The TSP’s Hidden Flaw: How Withdrawal Rules Could Cost Federal Retirees Thousands
Why the Thrift Savings Plan (TSP) Is Failing Retirees
The Thrift Savings Plan (TSP) is a fantastic retirement savings vehicle in many ways. It’s low-cost, easy to use, and offers matching contributions, making it an excellent tool for federal employees to build wealth and retire comfortably.
But (and there’s always a but), while the TSP excels in wealth accumulation, it falls short in wealth distribution. Retirees relying on the TSP for income are facing a hidden risk: Dollar Cost Ravaging (DCR)—a phenomenon that can erode retirement savings faster than expected.
If you’re a federal employee or retiree, here’s what you need to know about this financial pitfall and how to protect your hard-earned retirement funds using TSP withdrawal strategies for federal retirees.
What Is Dollar Cost Averaging?
Before we discuss the problem, let’s start with its positive counterpart: Dollar Cost Averaging (DCA)—a strategy many investors use.
With DCA, you invest a fixed amount at regular intervals, buying more shares when prices are low and fewer when prices are high. This method reduces the impact of market volatility and helps maximize long-term growth.
What Is Dollar Cost Ravaging?
Now, let’s meet DCA’s evil twin: Dollar Cost Ravaging (DCR).
When you retire and start withdrawing from your TSP or other investment accounts, you are selling shares to generate cash. The problem? If the market is down, you’re forced to sell more shares to meet the same withdrawal amount.
This is where TSP withdrawal strategies for federal retirees become crucial in mitigating the risk of running out of funds too soon.
Why the TSP Withdrawal Rules Make DCR Worse
1. You Can’t Choose What to Sell
The TSP forces withdrawals to come proportionally from all funds based on your allocation. If your TSP is 60% C Fund (stocks) and 40% G Fund (government securities), every withdrawal pulls 60% from stocks—no matter how volatile the market is.
A proper TSP withdrawal strategy for federal retirees should allow flexibility in choosing which funds to draw from first, minimizing the impact of selling in a down market.
2. Mandatory 20% Federal Tax Withholding
By law, the TSP automatically withholds 20% for federal taxes on withdrawals. But many retirees owe far less in taxes—often closer to 11% or lower.
Without proper TSP withdrawal strategies for federal retirees, you may be forced to sell more shares than necessary to cover taxes, accelerating portfolio depletion.
How Federal Employees Can Take Control
✅ 1. Advocate for Change
Contact your representatives and urge Congress to reform TSP withdrawal rules—including the ability to selectively withdraw from different funds.
✅ 2. Rollover to a Low-Cost IRA
Moving your TSP funds to an IRA allows for:
- Flexible withdrawals (sell from specific funds as needed)
- Custom tax withholding (avoid unnecessary 20% withholding)
- More investment choices (beyond limited TSP funds)
✅ 3. Use Strategic Rebalancing
- Withdraw from low-volatility funds first (e.g., G Fund or cash equivalents)
- Replenish these funds later from growth-oriented investments (C, S, I Funds) when markets recover
✅ 4. Work with a Federal Retirement Expert
A financial planner specializing in federal benefits can help you:
- Minimize the impact of Dollar Cost Ravaging
- Optimize TSP withdrawal strategies for federal retirees
- Reduce unnecessary tax withholdings
Final Thoughts: The TSP Needs Reform, But You Can Take Action Now
The TSP is excellent for growing retirement savings, but for withdrawals, it’s falling short. Without reform, retirees will continue to suffer from Dollar Cost Ravaging and unnecessary tax inefficiencies.
The good news? You can take control of your retirement today.
🔹 Considering a TSP rollover? Schedule a 20-minute consultation with a Federal Retirement Expert to explore your options.
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Anthony Bucci has over 19 years of experience helping federal employees retire confidently. A frequent contributor to FedSmith, Tony helps federal law enforcement professionals cut through financial noise and make smart retirement decisions.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor..
This material is for general information only and is not intended to provide specific advice or recommendations for any individual.
There is no assurance that the views or strategies discussed are suitable for all. investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets..
* https://www.tsp.gov/tsp-basics/expenses-and-fees/
** https://www.tsp.gov/taking-money-from-your-account/
***tsp.gov/publications/tspbk26.pdf
**** https://www.tsp.gov/funds-individual/
