The first thing they need to do is if they have a loan against their Thrift Savings Plan (TSP) account, make sure it is paid off. If that is covered, now they have one of three options as long as they have $200 in their TSP account.
Keep It There
If they decide to keep their TSP in the account it will continue to grow in that account. They also pay a low expense ratio compared to most investment companies to maintain the account. It is currently $0.40 per $1,000 invested. However, they cannot contribute any more to TSP unless they obtain a government position that offers that option. For example, I’m currently a contractor with the Air Force but that doesn’t entitle me to have the benefits of TSP. Many GS positions have that benefit, you just have to make sure you check.
Move It To Another Retirement Account
They also have the option of putting their TSP holdings into a commercial Individual Retirement Account (IRA) where they can continue to contribute to it. This allows them to build the money over time with compounding interest. They have to be careful with which type of account they put it in since there are 2 main types of IRA’s, at least for this purpose. There is a traditional IRA that lets your investment grow tax-free until you decide to retire. There is also an IRA that you pay taxes on as you’re contributing to the account. Basically, you don’t pay taxes at retirement because you already paid them during your working years. I mention all of that to say; typically if you have a traditional TSP you would put it in a traditional IRA and if you have a Roth TSP you would typically put it in a Roth IRA. If you cross the two accounts it can have tax implications because they are taxed differently. There might be some cases where it would be advantageous to cross (roll-over) the accounts but generally, it wouldn’t benefit most people.
Take It Out Themselves
They could take it out themselves but your family would most likely pay taxes on the money on top of the 10% penalty they would receive when you take the money out before 59 ½ years old. There is a different type of account for items you want to buy before you retire. Also, if they do this, it can affect your family’s ability to save for retirement since their money is not building over time and they’re not gradually adding to it.
Ultimately, the choice is up to your family what is done with their TSP but consider more long term needs such as your family’s final retirement as opposed to short term needs you might have as your family is transitioning out of the military. It might be nice to put a down payment on a new car or house, however, look at the overall impact on your financial health to make the best decision for you and your family in your specific situation. If you’d like more information on your spouse transitioning out the military please read So Your Spouse is Getting Out of the Military… . Please comment below what is your biggest worry when transitioning back into the civilian world.