You’ve spent years — maybe decades — contributing to your Thrift Savings Plan. Every paycheck, a portion went in. You watched the TSP performance climb through bull markets and dip through turbulent ones. You tracked TSP performance history and stayed the course. And now, as retirement approaches, you’re ready to start withdrawing.

But here’s the hard truth: the withdrawal phase is where most federal employees and military members quietly lose thousands of dollars — not because of bad investments, but because of easily avoidable mistakes.

Whether you’re a federal civilian, a postal worker, or an active-duty military member in Puerto Rico, understanding TSP withdrawal rules isn’t optional — it’s critical. The IRS isn’t concerned with your intentions. And the penalties for getting this wrong are very real.

Let’s break down the 4 most costly TSP withdrawal mistakes — and exactly what you should do instead.

This is the single most expensive mistake federal employees make, and it often happens out of desperation — a medical emergency, unexpected debt, or a sudden job transition.

Here’s what people don’t fully realize until it’s too late: when you take an early TSP withdrawal before age 59½, you’re not just pulling money out — you’re triggering a double financial hit. First, the IRS charges a 10% early withdrawal penalty on the total amount. Second, the entire withdrawal is counted as ordinary income in the year it’s taken, potentially pushing you into a higher tax bracket.

To make matters worse, the TSP is required to withhold 20% for federal income taxes upfront, the moment you take the distribution. So you might think you’re withdrawing $40,000, but you walk away with $32,000 — and then still owe more at tax time depending on your bracket.

Here’s a quick example: if you’re a federal employee in Puerto Rico in the 22% tax bracket and you withdraw $30,000 early, you could immediately lose $9,600+ to combined taxes and penalties — and that money is gone permanently, along with all the compound growth it would have generated over the next 10–20 years.

This is especially important for Puerto Rico-based federal employees and military personnel to understand, as local and federal tax interactions can be more complex in U.S. territories.

Retirement finally arrives. Your first instinct? “Let me take a big chunk of my TSP and put it somewhere I control.” Completely understandable — but potentially very costly.

When you take a large lump-sum withdrawal from a Traditional TSP, that entire amount is added to your taxable income for that year. This isn’t a capital gains situation — it’s ordinary income, taxed at your marginal rate. Pull out $200,000 in a single year and you could easily jump from a 22% bracket all the way into the 32% or even 35% bracket — not just on the TSP withdrawal, but on every other dollar of income you earned that year.

There’s another hidden danger here that most retirees in Puerto Rico overlook: Medicare IRMAA surcharges. If your modified adjusted gross income exceeds certain thresholds, Medicare increases your Part B and Part D premiums significantly. According to the Centers for Medicare & Medicaid Services (CMS), Medicare costs can rise by $594 to over $5,000 per year in 2025 due to IRMAA surcharges — purely because of a one-time income spike caused by a large TSP distribution.

That’s an avoidable, ongoing cost triggered by one bad decision.

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This is the mistake that often blindsides even financially savvy federal employees — especially those who continue working past traditional retirement age.

Required Minimum Distributions (RMDs) are the IRS’s way of forcing retirees to begin drawing down tax-deferred retirement accounts. For TSP participants, thanks to the SECURE 2.0 Act, RMDs now begin at age 73 (rising further to age 75 in 2033). Your first RMD must be taken by April 1 after the year you turn 73.

Miss it — even partially — and the IRS imposes an excise tax of 25% on the amount you failed to withdraw. Under SECURE 2.0, that can be reduced to 10% if corrected promptly, but it’s still a painful, unnecessary penalty.

There’s also a common point of confusion around Roth TSP and RMDs. Prior to 2024, even Roth TSP accounts were subject to RMDs — a significant difference from Roth IRAs, which have no RMD requirement during the owner’s lifetime. This changed with SECURE 2.0: Roth TSP accounts are no longer subject to RMDs starting in 2024. Many federal employees were caught off guard by the old rules, and some may still have incorrect assumptions lingering.

According to TSP.gov, participants who are separated from federal service must begin RMDs on schedule regardless of their employment status. However, if you’re still employed by the federal government, you may be able to delay RMDs from your current employer’s plan — but this comes with its own conditions and nuances.

This mistake doesn’t announce itself loudly. It creeps up slowly — a slightly higher withdrawal here, a market dip there — until one day federal employees realize their TSP balance is declining far faster than expected.

The core issue is withdrawal rate. Research by financial planner William Bengen, widely referenced as the “4% Rule,” suggests that withdrawing no more than 4% of your portfolio annually gives you a very high probability of not outliving your money over a 30-year retirement. More recent Morningstar research has suggested an even more conservative 3.3% as a safer starting point given current market conditions.

Why does this matter so much? Because federal employees and military members in Puerto Rico are living longer than ever. According to Social Security Administration actuarial tables, a federal employee who reaches age 65 today can expect to live, on average, to age 84 if male and age 87 if female — meaning retirement could easily span 20 to 30 years. A TSP that looks substantial at 65 can be devastated by excessive withdrawals combined with a major market downturn in the early years of retirement.

This is especially true for those who retire during or just after a market correction — a phenomenon known as sequence-of-returns risk. If your TSP takes a 25% hit in year two of retirement and you’re simultaneously drawing it down at an aggressive rate, recovery becomes almost mathematically impossible.

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Before taking money out of your Thrift Savings Plan (TSP), it’s important to review a few key financial areas that could impact your long-term retirement income. A poorly timed withdrawal may create unnecessary taxes, increase healthcare costs, or reduce future retirement flexibility. Here are several smart TSP withdrawal strategies federal employees should review before making any distribution decisions.

• Know Your Tax Bracket Before and After the Withdrawal
  TSP withdrawals are generally taxable, which means taking a large distribution in a single year could push you into a higher federal tax bracket. Many retirees underestimate how much taxes can reduce their net retirement income. Before withdrawing funds, calculate how the distribution may affect your annual taxable income and whether spreading withdrawals across multiple years could reduce the tax impact.
• Check Your Medicare IRMAA Exposure
  If you are approaching Medicare age, higher income from TSP withdrawals could trigger additional Medicare Part B and Part D premium surcharges under IRMAA (Income-Related Monthly Adjustment Amount). Even one large withdrawal could temporarily increase healthcare costs for the following year. Understanding these income thresholds ahead of time may help you avoid unnecessary premium increases.
• Confirm Your Required Minimum Distribution (RMD) Deadline
  Federal retirees must begin taking Required Minimum Distributions (RMDs) from traditional TSP accounts at the appropriate age under IRS rules. Missing an RMD deadline may result in costly penalties. Setting calendar reminders and planning distributions early can help avoid last-minute tax complications.
• Consider if a TSP loan would be the right choice
  In some situations, a TSP loan may be a better short-term option than an early withdrawal, especially for employees still in federal service. Early withdrawals may create taxes and penalties, while loans could offer more flexibility if repaid properly.
• Review Your TSP Fund Allocation Carefully
  As retirement approaches, your investment strategy should shift from pure accumulation toward income preservation and risk management. For example, federal employees invested heavily in growth-focused funds may need to rebalance portions of their portfolio. International diversification options like the TSP I Fund may still play a role in retirement planning, but your allocation should align with your retirement timeline, income needs, and risk tolerance rather than aggressive long-term growth alone.

Your TSP is one of the most valuable retirement benefits available to federal employees and military members. With low administrative costs, tax-advantaged growth, and diversified investment options like the TSP I Fund, it has the potential to provide long-term financial security throughout retirement. However, even a strong retirement account can lose value quickly if withdrawals are handled without a proper strategy.

Common mistakes such as early withdrawals, large lump-sum distributions, missed Required Minimum Distributions (RMDs), and unsustainable withdrawal rates continue to impact retirees every year. Many federal employees simply underestimate how taxes, inflation, healthcare costs, and market volatility can affect retirement income over time.

The good news is that these mistakes are often avoidable with careful planning and informed decision-making. Understanding your withdrawal options, aligning distributions with your retirement goals, and reviewing your overall income strategy can help protect your long-term financial future.

If you’re getting ready for retirement or thinking about TSP withdrawals, it may be a good time to schedule a meeting and review your options with someone familiar with the retirement challenges federal employees in Puerto Rico face.