The Thrift Savings Plan is widely known as one of the best retirement plans available. It excels at being simple and having low cost, but that doesn’t mean there aren’t some frustrating aspects to it.
The decision to keep TSP in retirement is an important one. The odd aspects of TSP should definitely be a factor in one’s decision to keep your TSP or transfer to an IRA. (For the full rundown of your choices, see TSP in Retirement.)
Odd aspects of the TSP that still apply in 2026
Mandatory tax withholding
Isn’t this one fun? The IRS is going to tax you regardless of how and when you pull money out of TSP, but the TSP has their own set of rules for how much they will withhold on distributions. Single withdrawals and installments expected to last less than 10 years get at least 20% federal withholding unless you transfer them. Be sure to become familiar with how withholding works.
You can’t specify which funds a distribution comes from
The TSP doesn’t allow you to determine which funds your distributions come from. Any TSP distribution will be proportionate to your TSP allocation. For example, if you have 60% in the C fund and 40% in the G fund, your distribution will come from 60% C fund and 40% G fund.
Many people plan to use the bucket or barbell strategy in retirement. These strategies are based on choosing between stock and bond withdrawals. To summarize the strategy, a retiree would withdraw from bond investments in years when the market is down and continue to do so until the stocks recover. With the prorated distribution method of TSP, a retiree would have to rebalance after every distribution. In other words, it would make these strategies more difficult to implement in retirement.
Beneficiaries of a Beneficiary Participant Account (BPA) can’t use an inherited IRA
This is potentially a BIG deal. Surviving spouses can maintain TSP as a Beneficiary Participant Account if the TSP holder passes first (more in Inheriting a Spousal TSP). At the surviving spouse’s death all funds must be withdrawn from TSP.
A beneficiary can typically move an IRA or retirement account to an inherited IRA, which gives them a 10-year window to remove funds. This 10-year window can potentially save the beneficiary tens of thousands of dollars, versus withdrawing all of the funds in one year.
The TSP does not allow a beneficiary to transfer funds from a BPA to an inherited IRA. Per TSP:
If a beneficiary participant dies, the new beneficiary(ies) cannot continue to maintain the account in the TSP. Also, the death benefit payment cannot be transferred or rolled over into any type of IRA or plan.
This could make a beneficiary pay the top current tax rate of 37% on distributions versus a lower tax rate that could be as low as 12%.
Lifecycle funds are overly conservative
This is one of the reasons that I’m not a fan of Lifecycle funds. The TSP’s Lifecycle funds are much more conservative than comparable target date funds. Here is a comparison I made when I first wrote this article in 2021 (approximate allocations according to each company’s website at the time).
- Fidelity’s 2040 fund = 92% stocks / 8% bonds
- Vanguard 2040 fund = 82% stocks / 18% bonds
- Blackrock LifePath Index 2040 = 84% stocks / 16% bonds
- TSP Lifecycle 2040 = 72% stocks / 28% bonds
The Lifecycle 2040 fund had at least 10% more bonds than each of the other three funds. What I have found is that this can lead to federal employees and retirees being more conservative than they intend to be, or than they should be.
No Qualified Charitable Distributions (QCDs)
A QCD is a method of charitable giving from an IRA. Those age 70½ and older can give up to $111,000 in 2026 to a charity directly from their IRA. This essentially enables people to take distributions from IRAs without paying taxes on them. The QCD can also count as all or part of a Required Minimum Distribution (RMD) for those who have reached RMD age (73, or 75 if you were born in 1960 or later). Utilizing QCDs from an IRA can be a very tax efficient way of giving, but the TSP doesn’t allow them.
Two odd aspects the TSP has fixed
Roth TSP no longer has RMDs
When I first wrote this, Roth TSP was subject to Required Minimum Distributions, which was very unfortunate since many people with Roth TSP plan on leaving the funds to their beneficiaries income tax free. Starting in 2024, Roth TSP has no RMDs during your lifetime, the same as a Roth IRA, so you no longer need to roll Roth TSP to a Roth IRA just to avoid RMDs.
You can now do a Roth conversion inside the TSP
For years the TSP did not allow in-plan conversions, so there was no way to get your traditional TSP dollars into Roth TSP without first moving them to an IRA. That changed on January 28, 2026, when the TSP launched in-plan Roth conversions. Each conversion must be at least $500, and the TSP does not withhold tax on it, so you need to pay the tax from other money. I cover the details in Roth TSP Conversions.
Figure out what is best for you!
Some people may be fine with the nuances mentioned above, yet others may not be. If there are a couple of characteristics that you don’t like, you should look at transferring to an IRA. Whatever you choose, remember that it’s not an all or nothing choice. If you like the benefits of an IRA but love the security of the G fund, you could do a partial transfer to an IRA and leave some funds in TSP. I compare the two side by side in TSP or IRA in Retirement? 12 Differences. Eliminating all of the noise and helping people make informed decisions is what we do here at Bobb Financial Inc.
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.