What Happens to Your TSP When You Leave the Military

Separating or retiring? Your TSP doesn't disappear — it's yours to keep. But you'll have choices to make, and a few of them carry real tax consequences. Here's a clear rundown.

Your money is vested (mostly)

Everything you contributed, plus all government matching contributions, is yours immediately. The only piece with a catch is the automatic 1% contributions under the Blended Retirement System, which vest after two years of service. Hit that mark and 100% of your balance goes with you.

Option 1: Leave it in the TSP

You don't have to move anything. The TSP is well known for very low fees, and you can keep your money invested in the same funds after you separate. You can't make new contributions once you leave federal service, but your balance keeps growing with the market, and you can still rebalance among funds.

Option 2: Roll it over

You can roll your TSP into an IRA or a new employer's 401(k). Reasons people do this include wanting more investment choices or consolidating accounts. Two important cautions:

• Use a direct (trustee-to-trustee) rollover so the money moves without being paid to you. An indirect rollover can trigger withholding and a 60-day deadline.
• Keep Roth and Traditional straight. Roll Roth TSP into a Roth IRA and Traditional TSP into a Traditional IRA to avoid an accidental taxable event. (See Roth vs. Traditional.)

Option 3: Withdraw it

You can take money out, but cashing out early is usually the most expensive choice. Withdrawals of Traditional funds are taxed as income, and taking money before age 59½ generally adds a 10% early-withdrawal penalty (with some exceptions). Beyond the tax hit, you lose decades of potential compounding.

Common mistakes to avoid

• Cashing out a small balance "because it's small." Left invested, even a modest balance can grow substantially over decades.
• Leaving before the 1% vests (under BRS) and forfeiting it unnecessarily, if you're close.
• Doing an indirect rollover and missing the 60-day window — turning a tax-free move into a taxable distribution.
• Losing track of the account. Keep your contact info updated with the TSP so you don't lose sight of your money.

Related reading: TSP funds explained · Lifecycle (L) Funds guide · BRS vs. High-3