What Happens If I Close My Thrift Savings Plan?

The Thrift Savings Plan for federal employees is a defined contribution plan, which means your account is funded through elective salary deferrals. Some federal agencies also offer an employer match. Once you're ready to leave federal service, you can withdraw your retirement money and close your account. Keep in mind that TSP withdrawals are generally subject to federal taxes.

Full Withdrawal Options

If you want to make a full withdrawal of your TSP money, there are three basic options for receiving the cash. You can request a lump-sum payment, a lifetime annuity, or a series of monthly payments based on a set dollar amount or your life expectancy. The annuity is a monthly benefit paid to you for life. You can only request a lifetime annuity if your account balance is $3,500 or more, as of 2013. You can combine two or more of these options, but you'll still be required to meet the minimum balance for the lifetime annuity.

Taxes

Generally, full withdrawals from a TSP are subject to federal income taxes. You may also have to pay state income taxes depending on where you live. Specific tax rules apply to the types of funds you have in your account. Thrift Savings Plans allow you to put contributions into a traditional or Roth IRA. If you withdraw traditional IRA contributions, the money is taxable. Withdrawals of Roth IRA contributions are tax-free, but you may have to pay taxes on the earnings, or investment gains, if you're under age 59 1/2. Traditional and Roth IRA distributions from a TSP are subject to a 10 percent early withdrawal penalty if you're under that age.

Transfers and Rollovers

If you're ready to close your TSP but want to defer paying taxes on the money, you can transfer or roll the money over into another retirement account. Generally, you can move your TSP money into a traditional or Roth IRA or another employer's qualified plan. If you request a direct transfer of the funds, you won't have to pay any taxes on the money until you start making withdrawals. If the money is sent to you, 20 percent will automatically be withheld for federal taxes. If you don't make up the difference when you complete the rollover, the 20 percent that was withheld will be treated as a taxable distribution.

Considerations

It can take up to eight weeks for a full withdrawal of your TSP to be processed and your account to be closed. If you have any outstanding loans from your account, the balance owed will be deducted from the amount you're withdrawing. If you're making a partial withdrawal, the rest of the money will stay in your account until you decide what to do with it. If you die with money remaining in your account, the funds will be distributed to your spouse, children or other heirs.

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About the Author

Rebecca Lake is a freelance writer and virtual assistant living in the southeast. She has been writing professionally since 2009 for various websites. Lake received her master's degree in criminal justice from Charleston Southern University.

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