final thoughts

Closing your Thrift Savings Plan account is a big decision, and you should consider its implications such as the fees associated with account closure. Also, if you have outstanding loans from your TSP account, you must pay back the unpaid loan amounts before the account can be closed.

Additionally, there may be other alternative options to closing your account such as rolling over to another retirement plan, withdrawing funds and keeping the account open, and leaving the retirement money in the account.