TSP After Separation: Five Options Compared
Leave it, roll it to a traditional IRA, convert it to a Roth, move it to a new 401(k), or take it out. Each has a different tax bill, a different fee drag and a different point of no return.
The short answer
Leaving the money in the TSP keeps the lowest cost and the age-55 separation exception. An IRA rollover keeps the tax deferral but gives up the G Fund and the age-55 exception. A Roth conversion is taxed now and cannot be undone. A cash payout is taxed now and may also carry a 10% early-distribution tax. The comparison below uses your numbers — it does not pick for you.
Fee percentages are editable assumptions, not quoted current rates. Confirm the TSP figure at tsp.gov and the target account's figure in its fee disclosure. Projected values use a 6% gross return for every option, so the only difference between rows is fees and taxes.
What a 0.50% target account is projected to cost you versus 0.05% in the TSP over 10 years on $100,000. Every basis point is a real dollar amount once the balance is large enough.
| Option | Tax this year | Early-distribution tax | Projected balance in 10 years | After tax at 24% | Difference vs TSP |
|---|---|---|---|---|---|
| Leave it in the TSP No tax event. Withdrawals are flexible after separation; RMDs start at 73 for your birth year. | — | — | $178,242 | $135,464 | — |
| Roll over to a traditional IRA No tax now. You lose the age-55 separation exception, so withdrawals before 59½ need another exception or a 10% penalty. | — | — | $170,814 | $129,819 | −$5,645 |
| Convert to a Roth IRA The conversion is taxed as ordinary income this year but the 10% early-distribution tax does not apply to the converted amount. Recharacterization is not available to undo it. The tax is assumed to be paid from other savings, so the full balance keeps growing. | $24,000 | — | $170,814 | $170,814 (tax-free) | +$35,351 |
| Roll over to a new employer's 401(k) Plan rules decide whether loans and the age-55 exception survive. The exception follows separation from the plan's own employer, not your federal separation. | — | — | $170,814 | $129,819 | −$5,645 |
| Take the money out Under 55, the 10% early-distribution tax applies on top of income tax. Mandatory 20% federal withholding also applies to an eligible rollover distribution you take in cash. | $24,000 | $10,000 | $66,000 now | $66,000 | — |
The after-tax column assumes the whole balance is withdrawn at your current marginal rate, so every option is compared on the same footing. A traditional account withdrawn in retirement at a lower rate would beat this figure; a higher future rate would lose to it. Cash out is shown as today's net dollars, not projected forward.
This compares arithmetic, not outcomes. It ignores market returns, future tax-law changes, state tax differences, creditor protection and the value of keeping the G Fund. No option is marked "best" on purpose — the right answer depends on when you need the money and what you would invest in.
The five options in detail
Leave the money in the TSP
No tax nowInstitutional expense ratio · G Fund · Age-55 separation exception
New TSP loans (not available after separation) · A wider fund menu
Yes — you can roll over later, subject to that year's rules.
Roll over to a traditional IRA
No tax nowTax deferral · Wide investment choice · Consolidation with other IRAs
G Fund · Age-55 separation exception · TSP expense ratio
Only if the receiving plan accepts an IRA rollover — many do, some do not.
Convert to a Roth IRA
Tax nowTax-free qualified withdrawals · No RMDs for the original owner · Wide investment choice
Cash to pay the conversion tax · G Fund · Age-55 separation exception
Roth conversions are no longer reversible — recharacterization of a conversion was repealed for tax years after 2017.
Roll over to a new employer's 401(k)
No tax nowTax deferral · Consolidation · Possible plan loan and age-55 access
G Fund · TSP expense ratio · Control over the plan's fund menu
Usually yes, when you change employers again.
Take the money out
Tax + 10%Immediate cash
Tax deferral on the whole balance · Future growth on what is withheld · Creditor protection
No. Once paid out, the 60-day rollover window is the only way back, and mandatory withholding still applies.
The age-55 exception, explained
If you separate from federal service in or after the calendar year you turn 55, TSP withdrawals escape the 10% early-distribution tax. This is why the rollover decision is time-sensitive: move the money to an IRA before using it and the exception is lost, because the IRA tests against 59.5 instead.
A 401(k) has the same exception, but it is tied to separating from that plan's employer in or after the year you turn 55 — not to your federal separation.
The fee gap is the quiet cost
The TSP is one of the cheapest retirement plans in the country. A retail IRA or a small-plan 401(k) may charge several times the TSP's expense ratio. The difference is invisible in a monthly statement and enormous over a decade.
Use the two fee fields above with the figures from the actual plan documents. A basis point is one hundredth of a percent — 0.50% is fifty of them.
A note on the acronym: on this page, TSP means the Thrift Savings Plan, the federal retirement savings account. It is unrelated to trisodium phosphate, the cleaning chemical that also appears in search results for "TSP."
Common questions
What are my options for my TSP after leaving federal service?＋
Five: leave the money in the TSP, roll it to a traditional IRA, convert it to a Roth IRA, roll it into a new employer's 401(k), or take it out. The first two and the 401(k) rollover are not taxable events. A Roth conversion is taxable now. A cash payout is taxable now and may also carry a 10% early-distribution tax.
Can I leave my money in the TSP after I separate?＋
Yes, as long as the balance is above the plan's minimum. Separated participants keep access to the TSP funds and the G Fund, but cannot take new TSP loans. Withdrawals are available at any time, subject to tax and the early-distribution rules.
What is the age-55 rule for the TSP?＋
If you separate from federal service in or after the year you turn 55, withdrawals from the TSP are not subject to the 10% early-distribution tax. That exception does not follow the money into an IRA — roll it to a traditional IRA at 56 and the exception is gone. A new employer's 401(k) only preserves an exception tied to separating from that employer.
Should I roll my TSP into an IRA?＋
It depends on what you need. An IRA offers a wider fund menu and consolidation; the TSP offers a very low expense ratio, the G Fund and the age-55 exception. Rolling to an IRA at 56 can make later withdrawals more expensive. There is no universal right answer, and this page does not give advice.
Is a Roth conversion a good idea after a low-income year?＋
A separation year can be the lowest-income year you have had in a while, which makes a conversion cheaper than it would be later. The trade-off is paying tax now with cash you may need for living expenses. The conversion itself is not subject to the 10% early-distribution tax, and it cannot be undone.
What happens if I cash out?＋
The payout is ordinary income. If you are under 55 in the year of separation, a 10% early-distribution tax also applies unless another exception fits. Mandatory 20% federal withholding applies to an eligible rollover distribution paid to you. You also permanently give up the tax deferral and future growth on the whole amount.
When do required minimum distributions start?＋
For most people, age 73. If you were born in 1960 or later, the age is 75 under SECURE 2.0. Roth IRAs have no lifetime RMDs for the original owner; Roth TSP balances are also excluded from RMDs.
Before you decide
The other half of a federal separation is the severance calculation and the health coverage window. Both interact with the TSP decision through your cash flow.
Sources
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By Alyssa Xu, Founder & Editor.
Reviewed by Gavin YE, Technical Director, ClearRules Labs.
Page last reviewed 2026-10-20