If you’re a federal employee — or already retired from federal service — your Thrift Savings Plan (TSP) is likely one of your most valuable retirement assets. But here’s the hard truth: making even one wrong move with your TSP Required Minimum Distributions (RMDs) can cost you thousands of dollars in avoidable taxes and IRS penalties.

Most federal employees spend decades building their TSP balance, carefully watching TSP performance and TSP performance history, only to lose a significant chunk of it in retirement due to RMD mistakes that were 100% preventable.

This guide breaks down the most costly TSP RMD mistakes federal employees make — and exactly how to avoid them.

Before diving into the mistakes, let’s get clear on the basics. A Required Minimum Distribution (RMD) is the minimum amount the IRS requires you to withdraw from your tax-deferred retirement accounts each year once you reach a certain age. This applies to your Traditional TSP — the money you contributed pre-tax throughout your federal career.

Here’s what makes this especially important for federal employees: TSP RMD rules have their own unique quirks that differ from private-sector 401(k) plans. And if you’re a federal employee or retiree living in Puerto Rico, the combined impact of federal income tax rules plus your local tax obligations makes getting this right even more critical to your financial wellbeing.

Under the SECURE 2.0 Act of 2022, the RMD starting age was increased to 73 (and will rise again to 75 by 2033). However, many federal employees still operate on outdated assumptions — and that’s exactly where costly mistakes begin.

One of the most common — and expensive — mistakes federal employees make is simply missing their RMD deadline. Your first RMD must be taken by April 1 of the year following the year you turn 73, or the year you separate from federal service, whichever comes later.

What makes this tricky is the “double RMD” trap. If you delay your first RMD until April 1, you’ll still need to take your second RMD by December 31 of that same year. That means two taxable distributions hitting your income in one calendar year — potentially pushing you into a higher tax bracket and triggering unexpected consequences like Medicare IRMAA surcharges.

And if you miss the deadline entirely? The IRS penalty was reduced under SECURE 2.0 from 50% to 25% of the missed distribution amount — and as low as 10% if corrected in a timely manner.

Many federal employees assume they can delay their TSP RMDs simply by continuing to work — similar to how private-sector workers can defer 401(k) RMDs while still employed. This is a dangerous misconception.

For most federal employees, TSP RMDs begin at age 73 OR upon separation from service — whichever is later. This is actually more favorable than many private plans, but the confusion arises when employees don’t calculate their personal RMD window correctly.

Consider this common scenario: a federal employee who retires at age 62 won’t need to take TSP RMDs until they turn 73 — giving them over a decade of tax-deferred growth. But a federal employee who retires at age 74 will owe an RMD almost immediately after their separation date. Many retirees in this situation are caught completely off guard.

If you’re approaching retirement and want to understand exactly how your separation date affects your TSP withdrawal timeline, Schedule a Meeting with a financial advisor who specializes in FERS and federal benefits — this single conversation could save you from a rushed, poorly-planned first RMD.

If you’re unsure how to calculate your bracket ceiling or assess your IRMAA exposure, this is exactly the kind of analysis worth sitting down with a specialist for. Schedule a Meeting with a federal retirement advisor who understands both TSP mechanics and the tax landscape for federal employees in Puerto Rico — the math alone can save you thousands.

Read More : 4 TSP Withdrawal Mistakes You Should Never Make

Before 2024, Roth TSP accounts required minimum distributions, unlike Roth IRAs, which have traditionally been exempt from RMD rules. This caused many federal employees to roll their Roth TSP into a Roth IRA specifically to avoid mandatory withdrawals. While that strategy made sense under the old rules, it’s no longer necessary for most people.

Starting in 2024, Roth TSP accounts are now exempt from RMDs, bringing them in line with Roth IRAs. This is a major win for federal employees who want to let their Roth TSP grow tax-free for as long as possible — or leave it as a tax-free inheritance for their beneficiaries.

Emotional decision-making is the enemy here. Converting out of fear that tax rates will rise in the future — without a concrete projection of your actual lifetime tax picture — is a gamble disguised as a strategy. The permanence of this decision demands precision, patience, and professional guidance. Not urgency.

This is one of the sneakiest and most financially damaging mistakes federal retirees make. TSP RMDs from your Traditional TSP are taxed as ordinary income — and when you layer them on top of your FERS annuity and Social Security benefits, the total taxable income can push you into a higher bracket than you expected.

According to the Federal Retirement Thrift Investment Board (FRTIB), the average TSP account balance for FERS retirees was over $170,000. Given historical TSP performance and compound growth over a long federal career, many employees have balances significantly higher than this — meaning RMDs can be substantial.

For federal employees and retirees in Puerto Rico, this income stacking effect is particularly important to plan for. The overlap between federal tax requirements and local tax rules can increase your total tax burden if TSP withdrawals are not properly timed and managed.

Smart tax strategies to explore:

• Qualified Charitable Distributions (QCDs): If you’re 70½ or older, you can donate up to $105,000 per year directly from an IRA to a qualified charity — satisfying your RMD while keeping that money out of your taxable income.
• Roth conversions before age 73: Converting portions of your Traditional TSP to a Roth IRA in the years before RMDs begin can reduce the size of future mandatory withdrawals.
• Bracket-filling strategy: Work with a financial planner to take strategic withdrawals in lower-income years before RMDs kick in, “filling up” your current tax bracket to avoid a bigger hit later.

If your TSP balance reflects years of strong TSP performance — including the historically consistent TSP performance history of funds like the C Fund and S Fund — your RMD obligations will only grow over time. Planning ahead isn’t optional; it’s essential.

Federal employees often focus entirely on their own RMD obligations and completely overlook how TSP assets are taxed when passed to beneficiaries. This oversight can leave your loved ones with a massive, compressed tax bill.

Under the SECURE Act, most non-spouse beneficiaries who inherit a traditional TSP or IRA must withdraw all funds within 10 years — with no option to “stretch” distributions over their lifetime as previously allowed. For adult children inheriting a large traditional TSP balance, this can mean significant taxable income hitting them during their peak earning years.

Spousal beneficiaries have more flexibility — they can roll inherited TSP funds into their own IRA or TSP and take distributions on their own schedule. But non-spouse beneficiaries don’t have that luxury.

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Q: When do federal employees have to start taking RMDs from TSP?
Federal employees must begin TSP RMDs at age 73 or in the year they separate from federal service, whichever comes later.

Q: What is the penalty for missing a TSP RMD?
Under the SECURE 2.0 Act, the IRS penalty for a missed RMD is 25% of the missed distribution amount, reduced to 10% if corrected in a timely manner.

Q: Does the Roth TSP have RMDs?
No. Starting in 2024, Roth TSP accounts are exempt from Required Minimum Distributions under the SECURE 2.0 Act.

Q: Can I delay my TSP RMD while I’m still working?
Yes — if you’re still in federal service, you may delay TSP RMDs until the year you separate, even past age 73.

Q: Should I roll my TSP into an IRA before RMDs start?
It depends on your tax situation, charitable goals, and estate planning needs. An IRA offers more flexibility (including QCDs), but the TSP has lower expense ratios. Consult a TSP-specialized advisor.

You spent years watching your TSP grow — tracking TSP performance, staying the course through market volatility, and building a retirement nest egg you can be proud of. The last thing you want is to lose a meaningful portion of it to IRS penalties, unnecessary taxes, or poor distribution timing.

Understanding the tsp distribution rules is not optional for federal retirees — it’s one of the most financially impactful areas of your retirement plan. Whether you’re five years from separation or already taking RMDs, getting proactive about this now makes a real difference.

The mistakes outlined here are entirely avoidable with the right knowledge and guidance. Work with a financial advisor who understands the unique landscape of FERS retirement planning, TSP withdrawal strategies, and federal benefits — especially one familiar with the tax environment facing federal employees and retirees in Puerto Rico.

Your federal career earned you a strong retirement foundation. Make sure your TSP distribution strategy protects it.