Retiring Soon? Avoid These 7 Costly TSP Mistakes

For most federal employees, the Thrift Savings Plan (TSP) is one of the most valuable parts of their Federal retirement benefit package. It grows quietly for decades, and then, in the last five to ten years before retirement, the decisions you make about it start to matter more than ever.

The good news? Most TSP mistakes before retirement are avoidable with awareness and a plan. Here are seven we see most often, and how thoughtful TSP Retirement Guidance can help you steer around them.

Mistake #1: Leaving Agency Matching Money on the Table

Under FERS, your agency automatically contributes 1% of your basic pay, and matches up to another 4% when you contribute at least 5%. Contributing less than 5% means passing up money your agency is ready to add.

A quieter version of this mistake is front-loading. If you hit the annual limit before December, your contributions stop, and so do your matching contributions for the remaining pay periods. Spreading contributions across all 26 pay periods keeps the match flowing all year.

Illustrative example: On an $80,000 salary, the 4% match equals $3,200 per year. Over ten years, that’s $32,000 in contributions before any growth.

Mistake #2: An Investment Mix That Doesn’t Match Your Timeline

Two opposite errors show up near retirement. Some employees stay fully invested in the C, S, and I Funds right up to their last day, exposed to a market downturn just as withdrawals begin. Others move everything to the G Fund after a bad month and miss years of potential growth they may still need.

Your allocation should reflect when you’ll actually use the money, not headlines. Retirement can last 25 years or more, so part of your savings may still have a long runway. The L Funds offer one built-in approach; a personalized review offers another.

Mistake #3: Missing Your Catch-Up Window

Once you turn 50, you can contribute beyond the standard limit. For 2026, that’s $24,500 plus an $8,000 catch-up, and employees ages 60 through 63 qualify for an enhanced catch-up of $11,250.

There’s a new wrinkle for 2026: if your prior-year FICA wages exceeded the IRS threshold, your catch-up contributions must go into the Roth TSP. That changes the tax picture, and it’s worth reviewing before you set your elections.

Mistake #4: Retiring With an Outstanding TSP Loan

A TSP loan can feel harmless while you’re working. At separation, though, an unpaid balance that isn’t repaid within the window the TSP allows may be treated as a taxable distribution. If you’re under 59½, an additional early withdrawal tax may apply.

If you have a loan and your retirement date is approaching, build a payoff plan into your timeline now, not in your final month.

Mistake #5: Overlooking the Tax Side of Withdrawals

Traditional TSP withdrawals are generally taxed as ordinary income. Qualified Roth TSP withdrawals can be tax-free if you meet the age and five-year requirements. Taking a large lump sum in a single year can push you into a higher bracket, and certain payments carry mandatory federal withholding.

For Puerto Rico residents, the interaction between federal and local tax rules adds another layer. This is where coordinated Financial Guidance, alongside a qualified tax professional, makes a real difference.

Mistake #6: Mistiming Your Separation Date

Timing matters more than many employees realize. If you separate from federal service in or after the year you turn 55 (50 for eligible public safety employees), you can generally take TSP withdrawals without the 10% early withdrawal tax. Separate at 54, and that exception may not apply until 59½.

Your separation date also affects your FERS supplement, leave payout, and Required Minimum Distributions (currently beginning at age 73, or 75 for those born in 1960 or later). A few weeks’ difference can change the outcome.

Mistake #7: Planning in Isolation, and Forgetting Your Beneficiaries

Your TSP beneficiary designation (Form TSP-3) generally takes priority over your will. Life changes like marriage, divorce, or a new grandchild can leave that form outdated. Spouses also have specific rights regarding certain withdrawal elections.

More broadly, your TSP doesn’t work alone. It works alongside your FERS basic benefit, Social Security, FEGLI, and FEHB. Real Federal Retirement Guidance looks at all of them together, with your spouse in the room.

Learn It in Person: PWR Fed 360

Want to walk through these topics face to face? PWR Fed 360 is a full-day federal retirement education event built for federal employees and veterans, offered on two dates in two locations: October 24, 2026 at TRYP by Wyndham, 4820 Isla Verde Ave., Carolina, PR 00979, and October 25, 2026 at Hilton Ponce Golf & Casino Resort, 1150 Av. Caribe, Ponce, PR 00716. Attendance is free, sessions are presented in English and Spanish, and breakfast and lunch are included for all registered attendees. Registration is required, so choose your day and reserve your seat early. Bring your spouse, since survivor and health coverage decisions affect you both, and invite your colleagues who are thinking about their own federal retirement path.

Frequently Asked Questions

1. What are the most common TSP mistakes before retirement?
The most frequent ones include not contributing enough to receive the full agency match, keeping an investment mix that doesn’t fit your timeline, retiring with an unpaid TSP loan, overlooking withdrawal taxes, and outdated beneficiary forms.

2. What are the TSP contribution limits for 2026?
The elective deferral limit is $24,500. Employees 50 and older may add an $8,000 catch-up, and those ages 60 through 63 may add an enhanced $11,250 catch-up instead.

3. What is the new Roth catch-up rule for the TSP?
Starting in 2026, employees whose prior-year FICA wages exceeded the IRS threshold must make any catch-up contributions to the Roth TSP rather than the traditional TSP.

4. Can I keep my money in the TSP after I retire?
Yes. You can generally leave your balance in the TSP after separation, subject to Required Minimum Distribution rules.

5. At what age do TSP Required Minimum Distributions begin?
Currently at age 73, or 75 for those born in 1960 or later. Confirm current rules with the TSP or a tax professional before planning around a specific date.

6. What happens to my TSP loan when I retire?
You’ll generally have a window to repay it. Any unpaid balance may be treated as a taxable distribution, possibly with an additional early withdrawal tax if you’re under 59½.

7. Can I withdraw from my TSP at 55 without the early withdrawal tax?
Generally yes, if you separate from federal service in or after the calendar year you turn 55 (50 for eligible public safety employees).

8. Does my TSP beneficiary form override my will?
Generally, yes. A valid Form TSP-3 takes priority, which is why it should be reviewed after any major life event.