The TSP is designed to make up one third of a federal employee’s retirement income, but taking money out of it can be a tough decision. One of the most common distribution strategies I have heard is, “I’m going to wait until I have to.”
What does “I’m going to wait” mean? When I probe a little more to see exactly what the person means, the answer I usually hear is “I’m going to wait until I have to take distributions.” That is your required minimum distribution (RMD) age: 73 if you were born from 1951 to 1959, and 75 if you were born in 1960 or later. (When I first wrote this article the RMD age was 72.)
Why wait until RMD age? Some answers I have heard are:
- I want to save my TSP
- I don’t need it
To be certain, people in this situation are going to be much better off financially in retirement than the retiree that takes large distributions and runs out of money, but is waiting the best thing to do? Financial planning isn’t only about putting yourself in a good situation, it’s also optimizing the resources you have.
Many times, the reason people don’t take money out of their TSP is fear. Retirement and the distribution stage are completely different than what most people have grown accustomed to: saving for retirement. Then there is the question of how much of a distribution a retiree can take, which can be challenging as well (I look at one common rule of thumb in Should You Withdraw 4% From Your TSP?).
Sometimes, delaying withdrawals from TSP isn’t the best option, and I would like to offer two legitimate reasons why a person shouldn’t delay.
- It’s time to enjoy life and spend some money
- By delaying you are also delaying your tax liability as well as compounding it
Reason 1: Enjoy life in retirement
It seems odd, but I have encouraged a retiree to spend some of their retirement savings more times than I can count. Retirement can be difficult because you are forced to do a 180 degree turn and start taking distributions instead of saving (which most people have been doing for 30+ years!). There is nothing wrong with developing a responsible retirement plan and periodically withdrawing money from your investments.
If spending isn’t your thing, do you enjoy giving money to kids, grandkids, or charities? Some retirees plan to leave a substantial amount of assets to family members, which is a valid strategy, however, if it’s possible to start gifting assets now, why wait? Gifting for grandkids’ education or even a down payment on a home could be a satisfying way of spending. For 2026, you can give up to $19,000 per person without filing a gift tax return. If charity is your goal, see how to reduce your retirement tax bill by strategic giving.
Reason 2: Waiting for RMDs can create a bigger tax bill
Here are a few things that delaying your TSP distributions does:
- Allows your assets time to grow, which increases your tax liability
- Gives you less control in the future
- Gives your beneficiaries less control
These three obstacles are hard to argue with. As a tax deferred investment grows, so does the tax liability that someone will eventually have to pay, as well as the RMD that you are forced to take at 73 or 75. Your beneficiary’s tax liability and possible RMD grows as well. I explain how RMDs are calculated in Understanding and Planning for Required Minimum Distributions.
What should I do differently?
Everyone that invests money should also consider the tax ramifications before making an investment. This is really simple: paying more in taxes means less money that the investor gets to keep. One of the biggest mistakes I believe people make when saving for retirement is not saving with the end in mind. A great example of this are federal employees who are retiring and say they have enough income from their FERS Annuity and Social Security, and all of their savings is in Traditional TSP. They have no need or plans to take distributions from TSP.
If you don’t plan to take distributions, then the traditional TSP probably isn’t the best investment vehicle for you. Here are a few ideas that you could use to ease your future tax burden and RMDs.
- Contribute to Roth IRAs immediately, as long as you (or your spouse) still have earned income! For 2026, individuals age 50 and over can contribute $8,600 per year ($7,500 plus a $1,100 catch-up). This is the easiest thing to do. If you are over the income limit for contributing to a Roth, then you may be able to do a backdoor Roth IRA.
- Contribute to Roth TSP. Everyone can contribute to Roth TSP regardless of income. The limits in 2026 are $24,500 plus an additional $8,000 for employees age 50 and older ($11,250 for ages 60 to 63). Starting in 2026, if your FICA wages last year were over $150,000, your catch-up contributions have to go to Roth anyway.
- ROTH CONVERSION
- ROTH CONVERSION
- ROTH CONVERSION
Why look at a Roth conversion every year?
Did I hear somebody say Roth conversion? Yes, if you have assets in a tax deferred account, like the Thrift Savings Plan or an IRA, conversions are something you should look at annually. The reason is you can make the asset more tax efficient to accomplish your future goals. Since January 28, 2026, you can convert traditional TSP to Roth TSP inside the plan, or you can convert in an IRA (see Roth TSP Conversions). By moving assets to Roth, you gain a few advantages:
- No forced distributions during your lifetime (Roth IRAs, and Roth TSP since 2024)
- Income tax free withdrawals
- Passes to heirs income tax free
- Heirs can generally keep the money growing income tax free for up to 10 years
- Reduce your future RMDs from your IRA or TSP
Current taxes are the primary reason it’s beneficial to look at conversions annually versus converting all at once. A $500,000 conversion in one year means $500,000 of taxable income in that year. This could easily push the retiree into the 35% or 37% tax bracket versus 22%, and could also cause you to pay higher Medicare premiums. Instead of a full conversion, it may be beneficial to convert $22,000 this year because that is the amount left in the 22% tax bracket.
Waiting until your RMD age when withdrawals are forced tends to be a common strategy for many federal employees. While it may be common, and the people doing it tend to be responsible with their money, I have found very few instances where it is the optimal strategy. I would like to urge you to look at your goals and see if your savings instruments match up with them. If not, make some changes. If you need help and would like a partner on your retirement journey, I’d be happy to schedule a call and see if we can help.
Brad Bobb, CFP®, Bobb Financial, is an expert in federal benefits and retirement planning for federal employees.
This article is for educational purposes only and is not individualized financial advice. Figures are illustrative.