The Rule of 55 allows federal employees to access their Thrift Savings Plan (TSP) if they separate from service in the year they turn 55 or later without penalty. For federal law enforcement officers (LEOs) and other special category employees (SCEs), however, the rules are a little different.

Federal SCEs can access TSP if they meet the SCE retirement requirements, which are:

• Retirement at any age with 25 years of service
• Retirement at age 50 or older with 20 years or more of service

Prior to this recent change, LEOs had to wait until the year they turned 50 to retire to access their TSP without penalty.

Should a LEO Retiree Leave Money in TSP?

The short answer to this question is probably. There are a couple of things to remember when moving funds out of TSP:

1. If you transfer all funds out of your TSP, you can never go back to it in retirement.
2. Prior to age 59 ½, your TSP is more accessible than an IRA.

If there is any chance you may want to go back to your TSP or need access to the funds in your TSP prior to age 59½, then it would be a good idea to leave some funds in TSP. The minimum amount required to keep your TSP open is $200.

How Much Should You Leave in TSP?

This is a great question, and the answer is different for everyone. Here are a few examples for those who want to move funds out of TSP that may resonate with your situation.

1. A retiree that takes a contract job and doesn’t think he will need funds prior to age 59½. Although he doesn’t expect to need access to TSP, he would like to keep it open. He could consider leaving $25,000 in the G fund since it is the one unique fund TSP offers. This way, the TSP stays open giving him access to the funds prior to age 59½, and he can transfer IRA funds back into the TSP as long as it stays open. He can take advantage of the flexibility of another custodian with access to thousands of funds, ETFs, etc., via a transfer.
2. Occasionally, a LEO will retire early without taking a contract job. In other words, a person may retire at the age of 50 and start taking distributions from investment accounts right away. If the retiree has all retirement funds in TSP and Roth TSP, and has no other investment accounts, he probably needs immediate access to his TSP. A retiree who needs a distribution of $30,000 a year from TSP for up to 10 years would want to leave at least 10 years of income in TSP and maybe a bit of a buffer, so he would ideally leave $300,000 to $400,000 in TSP. This amount should be enough for the next 10 years of distributions; if he needs more, he could always move funds back into TSP.
3. I would call option 3 the ideal LEO retiree scenario. This retiree has different types of investment accounts that include a taxable account. A taxable account gives the retiree immediate access to funds without penalty. Having enough money in the taxable account to cover the next 10 years would give him more flexibility regarding moving his TSP funds to an IRA.

The key here is to not make a brash decision and move all your funds out of TSP if there is even a slight chance you may need to access these funds prior to age 59½. I have seen retirees move 100% of their TSP out and end up having to pay a 10% penalty to access those funds, which is exactly what not to do.

Access to Roth TSP Is a Little Different

Although SCEs have access to their TSP prior to age 59½, they do not have access to their Roth TSP prior to age 59½. Withdrawals from Roth TSP prior to age 59½ would bring into play a pro rata rule that says that a distribution would be part contribution and part earnings. The earnings portion would be subject to income taxes prior to age 59½.

This rule is a great reason to only take distributions from traditional TSPs as well as to move Roth TSP funds to a Roth IRA. The benefit of moving to a Roth IRA is that contributions can come out of the Roth IRA penalty and tax free. You still have the 5-year rule for taking earnings, but there is no 5-year rule for the contributions. One other benefit of doing a transfer is that you eliminate any possible mistake of taking a distribution from your Roth TSP.

Hopefully, these rules are familiar to those nearing retirement. If they’re not, it is important to familiarize yourself with them or find an advisor who can help you navigate them. If you would like help putting a retirement plan together or would like the help of a CFP® professional on your retirement journey, you are welcome to set up an initial call.

Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.