Saving for retirement is only half the battle; knowing how to get your money out without getting burned by taxes or rigid rules is where things get complicated. In this episode, John and Tommy dive deep into the specific Thrift Savings Plan (TSP) mistakes that are rarely talked about but can cost federal employees thousands. From the operational headaches of unfair tax withholdings to the danger of default account selections, they share exactly how to maintain control of your wealth.
You’ll learn how to audit your withdrawal strategies, why traditional advice about closing your account early is often wrong, and how to outsmart hidden tax traps like IRMAA and the “tax torpedo”. John and Tommy also share a candid look into their firm’s internal summer projects, why they prioritize buying back time, and how to get over the psychological hurdle of finally spending the money you spent a lifetime saving.
Listen to the full episode here:
What you will learn:
- Why refusing to take retirement distributions can be a massive lifestyle mistake. (14:45)
- The danger of default “proportionate distributions.” (26:03)
- How closing your TSP too early can strip away major state income tax benefits. (30:30)
- The hidden trap of mandatory 20% federal tax withholding on standard TSP distributions. (36:28)
- Why facilitating charitable giving directly from the TSP is tax-inefficient. (41:11)
- The critical 90-day deadline for non-spouse inherited TSPs. (46:30)
- How to leverage in-service distributions at age 59 ½. (44:30)
Ideas Worth Sharing:
- “If you were never going to spend this money, you never needed to save it to begin with. You missed experiences.” – Mason & Associates
- “Well, a memory dividend is when Tommy and Jess do something with their family, and for the next 60 years, they can say, ‘Remember when we went on that Disney cruise?’ or, ‘Remember when we did that?’ And they get to relive and re-enjoy that memory for decades. That memory is more valuable at 38 years old than it is at 98 years old.” – Mason & Associates
- “We would say caution working with any financial planner who just wholesale says, ‘Let’s close TSP and roll it.’ Clearly, that’s not how we operate. We like the flexibility, and we like that you have the peace of mind knowing you can go back to it.” – Mason & Associates
Resources from this episode:
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Read the Transcript Below:
John Mason: Thank you for tuning in to another episode of the Federal Employee Financial Planning Podcast. Are you interested in moving from general education to personalized advice? You can start that process at masonllc.net. That’s masonllc.net. Or give us a call at 757-223-9898. If you’re not ready to take that next step, that’s okay. Keep hanging out with us right here on YouTube and our Federal Employee Financial Planning Podcast.
Welcome to the Federal Employee Financial Planning Podcast and the Mason YouTube channel. This episode: “The TSP Withdrawal Mistakes That Nobody Warns You About.”
In this episode, Tommy Blackburn and I are going to talk about these mistakes. Some of these mistakes occur while you’re working; others occur in those retirement years. Please stick with us until the end as you learn about all the withdrawal mistakes that you might make while you’re working and in those retirement years.
Tommy, welcome to the Federal Employee Financial Planning Podcast.
Tommy Blackburn: John, it’s good to be back with you recording another one of these. As always, I think we’re going to have a lot of fun bouncing and bobbing and weaving on this episode because there are a lot of different directions we can take it, so I’m excited to jump into it with you.
John Mason: Me too, man. It is episode two of the day. So today is May 27th, 2026, and boy, audience, it feels good to record episode number two. We just did—
Tommy Blackburn: It really does…
John Mason: “2026 Strategic Planning Meeting Season Recap,” and I don’t want to say it was rough, but it was a little rough in the sense that, like, we had to figure out how to hook up our microphones again, and we had to get comfortable and figure out how close we need to sit to the camera, and all those things. Because we’ve been doing client meetings the last basically 12 weeks—six weeks of prep and six weeks of executing—we got a little rusty. So we’re hoping this one’s a little bit tighter and equally as enjoyable for both existing clients and for new clients across the country.
Couple quick announcements: We are taking new clients. Today is May 27th. We onboard new clients throughout the balance of the year. So, you can start that process at masonllc.net or 757-223-9898. That is for people who are looking to move from general education to personalized advice. We’d be honored if you give us a shot. Interview us to see if we’re the right financial planning team for the job. That’s masonllc.net or 757-223-9898, Monday through Thursday, normal East Coast hours for those of you who are interested. And yes, we’re real people. This is not AI, and we work with people across the country.
So that’s that. Number one announcement. We’ll have another announcement earlier that we’ll bring in kind of midway through the podcast, Tommy, but let’s just jump into quickly, you know, I don’t know that we told the audience in the last episode what our summer plans are. So we do this, like, surge strategic planning meeting season because we, one, when that’s all you’re doing, you get really good at it. So now that’s why we also record multiple podcast episodes in a day, because episodes two and three tend to be better than episode one. So now that we go into summer, the goals change a bit. We are bringing on new clients. We’re helping implement plans from SPM season. But let’s just briefly tell the audience what’s on our mind, how we think about summer, and what our clients are up to this year. I think that might be a good couple minutes.
Tommy Blackburn: So summertime for us is you’ve knocked out, you know, the first half of the year. The strategic planning meeting season was the big milestone that you were trying to work towards and work past. So you’ve laid the foundation, had really great meetings. Tax planning is a year-round sport, but you’ve gotten the initial phase of it out there, made some moves, so you’re in a good place.
Now, to me, summertime is where we, as you said, John, we onboard new clients, pick up new clients. We also circle back to existing clients on things that came out of that strategic planning meeting season. So there’s usually tasks, whether they happened during the summer or the fall, there’s typically going to be some follow-up work that needs to be done. So that’s on the rest of the agenda for the year.
And then a lot of it, too, is somewhat of a slower, try to be a slightly slower pace. And as I say this, it’s not an extremely slow pace. Just remember, we came out of a very high-intensity pace. So this is certainly, you know, I don’t know about you, John, but at the end of strategic planning meeting season, Memorial Day weekend, maybe not for you because you had your run you were doing. But I felt, you could feel the adrenaline come down that last week and definitely that weekend when it was over. Your body kind of let you know you just went through a relatively intense period, and you could feel—you just could feel the relaxation or the need to relax a little bit. So that’s what I mean by just a slightly slower pace.
A lot of it for us as a firm, too, is there’s a lot of initiatives that we’re now going to start tack-tackling, a lot of projects, revamping, fine-tuning the new client and existing client processes. All the technology is on the table—every technology we use—and then while it’s on the table, prioritizing what has the biggest ROI, and tackling those first and foremost, getting new hires, continuing to get them implemented into the team. The two that we’ve already hired are definitely implemented very well, but now it’s the rest of the year continuing to work on that train, educate all of ourselves. We’ve got a new one starting this summer, so we’ll be onboarding him and announcing him, so we’ll have that. So there’s still, you know, we can keep going. There’s an office, you know, we’re rehabbing the office, so to speak, or changing it, adding additional space for new people.
So there’s a lot that’s still going on, and it’s kind of surprising to rattle it all off and say that’s going to be a slower pace, but it does feel like it will be.
And then, of course, there’s family time. That’s probably the biggest one. You ask, like, “What are clients up to?” Most clients, summer, kids are out of school, work—so most businesses seem to be kind of seasonal for whatever reason, or so summertime just seems to be, “Hey, this is when we travel. This is when we do all the things as a family.” It’s true for us as well. I know I’ve got a few trips planned. Definitely going to spend time with the kids and the family over the summer. I think same for you, John.
John Mason: Well said. Yeah, I hope to spend somewhere between four and seven weeks in the RV. You know, for our audience, I have a 3500 and a fifth wheel, and we like to travel, and I really like the auto-leveling over what we used to have in the travel trailer. So life’s changed a lot for Tommy and I. We used to have a lot more flexibility. It’s interesting, you know, we don’t mind sharing, like income is good, flexibility in the job is good. So in a way, like we should be more flexible and nimble now than ever, but we’re actually more constrained and limited in many ways because now our kids are in school.
So yes, audience, like if you want to become a client and you’re like, “Hey, what are John and Tommy and these guys up to at Mason, men and women?” Well, as we continue to hire younger people who are going to have families one day, and those kids are going to be in school, we’re not going to bail on you during the summer, but we have 11 weeks. Like at the end of the day, we have 11 weeks to do something fun because the other nine or 10 months out of the year are pretty spoken for.
And Tommy got a nastygram from his school system. Zoe missed like one day and they’re like—send home a letter threatening the world’s going to end, and it’s like, for one day? So we’ve got 11 weeks to really spend time out of the office and enjoy time with our family, and we’re not going to disappear for all the 11, but we’re going to try to disappear as often as we can, whether that’s travel, pool, less hours. There’s just make hay while the sun shines, you know, die with zero, enjoy this time of life with our kids.
So that’s our plan for the summer is to just really, really kind of try to get out of the office as often as we can, spend time with the family while continuing to move the business and move our team forward. Clients are doing cool stuff. I wrote down a lot of Viking River cruises this summer.
Tommy Blackburn: Yeah.
John Mason: I wrote down Alaska, some Disney vacations, a lot of people doing beach houses where they rent a beach house and take the whole family down. So a lot of cool stuff happening over the summer. Still international travel, given everything that’s going on in the world. I know we have some clients going to the Far East who may have already returned from that trip, and we’ve got clients doing national parks. So that’s really fun for us to see what clients do, and we get a little envious because we don’t have that capability just yet. But one day it’ll be our turn to do some of this travel and stuff that they’re doing, too.
Tommy Blackburn: We get to do a lot. We’re not retired, so we don’t have the flexibility that a retiree has from that perspective. But we have a really, like you said, we try to make hay as best we can with the constraints we have. We get to do a lot of cool stuff. So I’m not going to dismiss that. Certainly not retiree flexibility. And it’s also really fun to share our experiences with clients, the things we’re doing with our families, but also clients to share what’s happening in their lives. We get to learn about it. It gives us ideas for our own personal lives, but we also get to share that with clients.
And I had at least one comment, if not multiple, of clients suggesting—and I professed to them I just don’t know how to implement this realistically with every other initiative we have going on, but I do think it’s a great idea—was if Mason could curate a repository of some sort that’s, “Here’s all of our personal experiences and our client experiences, and all the resources that could be helpful to you as you think about what’s the next trip or the next thing with my family I want to do.” And I thought, you know, that is an awesome idea. Unfortunately, I just don’t have the brainpower to figure out how to actually make that happen at the moment. So for now, it’s just going to continue to be conversations, you know, personal conversations that happen. But again, kind of the collaboration, the partnership of us all sharing our lives together is pretty neat.
John Mason: It is, and we get to share with clients, to your point, like, “Joe and Sally went to Alaska, and this is what they did, and they had a lot of fun,” or, “This is a mistake that we’ve seen throughout travel.” And at the end of the day, we know that our clients are the secret multimillionaires because they have big pensions, military pensions, Social Security benefits, and more.
And at the end of the day, most of our clients pay all of their bills on their guaranteed income, and many of them can even travel and vacation on their guaranteed income. Oh, by the way, they have $1 to $3 million or more of investable assets—TSPs, IRAs, 401ks, brokerage accounts—that they’re not necessarily using, and they’re still having the time of their life.
So as we talked about during SPM season on the last episode, we did talk a lot about the Die with Zero concept from Bill Perkins, or, like, when you want to maximize your wealth. Like, at what point do you want to see your highest account value? And kind of arguing through things like maybe you don’t want to see your highest account value at 97. That seems like maybe a mistake. We talked about things like memory dividends, having a dividend from a company as they’re giving you back some of the profit. Well, a memory dividend is when Tommy and Jess do something with their family, and for the next 60 years, they can say, “Remember when we went on that Disney cruise?” or, “Remember when we did that?” And they get to relive and re-enjoy that memory for decades. That memory is more valuable at 38 years old than it is at 98 years old.
So we had a lot of those conversations, and ultimately we’re going to talk about now the withdrawal strategy mistakes that folks are making, but it’s just important to realize that we’re never going to “should.” Like, that’s not a bad word. We’re never going to “should” all over you, and tell you what you should be doing. But making sure our clients feel comfortable, Tommy, using their portfolio to enhance their experience. They still need to get value for what they’re spending.
And one of the stories that I was telling during SPM season was, you know, I’m going to a baseball game coming up, and we’re going to go as a family. And I Googled, like, “I want—” Or ChatGPT: “I want to go to a Braves game, luxury style.” And it was like, “Stay at this hotel, buy these seats, and fly first class on Delta.” And I did two out of the three. I bought the nice seats, the nice hotel, and we’re flying, you know, economy comfort, I think, because we’re saving $1,500 or $2,000 on the flight for an hour flight to Atlanta. Like, at some point, it is just insulting.
So yes, audience, we hear you. Clients, we hear you. There are just some things that even if you can afford it, aren’t worth it to you, and we get that. But our challenge to you is to find the things that are worth it to you. You’ve spent your entire life, as Bill Perkins would say, exchanging your health and your time for money, just so now you wake up at retirement with all the money in the world and arguably less time and less health to enjoy it. So let’s figure out what makes you tick. Let’s figure out what you do value, and let’s start channeling those resources above and beyond your guaranteed income to get the things that you value, whether that’s vacations, travel, warm hand, cold hand, helping charities and family members now. So much of that, Tommy, is what we impacted, and I think that’s a good lead-in to the withdrawal mistakes that nobody talks about.
Tommy Blackburn: Absolutely. It’s a perfect dovetail into it. It all comes back to values, and the biggest, I think, we would—or we’ve got some really good directions. Yeah, obviously, we think it’s good directions, conflicting directions, many different potential withdrawal strategies. Nobody’s talking about mistakes. I think the biggest one here, John, you just laid up in so many ways is it’s not taking them, right? Whether it’s TSP, IRA, brokerage, we think the one that’s never talked about or not talked about enough is not exercising our values, you know, growing that account, not utilizing what we’ve saved it for.
We certainly don’t want to be frivolous. We understand it. John, completely agree. It’s about what do we value. Those flights are hard. I think about myself, and have the same struggles. I can also tell you from personal experience, and I think many clients would admit this too, there are times where what has been a strength throughout your life and allowed you to be in this position of strength hurts you, and sometimes it’s on those flights, even when it seems insulting. I agree with your example, John. I’m not disagreeing with that.
Jess and I recently took a trip that was amazing, and for whatever reason, the flights, I just couldn’t get over that cost difference. This was into the Caribbean, and both flights—way there and back—I’m kicking myself, just like, “Why? I know, I know it wasn’t insulting, Tommy. I know it just didn’t sit well with you.” But at the end of the day, 30, 40, 50 years from now, I’m not going to notice that amount that I didn’t save it and invest it, but I’m kicking myself right now for having, you know, it almost like it soiled the experience of like, why didn’t we just pay the extra money?
But it was a lesson learned, and we evolve, we get better as we go, too. So I probably have a lower threshold going forward of just, you know, Tommy, just unless it’s the hour flight, but if it’s any distance at all, just suck it up. You’re going to love the experience so much. The memory dividend is far more important than the insulting part you’re wrestling with right now. To a degree, I’ll never get over it, and there’s just going to be certain lines you’re not willing to cross. But all of that, again, requires me and willing to spend money, take withdrawals, take distributions. So that’s the first strategy.
John Mason: Yeah, I love that. So not taking distributions is a gigantic mistake for several reasons. One, you’re arbitrarily living on less for no reason, and it seems like… I mean, even our clients who have been clients for decades, some of them, one of the concerns during SPM season—SPM for strategic planning meeting—was running out of money.
And bear with this comment, audience, sometimes it’s a little laughable, and I don’t mean that to be insulting to our clients, but it’s like, unless the world ends, the government pension and Social Security and the military pensions are going to keep coming in. So even if you ran out of your portfolio, it’s not like you wake up at 92 destitute. You still wake up at 92 in the top 10 or 20% of all income earners in the world, or whatever the stat is. So there’s, in our opinion, there’s not really a world where you ever really run out of money, but yet that’s a concern.
So then dovetailing right back into the withdrawal mistake, which is not taking distributions, it’s probably because you think you’re going to run out of money, and you probably think you’re going to run out of money because you’ve never spent your money before. Maybe you don’t have a good grasp of the stock market. Maybe you don’t have an accountability partner or a financial planner to show you the data behind the recommendations and why these withdrawal rates do work and have worked historically. Maybe you just need a financial plan to unlock that freedom and flexibility so you can get over the strength, you know, becoming your weakness, which is becoming a hoarder, you know, of your investment dollars over your retirement years.
So why is this a mistake? Well, if you’re never going to take investment distributions, then you never needed to save in TSP to begin with. So the last 40 years of your working career was arbitrarily too hard. You could have bought a different house, you could have lived in a different school district, you could have taken more vacations, you could have done more fun things. If you were never going to spend this money, you never needed to save it to begin with. You missed experiences.
Your kids right now, your adult children or your younger children, their life is hard. Mortgage rates are high, housing is arguably unaffordable, the average car purchase in America is like north of 50,000, yet we’re hoarding our assets as our kids are struggling. Just so one day when they’ve made it through the struggle, they can inherit a couple million dollars that doesn’t help them at all.
Your RMD—a million-dollar RMD, let’s call it 40,000 a year at age 73. Well, if you have a million dollars in your TSP, it could conceivably double one or two times before you reach RMD age. So now all of a sudden your RMD goes from 40 to 80 to maybe 120,000 because we were hoarding our investment distributions. We weren’t doing things like Roth conversions. And then I’ll get off my soapbox here, but let’s just also say this, Tommy: Not taking investment distributions for our clients who are in their retirement years is dangerous. And here’s why.
Tommy Blackburn: That’s powerful.
John Mason: It’s dangerous. It’s not just overly conservative. It can be dangerous. Like, audience, how many of you got up on a ladder last fall to clean out your gutters? How many of you know somebody that fell off a ladder last year cleaning their gutters or painting their house or doing whatever? Now, we’re not saying we all need to become soft and not do things around the house, but at the end of the day, what’s your health worth and what’s your time worth? And if you’re up on a 30-foot ladder cleaning gutters on these gigantic gables of your house, cheating death every day because you don’t want to take out a distribution, that’s just dangerous. And at what point do we just stop doing that?
And then I also wrote down, and the audience knows, and I promise I’m done now with my soapbox, is are you getting the best quality healthcare that you can get in retirement? Do you have an advocate? Are you doing the cancer screenings? Are you getting the heart screenings? Are you taking the right supplements? Do you have a personal trainer? Are you buying the right food? Do you need a personal chef? Like, if you’re not taking investment distributions and all that stuff seems too expensive, maybe it’s not expensive at all if we just unlock the portfolio and then we invest back into yourself.
Tommy Blackburn: Well said. That’s exactly where my mind was going. It’s conflicting of, “I won’t spend the money, so I’ll risk my life,” and somehow I even convince myself that this is a form of exercise by going out there every day and not being soft, as you say, and risking my health, and God knows what type of bills and health consequences will come from that. Whereas maybe what we should be doing is actually taking distributions.
One, we have to have a plan. Wrote that down as you were talking, John. Part of the problem is not having a plan. Like, why are we saving? What is our plan for this money? So if that’s in—and what a plan is of itself, but the other part of this is, is yeah, maybe if we took the money and paid somebody to take care of these things, we still go exercise. We don’t have to put our life at risk. We could actually go pay a trainer to then help us get the right exercise and move our body in the right way, or maybe a guide to go take us on some crazy excursion up a mountain somewhere. But at least, like, having… We can still get exercise and spend money, get supplements, cancer screening, you know, whatever it is for your health. Those are—there are better ways to take care of yourself than just refusing to be soft, if you will, as you said, by saying, “I’m going to go climb up on the roof.”
So completely agree. So biggest mistake or biggest strategy nobody talks about is actually spending money that you saved.
John Mason: My uncle, our business partner, Ken, in 1990-something, maybe early 2000, I don’t know what it was, he had this income threshold in his mind, and we’ll say it’s 100,000. And he was like, “I never want to make $100,000 because if I make $100,000, I’m going to be an A-hole.” And it was just, like, this weird defense mechanism that he had. He just assumed that everybody who made a certain threshold just became a butthead at some point, or that they would change and not be relatable, so he had, like, talked himself into this limiting factor. Well, turns out you can make $100,000 in 1997 and not be a butthead. Who would’ve thought?
And the reason that this is relatable, and we’ll move to the next mistake, is that are your neighbors going to judge you for retiring at 57 when they can’t retire until 65? Yes. Are your neighbors going to look at you and be like, “Wow, they have a cleaning service. I wish I had one”? Yes. Are your neighbors going to think, “Wow, they went on a first-class trip to Hawaii. I wish I could’ve done that”? Yes. But at the end of the day, like, you have to be comfortable in your own skin, and people are going to judge you. They’re going to think what they want to think, but that shouldn’t be the limiting factor on how you enjoy your portfolio and your life.
And I know from 17 years of doing this that people do have these biases. Like, “I don’t need somebody else to cut my grass,” or, “I don’t need somebody to do that for me,” or, “I can do it myself.” But at the end of the day, they also don’t want to come across as snobby or snooty or rich, and they want to fly under the radar. You know, whatever these other, like, hidden things are, is we still have to get comfortable in our own skin. You worked too doggone hard to get here to be hiding from your success.
Tommy Blackburn: And it’s probably—and maybe even if people are judging you, perhaps it’s an inspiration or a motivation to them as well to see how rich of a life you’re living. Again, we’re not advocating for being frivolous, reckless. We still want to be good stewards. We still want to put our values out there.
But I also think about some of this is business-related as you move through a career, and it’s like the second and third order of things where, yeah, I’ve cut grass my whole life, and that’s part of who I am, and I’m not going to give it up for whatever reasons it set. But have we thought about, I don’t know, maybe what it could do to our health to actually not be out there getting all of this stuff, breathing it in constantly could have its own issues? But what does it free us up to do? I mean, that’s the biggest thing, is buying your time back by not having some of these tasks, these luxuries.
I mean, arguably, we would agree these are not needs, but having these things in place frees you up—either if you’re in business, perhaps you go apply it to make more money doing business work versus doing this, or if in your personal life, if you’re retired, would you rather do something else with your time? I think it’s the bigger question. Could you do something more valuable? And that’s what you’re using your assets for.
So John, you may have more you want to expand into that. I think we’ve probably, between this and previous episodes, gone, you know, we’ve hit that one over the head.
John Mason: Yes, we have. All right, audience, we’re going to move on to the next withdrawal mistake that nobody’s talking about, would be taking the default election, which I’m pretty sure is still the election of proportionate distributions from your TSP in retirement. So many federal employees now, and military, have a combination of TSP balances, Tommy—pre-tax, Roth, and if you’re military, you could have some tax-exempt contributions. A mistake here is taking proportionate distributions, meaning money’s coming out of both sides.
Tommy Blackburn: Well, it’s not—yeah, it seems like there’s no plan there whatsoever, right? We want to know when we’re coming—we’re taking a distribution, is it pre-tax, so it’s all taxable? Or is it Roth? Is it, I don’t know. I guess there’s a scenario, but off the top of my head, I just think of, you know, tax-exempt—that combat zone—need to move that to a Roth IRA yesterday just to get it growing tax-free, and the earnings we can roll to an IRA for a deferral. But yes, we should have a strategy there.
And when you said proportional, John, my mind jumped to, for some reason, thinking about Roth distributions, and an oddity with TSP still versus a Roth IRA is Roth TSP distributions are still proportional between earnings and basis, whereas a Roth IRA is just basis—or what you contributed, what’s already been taxed, after-tax amount. It’s a nuance that usually doesn’t mean a lot or come up, but where it comes up is your basis, your contributions, what’s already been taxed in a Roth IRA is pretty much 99% of the time going to be tax and penalty-free, particularly if it’s a true contribution. If it’s a conversion, there are some other nuances there to unpack. But if it’s just money we put in—we’ve already been taxed, normal contribution—it always comes back first, which means there are no consequences, there are no thoughts, there’s nothing to be worried about there.
Whereas if it’s proportional basis and earnings, now we’re looking at how long has it been in there? Are we under 59 ½? What are the other things with that earnings piece that we have to think through and could get caught by something unaware? That’s where my mind went. You went a different way with it, which I love, and that’s why, you know, we think similarly, but sometimes our minds go in different directions.
John Mason: Agreed. There are multiple five-year rules. So you have a five-year rule inside of TSP. You have a five-year rule inside of Roth IRAs. Satisfying the five-year rule inside of Roth TSP doesn’t satisfy it in a Roth IRA. So audience, if you have Roth TSP, you probably want to go ahead and open a Roth IRA and get that five-year clock ticking.
The standard order of operations, Tommy, on distributions in retirement would be non-qualified money or excess savings first, pre-tax money second, Roth IRA money third. And if you’re taking proportionate distributions from pre and post, or pre-tax and Roth, you’re giving up potentially decades of tax-free growth.
And I guess I’ll also say here, not that we’re, like, huge advocates of this planning strategy, but there’s asset allocation, which is 60/40 stock/bond and allocating your pre-tax money a certain way. Well, inside of TSP, let’s say you have a 500,000 IRA and 500,000 Roth. Inside of TSP, you have to allocate it all the same way: 60/40, 70/30, 80/20. Well, if you had it in an IRA, you could have arguably 100% fixed income in your IRA and 100% stock in your Roth. Now, we could unpack whether or not that’s a good strategy long-term, but there’s a lot of math out there, papers, and research that would indicate putting your risky assets in a Roth and putting your conservative or less efficient assets in an IRA makes sense. So you can’t do that inside TSP, so that’s just a random nugget of information.
But proportionate distributions, I love your point about segregating the basis and the difference between, you know, first-in, first-out, and how TSP does that proportionately. So yeah, need to think through it entirely. So that’s the second mistake. The third mistake nobody’s talking about is closing TSP too early.
Tommy Blackburn: Absolutely. And we see it all the time. We’re big proponents, if you’ve listened to us over time, seen any of our blogs, except newsletters, or are a client—we’re just big proponents of flexibility, and one way to maintain flexibility is by not closing TSP. And probably until, you know, sometimes clients just get to a point where it’s, “Tommy, we’re never going to use it. Can we just consolidate it? I know you keep preaching flexibility, but it’s just more of a nuance. I just want to consolidate it.” Okay, we’ll cross that bridge, particularly when required minimum distributions start, we cross that bridge.
But the flexibility is there in a number of ways. I’m working with a client right now in New York, where New York doesn’t tax TSP distributions. So state tax-free—that’s a reason that we did not want to close it out, and by our firm always having pretty much the general approach of, “We don’t close TSP,” you know, that prevents a mistake. You know, ideally, you’re proactive and you’ve identified that special treatment, but what if a client moves to another state and you never—how could you know? All of a sudden, hey, we left that door open if there’s something special about that state, which could happen.
Additionally, another big one is we retire before 59½. Well, if we’re 55 and separated from service, or if we’re LEO special, I think it’s 50, if I’m not mistaken. Correct, John? Yeah, so there are nuances there, but we can take distributions from TSP before 59 ½ in the right circumstances and not be subject to a 10% early withdrawal penalty. There’s certainly some others.
John Mason: Yeah, I love it. Closing TSP too early is a mistake that transfers into multiple mistakes, kind of like you indicated, and most people aren’t aware that you can transfer money back to TSP either. So by leaving 10 or 15,000 in the Thrift Savings Plan, you preserve your ability to roll money back to TSP. Currently, 99% sure you still can’t roll Roth money back, so I’m pretty sure the rule is still you can only roll pre-tax money back. So it’s something to be aware of, you know, you may get a second job; maybe we need to segregate basis and do backdoor Roths. You mentioned, Tommy, the state tax benefits.
So they’re—just closing TSP in general probably before 75, 70 to 75, is potentially a mistake. And, you know, if you’re working with somebody like us, nine times out of 10, we’re going to keep the TSP open until you tell us that you want to close it. Yes, your TSP is essentially free, so if you’re working with a financial planner, the financial planner’s more expensive. Understand that. But TSP is also not the holy grail. Like, you can get a lot of great stuff at Vanguard, Fidelity, Schwab. You can buy low-cost index funds where the fees are very similar to what you would be seeing inside of TSP. So we’re not keeping TSP open because the investment fees are so low. We’re keeping it open for all of the other benefits that we’ve already discussed. So that’s not for, like, ETF or mutual fund fees.
Tommy Blackburn: Exactly. And just to elaborate or expand on that one a little bit, I think we’ve been very transparent. We would say caution working with any financial planner who just wholesale says, “Let’s close TSP and roll it.” Clearly, that’s not how we operate. We like the flexibility. We like that you have a peace of mind in knowing you can go back to it.
But to your point, John, we’re not comparing TSP as so cost-effective and special in its investments versus what we have access to or what we can do over here. It’s just a tool. The price you’re paying is for the advisor, and for the advisor—at least working with us—in order to be compensated, and we think for us to do our best job for you, we need to be managing the bulk of it. Like John said, we leave essentially a nominal amount over there so that that tool is still available, but the cost is us. And that’s the question is: Is the advice and us being compensated worth it? Not, is the investment vehicles inside of it just so much better than anything we could do elsewhere?
John Mason: So another mistake here, just elaborating, maybe, audience, you’ve transferred some of your money to an IRA, and there’s fees, and you have some of your money in TSP, and you’ve decided, “Well, I’m just gonna start pulling from my IRA to protect my TSP,” but you didn’t realize, like Tommy said, that if you were pulling from TSP, you wouldn’t be paying any state income tax on that distribution. So just understanding all aspects of your plan, all the arrows in the quiver, what everything is doing for you.
Having TSP, Tommy, you said pre-59 ½ is great because you avoid 72(t) distributions. TSP, 401ks, the typical is you retire the year you turn 55, and you get access to those penalty-free distributions. Rolling all your money to an IRA and then having to do a 72(t) feels unnecessarily complicated. So what we do is we transfer the bulk of the money out, and as distributions are needed, it’s a little bit more work for all of us. We transfer money back to TSP, facilitate the distribution, and everybody’s a happy camper. And depending on the state tax rate, we’re adding, you know, 5 to 10% tax savings on those investment distributions.
So don’t close TSP too early. I think that also hits the pre-59 ½ message that we were going to hit. Missing state tax benefits, we caught up in there, too. So the closing TSP early satisfied a lot of these. Another mistake that nobody talks about, Tommy, with TSP distributions is just the fact that it can set you up for failure, and this is both on Roth conversions. It’s actually interesting now that I’m about to say this. It’s pretty frustrating. So on Roth conversions, they don’t allow any withholding. So you convert 100,000 to Roth, you’ve got to make an estimated payment, and if you don’t know about that, then bam, at tax time, you’re going to have taxes and a penalty. So they do not allow, under any circumstance, tax withholding on Roth TSP conversions. But then on the flip side—
Tommy Blackburn: And by “they,” you mean TSP
John Mason: Correct. Correct. But on the flip side, I want to go on a $10,000 vacation or a $20,000 vacation, and I’m already well paid into the tax system. They’re going to say, “Don’t care, bro. We’re going to withhold 20% on that distribution.” So when I want you to have taxes withheld to help me on my conversion, I’m out of luck. When I don’t want taxes withheld, you’re telling me you have to have it anyhow. So the mistake here is just not understanding, one, what can and cannot be withheld based on the distribution that you’re taking. And then, oh, by the way, if you’re not careful, you also need to know that there’s no state tax withholding on those distributions. So generally speaking, the tax plan is just really a little bit harder to manage within TSP.
Tommy Blackburn: You generally have, and again, it’s general. We’ve laid out scenarios where pre-59 ½, it opens up opportunities, but the tax withholding piece, uh, the sourcing of distributions, you have generally just a lot more flexibility with an IRA, something outside of TSP. And it’s kind of annoying.
John and I were talking game-planning before the episode of, you know, say you wanted that $10,000 distribution example for the vacation, you already paid in, you don’t need it, whatever it is about your situation. Well, TSP is going to probably make you take out 12,500 because they’re going to have 20% withheld. So as you’re saying, “I need the net 10K,” well, we’re going to keep 20%, which means you’ve got to now gross this thing up. Maybe it doesn’t amount to a whole lot because come tax time when you file your return, you’re just getting a refund. But all of a sudden we created more income. We had to take money. Now it’s no longer growing tax-advantaged inside of a retirement vehicle. Maybe it causes us to trip some phase-out or just maybe it’s not the time when we want to create more income. That is certainly a limitation. We don’t have the state tax withholding on top of it. Don’t want to… Yeah, it’s frustrating to have those limitations on you.
John Mason: Dude, it’s—I mean, I have to expand on that. Taking out extra money and grossing up a distribution, like, you’re going to hit an IRMAA threshold, and your Medicare premiums are going to go up. You could be in the tax torpedo, and 85 cents of every dollar extra that you pull in is making more of Social Security taxable. Healthcare, you already have to clear a 7½% AGI. Itemized deductions for charitable, you have to clear 0.5. The enhanced senior deduction begins phasing out at 150. So yeah, I mean, it’s very frustrating. And it’s not good.
Tommy Blackburn: It’s not ideal. Yeah, or if you wanted to do a Roth—yeah, if you want to do a Roth conversion, all of a sudden we’re eating up additional of that Roth conversion bracket. It’s hard to think of where it’s like, yeah, that’s the best outcome, is being forced to have more money withheld than you needed and creating income to do that.
John Mason: Unbelievable.
Hey, well, we’re going to take a quick break and talk about our e-book that is now available on masonllc.net. So audience, we told you this was coming. It’s fully available now. It’s our e-book on survivor benefits that’s available at masonllc.net. That’s masonllc.net. There’s a link for it at the top, right above our Mason logo, as well as at the bottom of the page. We’ll ask for your name, your email. You’ll be able to get a free copy of that e-book on survivor benefits, which is decades of experience. We built a firm around helping federal, state, and military members elect full SBP at retirement. Get your resource at masonllc.net. And as important, you can be somebody’s hero. Once you’ve seen this, once you know how valuable it is, share it with friends, family, and coworkers across the country. You can help somebody avoid a huge mistake. In our opinion, declining survivor benefits is that huge mistake. Masonllc.net.
All right, Tommy, so after that brief commercial, we’re back with the—I think the final mistake here is facilitating charitable giving from TSP. And I’ll just jump in and say right now, one of the most efficient ways to give to 501(c)(3)s, qualified charitable entities, is at 70 ½—you have to physically actually be 70 ½. We can distribute from an IRA directly to a charity completely tax-free. It is a super efficient way to complete your charitable giving. You don’t have to worry about itemizing. You don’t have to worry about thresholds. It also satisfies your required minimum distribution, so you’re avoiding some of those income traps that we talked about earlier. We’re not pushing over IRMAA. We’re not incurring, uh, tax torpedo issues. So QCDs are often—maybe not 100% of the time, but like, pretty close—the best way to give.
And in order to give from your TSP, you would actually have to take a taxable distribution. So let’s say you wanted to give 10 grand, you’d have to take out 12, net 10, give 10 to charity. Well—
Tommy Blackburn: And then take the standard
John Mason: And then take the standard deduction. And then take the standard deduction. Maybe you’d pick up the $2,000, you know, cash donation that’s now available under the one big beautiful bill. But we boosted your income. We add $12,000 of taxable income so that we could maybe deduct two. Chances are you’re probably not itemizing, so clearly facilitating charitable giving distributions from TSP is, you know, I don’t know what’s worse than less ideal, but it’s not good.
Tommy Blackburn: Yeah, I agree. That’s a good way to say it. Yeah, not good, dangerous, not ideal. Pick your words. I would add another one, and maybe it’s not a withdrawal strategy, John, but sometimes I’m thinking about retired military or, you know, military uniform service TSP, then we go do a GS job and potentially combine that military TSP with the civilian TSP. Would say that’s probably a mistake for a number of reasons.
One is we may have those tax-exempt from combat zones that we could—we should be getting those out so that we can put it into a Roth and grow it tax-free from there, those contributions. But also, if we’re, you know, typical working age, under 59 1⁄2, and now we take it from our separated-from-service military, put it into the civilian, well, it’s locked—it’s pretty much locked up again. We’re not going to be able to do anything with it. Whereas because we separated, we can roll it to an IRA, to a Roth IRA, where maybe we don’t want to take distributions yet, but if we needed to, we do have that flexibility now because we’re no longer in service. So just a lot more, you just—you lose flexibility. I don’t—and like, maybe there’s a good reason, but on the surface, don’t really see combining them being a benefit.
John Mason: I agree. I think that was a really good call. I also just wrote down, not taking TSP withdrawals at 59 ½ while you’re still working. And how is that a mistake? Well, one of our popular videos on YouTube was “Stop Maxing Your TSP,” and people like it, people don’t like it. It’s a little controversial, but at 59 1⁄2, retiring at 62, two more years of TSP contributions probably not going to move the needle on whether or not you can retire.
So again, just thinking about what’s our plan. Well, at 59 ½ or 60, maybe we can scale back our savings from maxing TSP back down to 5%. We don’t want to give up the full match, but, you know, we have a video we’re going to record about the dangerous decade, which I identify is 60 to 70. Anecdotally, it seems like if you live past that, you may live till 90, but bad things happen in your 60s, is what I’ve seen over my 17 years. So I think it’s a dangerous decade. Audience, I’m not a doctor, but that’s your danger zone.
Why not, Tommy, at 59 ½, when we have access to in-service distributions, and we have some health, and we have time, and we’re still earning a good salary, there’s nothing saying that you can’t take out 30, 40, 50k from TSP and do the vacation of a lifetime? In fact, there’s a lot less pressure on that type of distribution because you’re still working and you’re still contributing that little bit into TSP. So yeah, I just think that not even considering the fact that you could is a mistake. Just because you’re still working doesn’t mean you get to not use your money.
Tommy Blackburn: Absolutely. And I know we want to wind it down, but because we keep hitting these, there’s one other that popped into my head as we’re going, and this is certainly probably more of a fringe. We don’t like to think about death too much, but inherited TSP and leaving it there, particularly as a non-spouse. And what I’m thinking is, is we’ve seen, unfortunately, or had the unfortunate—we just had to deal with it—is if you don’t do something within 90 days as a non-spouse, guess what TSP’s going to do? They’re going to send you a taxable distribution. So potentially hundreds of thousands, millions all of a sudden taxable income. You’re welcome. So that’s when we certainly want to roll this into an inherited IRA or Roth IRA, whatever the case is. I mean, there’s no… Perhaps there’s a good reason, but again, almost 99% of the time, less than ideal, not good, as John would say.
John Mason: I love it, dude. Another good episode.
Tommy Blackburn: Good. Yeah, it was great. It was fun. I hope the audience is enjoying it.
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