Intro
The Thrift Savings Plan is one of the best-designed retirement accounts in the country — low fees, simple fund choices, and a straightforward payout system. For most federal employees it’s also the largest piece of their retirement nest egg.
That makes the decision about what to do with your TSP at retirement one of the biggest financial choices of your career. Roll it all to an IRA? Leave it in TSP? Take a lump sum? Split it? The wrong choice can cost tens of thousands of dollars — either in taxes, in lost planning flexibility, or in early-withdrawal penalties most retirees don’t realize they’d trigger.
Here are the five TSP rollover mistakes we see most often, and what smart federal retirees do instead.
Mistake 1: Rolling everything to an IRA without doing the math
The most common — and often most expensive — mistake is doing a full rollover of your entire TSP balance to an IRA immediately at retirement. It feels productive. Your money is now “in one place.” An advisor may have suggested it. But it’s frequently not the right move.
Here’s why. The TSP has some of the lowest expense ratios of any retirement account in existence. The C Fund charges about 0.05%. A typical IRA in an S&P 500 index fund costs around 0.03% to 0.10% — comparable. But other TSP funds are cheaper than most IRA equivalents, and TSP as a whole has no advisor fees, wrap fees, or hidden costs.
If you roll to an IRA and start paying a 1% advisor management fee, you’ve just increased your annual costs by roughly 20x. On a $500,000 balance, that’s $5,000 per year — every year — for the rest of your retirement.
The right question isn’t “should I roll to an IRA?” It’s “what does the IRA give me that the TSP doesn’t, and is it worth the extra cost?” IRAs offer more flexible withdrawal timing, more investment choices, better Roth conversion mechanics, and better beneficiary options. Whether those matter depends on your specific plan. But rolling everything by default — without knowing what you’re gaining — is a mistake.
Mistake 2: Losing the age-55 penalty exception
This one causes real regret. Federal employees who separate from service in or after the year they turn 55 can take TSP withdrawals without the standard 10% early-withdrawal penalty. This exception applies to TSP specifically — it does not apply to IRAs.
If you retire at 56 with $600,000 in your TSP and roll everything to an IRA before turning 59½, you’ve just erased that exception. Any withdrawal from the IRA between 56 and 59½ gets hit with the 10% penalty. On a $50,000 withdrawal, that’s $5,000 lost — for no reason other than a paperwork move that seemed harmless.
The fix: if you plan to draw meaningful income from your retirement accounts before 59½, keep at least that portion in TSP where the age-55 exception applies. Roll to an IRA only after 59½, or roll only the portion you won’t touch until 59½ or later.
Special note for law enforcement, firefighters, and air traffic controllers: your exception starts at age 50, not 55. Same rule applies — don’t roll to an IRA before 59½ if you’re actively drawing from the account.
Mistake 3: Taking a lump-sum distribution to “get access to your money”
Some retirees take the entire TSP balance as a lump-sum cash distribution rather than rolling it over. The reasoning is usually “I want the money accessible” or “I want to pay off the house.”
The tax consequences are brutal. A $400,000 lump-sum distribution from traditional TSP is treated as $400,000 of ordinary income in the year you receive it. In 2026, that pushes a couple filing jointly into the top federal tax brackets and easily generates a $110,000+ federal tax bill — before state taxes. Add Colorado’s 4.4% state income tax and you’re looking at $130,000+ in taxes on a single-year distribution.
The same $400,000 rolled to an IRA and withdrawn gradually over 15 years at $27,000/year would fall in the 12% and 22% federal brackets, generating maybe $50,000 total in federal taxes across the entire withdrawal period. Same money, less than half the tax hit.
The lesson: even if you truly want the funds accessible, take periodic withdrawals from your TSP or IRA. A lump-sum distribution is almost never the right choice unless the balance is very small.
Mistake 4: Missing the 60-day rollover window
The IRS gives you exactly 60 days to complete an indirect rollover — where you receive the funds personally and then deposit them into another retirement account. Miss the window, and the entire distribution becomes a taxable event.
This trap is easy to fall into. Some financial institutions still process rollovers by cutting a check to the account holder. The retiree assumes they can deposit it whenever, or they get distracted by moving, health events, or family issues. Sixty days pass and the $300,000 that was supposed to move tax-free to an IRA is now $300,000 of ordinary income.
The fix: always use a direct trustee-to-trustee rollover. The funds move directly from TSP to the receiving IRA custodian — you never touch the money, and there’s no 60-day clock. Ask your receiving custodian to initiate the rollover on their end and to confirm they’re doing it directly. The paperwork is slightly different from an indirect rollover but easily worth the assurance.
If you’re a federal retiree who has already received TSP funds personally and is inside the 60-day window: deposit them immediately. Every day matters.
Mistake 5: Not coordinating with your spouse’s retirement accounts
If you’re married and your spouse also has retirement accounts — a TSP, an IRA from a previous employer, or a 401(k) — the rollover decision needs to consider both of you as a unit.
The mistakes we see:
Duplicating advisor fees. Both spouses roll to IRAs at the same advisor, both pay a 1% AUM fee. On a combined $1.2M portfolio, that’s $12,000 per year — $180,000 over 15 years — for advisory services that could often be provided at a flat fee or a lower percentage.
Missing Roth conversion opportunities. The retiree with the smaller taxable income can convert Roth at a lower rate than the higher-earning spouse. Coordinated conversions across both spouses’ accounts often save $30,000+ over a decade compared to each spouse converting independently.
Skipping spousal survivor planning. TSP has specific rules about spousal consent and beneficiary designations that don’t perfectly mirror IRA rules. Rolling to an IRA without understanding how your beneficiary designation carries over — or doesn’t — can leave your spouse with less protection than you thought.
Uncoordinated withdrawal timing. If both spouses withdraw from taxable accounts in the same year, you may push into a higher tax bracket unnecessarily. Coordinating withdrawals across both accounts — often keeping one spouse’s IRA growing tax-deferred while the other spouse draws — reduces the joint tax bill.
What smart federal retirees do
The pattern we see with retirees who get their TSP rollover right looks like this:
- They wait. They don’t rush the rollover decision at retirement. They keep the TSP intact for 6-12 months while they build a full retirement income plan.
- They do a partial rollover, not a full one. They roll the portion they don’t need before 59½ (if applicable) to an IRA for Roth conversion flexibility, and leave the rest in TSP for the age-55 exception and for the low expense ratios.
- They use trustee-to-trustee transfers. Every time. No exceptions.
- They plan Roth conversions across the gap years. The years between retirement and Social Security are often the lowest-tax-bracket years of retirement. Strategic Roth conversions in those years save meaningful money.
- They coordinate with their spouse. One integrated plan, not two independent ones.
What we tell federal retirees at Stonebridge
The TSP rollover decision is one of the four core decisions we cover in a Federal Retirement Report. It doesn’t stand alone — your TSP strategy interacts with FERS Supplement timing, FEHB-Medicare coordination, and Social Security claiming. A retiree who optimizes each of these decisions in isolation typically leaves $50,000 to $150,000 on the table over the course of retirement.
If you’d like a personalized walkthrough of your specific TSP rollover decision — including the age-55 exception, Roth conversion opportunities, and coordination with your spouse’s accounts — you can request a free Federal Retirement Report. There’s no charge and no obligation.
The TSP is one of the best retirement accounts in existence. Don’t rush the decision about what to do with it.