What to Do With Your TSP After You Separate

First, what does not happen: your TSP does not close, expire, or fundamentally change the day you separate. If your balance meets the minimum to stay, the account keeps operating exactly as before. You generally can no longer contribute to it, but the money stays invested, and you keep the same funds at the same costs. That means you have time.

The four options

Regulators describe four options for money left in a former employer's plan, plus combinations of them. Here is each one, honestly.

Option	What it means	Tends to fit when
Keep it in TSP	Leave the balance where it is. Simple menu of index-based funds and Lifecycle funds at very low cost. No new contributions, but same allocation options you’ve always had.	You value low costs and simplicity, the fund menu covers your needs, and you don't need broader investment options or account consolidation.
Roll it to your new employer's plan	If the new plan accepts rollovers, a direct rollover moves the balance in with no taxable event for like-to-like money, and keeps it inside an employer plan's rules, including the age-55 access provision.	You value consolidation inside one employer plan, the new plan's menu and costs hold up, and employer-plan features matter to you.
Roll it to an IRA	A direct rollover into an IRA. Like-to-like money (traditional to traditional, Roth to Roth) is generally not a taxable event.	You want more control over your investment options, consolidated accounts, more flexible withdrawal and planning options, or professional management of your whole picture.
Cash it out	Take the balance as a distribution. The traditional portion is taxed as income that year, an early-withdrawal penalty may apply depending on your age, and the tax-advantaged growth ends permanently.	Rarely: a genuine emergency with no better source, decided with the full tax bill in view. For most separating members this is the most expensive option on the table, which is why anyone urging it deserves scrutiny.

And these combine: a partial rollover moves some and keeps some, preserving a TSP-specific benefit such as the G Fund or age-55 access on the portion that stays while opening options on the portion that moves. There isn’t a default answer for everyone, and anyone who tells you one of them always wins is selling something. Your decision is based on a list of factors. Here are some important considerations.

The factors that actually decide it

The age-55 rule

Employer plans like the TSP have a provision IRAs do not. If you separate from service in or after the calendar year you turn 55, you can generally take withdrawals from that employer's plan without the early-withdrawal penalty that otherwise applies before 59 and a half. Roll everything to an IRA and that earlier access generally goes with it, because IRAs run on the 59-and-a-half clock regardless of when you left work.

For someone separating in their mid-fifties who might want income before 59 and a half, this single rule can argue for keeping at least part of the balance in the TSP. For someone separating at 35 with decades until retirement, it’s not an issue. Age at separation is the first sorting question.

The default-fund problem

For years, the default for TSP contributions was the G Fund, the government securities fund. It cannot lose money in nominal terms, which sounds like safety. However, over a multi-decade horizon, a portfolio parked entirely in the G Fund can struggle to outpace inflation, which is its own kind of risk. Since September 2015, new enrollees default into an age-appropriate Lifecycle fund instead, and Blended Retirement System members have been auto-enrolled into one since 2018. But plenty of long-serving members still hold allocations that were set by default years ago and never revisited.

Here is the important part: this is an allocation problem, not a location problem. You can fix it inside the TSP in ten minutes. Do not let anyone use the default-fund problem as the argument for a rollover; the argument it actually supports is reviewing your allocation, wherever the money lives.

Costs

The TSP's administrative expenses are among the lowest of any retirement plan in the country. Expenses in an IRA depend entirely on what you buy inside it: broad index funds can be comparably inexpensive, while more advanced or specific products can cost more. The fair framing is that keeping the TSP guarantees very low cost, while a rollover makes cost a variable you control. If you roll over, know what you will own and what it costs before you move, not after. Be sure to consider what low cost actually gets you (and what it doesn’t).

Investment menu and flexibility

The TSP's simplicity is a feature and a limit. It has a few broad index funds, which cover basic investing needs. An IRA opens the full investment universe, more withdrawal flexibility, and more room for coordinated planning strategies. Whether that breadth is worth it depends on whether you have a plan that uses it. Options without a plan are just more ways to tinker.

Combat-zone contributions

If you contributed to the TSP from pay earned in a combat zone, the tax treatment is unusual and worth understanding before you move anything. Contributions made from tax-exempt combat pay into the traditional TSP went in untaxed and come out untaxed, though their earnings are taxable. Contributions made from combat pay into the Roth TSP are the standout case: they went in tax-free and, under Roth rules, their qualified earnings come out tax-free too.

The TSP tracks your tax-exempt balance for you. In a rollover, that tracking becomes your problem and your receiving custodian's, and not every custodian handles tax-exempt basis gracefully. If you have combat-zone money in your account, get specific professional guidance on the mechanics before initiating any rollover. This is one of the few places in the TSP decision where a paperwork mistake can create a permanent tax cost.

Consolidation and attention

A serious consideration for rolling over has nothing to do with funds or fees: accounts that are consolidated get attention, and orphaned accounts tend to get forgotten. If your TSP would become one of four scattered old accounts you never look at, consolidation can have a real, intangible value. If you are the type who will maintain it, that argument carries less weight. Know yourself here.

Whatever you choose, do these two things

• Update your contact information and beneficiaries directly with the TSP. After separation, changes no longer flow from your service records. An outdated beneficiary designation is a mistake that surfaces at the worst possible moment.
• If you roll over, use a direct rollover. The money moves custodian to custodian and generally nothing is withheld. Taking the money as a check payable to you triggers withholding through the custodian and starts a short clock to redeposit the full amount, with tax consequences if you miss. There is rarely a good reason to touch the money yourself in transit.

Rules, limits, and TSP features change over time. Confirm current specifics with the TSP and a tax professional before acting.