Thrift Savings Plan (TSP) Benefits: What to Do if You Get Laid Off by the Government in Portland, Oregon

Thrift Savings Plan (TSP) Benefits: What to Do if You Get Laid Off by the Government in Portland, Oregon

Thrift Savings Plan (TSP) Benefits: What to Do if You Get Laid Off by the Government in Portland, Oregon

Losing a job is never easy, and for federal employees or members of the uniformed services in Portland, OR, navigating the complexities of your Thrift Savings Plan (TSP) after a layoff can add an additional layer of stress. The TSP can be a powerful retirement savings tool, offering tax advantages and low administrative fees to help secure your financial future.1 However, if you’re laid off or leave federal service, it’s important to understand what happens to your TSP and how to manage it effectively. This article will walk you through your options and provide helpful insights into what you should do if you find yourself in this situation in Portland, Oregon or anywhere in the USA.

1. Understand Your TSP Options When You Leave Federal Service

If you’re laid off or voluntarily leave your government job, your TSP account will remain intact1, but you will need to decide what to do with your funds. As a federal employee in Portland, OR, you have several options for managing your TSP2:

  • Leave Your TSP Account as-is: One of the simplest options is to leave your funds in the TSP. The account will continue to grow according to your investment choices, and you won’t be required to make any changes. The TSP allows you to keep your money in the plan as long as your balance is above $200, and you will not incur any fees for leaving it there. However, you won’t be able to make new contributions unless you return to federal service2.
  • Roll Over Your TSP to an IRA or Another Employer’s 401(k): If you get a new job in Portland that offers a 401(k) plan, you may want to roll over your TSP balance into your new employer’s retirement account. Alternatively, you can roll your TSP funds into an Individual Retirement Account (IRA) for more investment flexibility. Rolling over to an IRA gives you a wider range of investment options, but it also means losing access to the low fees and government-backed stability that the TSP provides. Be sure to research both your employer’s 401(k) and IRA options before making a decision.3
  • Withdraw Your TSP Funds: If you need access to the money right away, you can choose to withdraw your TSP funds. However, keep in mind that if you’re under age 59½, you’ll face a 10% early withdrawal penalty in addition to paying income tax on your pre-tax contributions and earnings.4
  • Convert to a Roth IRA (for Roth TSP holders): If you have a Roth TSP, you can roll over your Roth TSP to a Roth IRA. This allows you to maintain the tax-free growth potential of your Roth contributions, provided you follow the rules for qualified withdrawals. This is a good option if you want to continue building your retirement savings with tax-free growth, especially if you plan to leave the workforce for a while or transition to a new career.5

2. Understand the Tax Implications

The IRS treats TSP withdrawals and rollovers differently depending on the type of account (Traditional TSP vs. Roth TSP) and the method you choose.5 Understanding the tax consequences is essential to making the right decision.

  • Traditional TSP: If you decide to leave your funds in the TSP or roll them over to an IRA, you won’t pay taxes until you withdraw the money. If you choose to withdraw your funds directly, you’ll pay income tax on the pre-tax contributions and earnings. If you’re under 59½, you may face an additional 10% early withdrawal penalty. In Portland, where local taxes are generally favorable but state income taxes exist, it’s important to consider the full tax impact of a withdrawal.5
  • Roth TSP: Roth TSP contributions are made with after-tax dollars, so qualified withdrawals in retirement will be tax-free. If you roll over your Roth TSP into a Roth IRA, you will maintain the tax-free growth benefit. However, if you withdraw before age 59½ and the Roth TSP account is less than five years old, you might face taxes and penalties on any earnings.6

Consulting with a tax advisor can help you understand how your withdrawal will impact your financial situation.

3. Consider Your Long-Term Retirement Goals

Your decision about what to do with your TSP should align with your long-term retirement goals. If you’re planning to transition to another job in Portland with retirement benefits, it may make sense to roll your TSP over to that employer’s 401(k) plan. If you’re looking to maintain more flexibility in your investments, an IRA rollover might be the right choice.7

Consider the following when making your decision:

  • How close are you to retirement? If retirement is in the near future, you may want to leave your funds in the TSP to take advantage of the low fees and stable investment options. If you’re younger and have more time to grow your savings, rolling over your TSP into an IRA may provide more investment opportunities, though you will have to pay attention to fees and investment strategies.8
  • What are your investment preferences? The TSP provides a straightforward set of investment options, but an IRA may give you more flexibility with the types of assets you can hold. If you’re interested in more control over your investments, rolling over to an IRA could be beneficial.9
  • What are the fees? One of the main advantages of the TSP is its low administrative fees. When rolling over to an IRA or a new 401(k), you’ll need to evaluate the fees associated with those accounts. High fees can erode your retirement savings over time, so it’s important to weigh this factor carefully.10

4. Explore TSP Loans if You Still Have an Active Account

If you still have an active TSP account with a balance over $1,000, you may be eligible for a TSP loan. However, it’s important to note that once you leave federal service, you can no longer make contributions to your TSP account. Taking a loan from your TSP should be considered carefully, as it comes with obligations and risks. If you fail to repay the loan, it will be treated as a taxable distribution, and you will owe taxes and possibly penalties.10

5. Keep Your TSP Beneficiaries Updated

If you are laid off or leave your government job, it’s important to update your beneficiary designations for your TSP account. This ensures that your assets are distributed according to your wishes in the event of your death. Updating your beneficiary information can be done easily online through the TSP website, and it’s a critical step to help ensure that your loved ones are taken care of.11

6. Consult with a Financial Advisor

If you’re unsure about what to do with your TSP after a layoff, seeking professional advice may be a smart move. A CERTIFIED FINANCIAL PLANNER (CFP®) or retirement specialist serving clients in Portland can help you navigate your options, consider the tax implications, and create a strategy that helps to align your financial goals. Portland, Oregon has a robust financial services community, so finding a trusted advisor to guide you through this process should be relatively easy.

Conclusion

Being laid off from a government job in Portland, OR, can be a challenging experience, but with careful planning and a solid knowledge of your options, you can continue to manage your Thrift Savings Plan (TSP) effectively. Whether you decide to leave your funds in the TSP, roll them over to an IRA or 401(k), or make a withdrawal, it’s important to consider your long-term financial goals, the tax implications, and available options. Taking the time to make an informed decision can help ensure that your retirement savings stay on track, even during periods of transition.

 

About Harlow Wealth Management

Harlow Wealth Management, Inc. is an independently owned and operated advisor. We serve clients living in the greater southwest Washington and Portland metropolitan areas, with an office in downtown Vancouver, Washington. While our firm was officially created in 2005, our founding president, Danny Harlow, has been serving the retirement financial planning needs of our community since 1973. We focus on helping those who are retired or about to retire by building a customized retirement strategy. Our proprietary approach, the “Harlow Way”, addresses the following 5 key areas: designing a sustainable retirement income strategy, addressing healthcare and long-term care risk, investments and growing your portfolio, taxes, and estate/legacy strategies.

References

  1. https://en.wikipedia.org/wiki/Thrift_Savings_Plan
  2. https://www.ecfr.gov/current/title-5/chapter-VI/part-1650
  3. https://www.tsp.gov/publications/tspfs05.pdf
  4. https://www.fedweek.com/tsp/tsp-early-withdrawal-penalty-myth/
  5. https://www.tsp.gov/publications/tspfs05.pdf
  6. https://www.tsp.gov/publications/tspbk26.pdf
  7. https://rolloveryour401k.com/rolling-over-your-thrift-savings-plan-tsp/
  8. https://www.forbes.com/sites/robertberger/2017/02/28/should-you-roll-over-your-tsp-do-not-go-gentle-into-that-good-night
  9. https://stephenzelcer.com/14-differences-between-tsp-and-ira/
  10. https://en.wikipedia.org/wiki/Thrift_Savings_Plan
  11. https://www.tsp.gov/publications/tspbk31.pdf

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