He Will Retire From the Federal Government in 18 Months With $1.3 Million in the TSP. The Decision He’ll Have to Make on Day One
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A FERS employee who plans to retire in 18 months with $1.3 million in the Thrift Savings Plan has to decide what to do with that money once he separates. He can leave the balance in the TSP, start TSP installment payments, or move it to a traditional IRA with a direct rollover.
That choice controls whether the money can still be rolled over later, how required minimum distributions (RMDs) are calculated, and which tax provisions he can use. His FERS annuity follows its own rules no matter which path he takes.
Installment Elections Can Lock the Rollover Door
Under IRS Publication 721 (2025), “The CSRS, FERS, and TSP are considered qualified retirement plans.” The same guide states that “You can’t roll over any part of your CSRS or FERS annuity payments.” The pension comes to him as monthly income, and none of it can be moved into an IRA.
The TSP balance is more flexible, with exceptions. Any part of it can be rolled over except payments he chooses to receive over his life expectancy, the joint life expectancies of him and his beneficiary, or a period of 10 years or more. RMDs and hardship distributions are also excluded. If he chooses long installments at separation, those payments become taxable income and can never be rolled over.
Side-by-Side: TSP, IRA Rollover and FERS Annuity
| Feature | Keep in TSP | Direct rollover to traditional IRA |
|---|---|---|
| FERS annuity | Paid monthly; can’t be rolled over | Same; the rollover has no effect on it |
| RMD start age (born 1959) | 73 | 73 |
| Who calculates the RMD | The plan administrator figures the annual minimum | Calculated separately for each IRA; the total can come from one or more IRAs |
| Qualified charitable distributions | Not available; the exclusion is written into the IRA rules | Up to $111,000 in 2026 |
| Cash paid to him first | 20% withheld from any eligible rollover distribution paid to him, even if he rolls it over later | |
| Moving money back | The IRS lists the TSP among plans that can accept rollovers from a traditional IRA, but plans aren’t required to | |
Publication 575 (2025) says that for an account-based plan, “your plan administrator must figure the minimum amount that must be distributed from the plan each year.” For IRAs, the IRS says an owner “must calculate the RMD separately for each IRA they own but can withdraw the total amount from one or more of the IRAs.” The charitable exclusion comes from section 408(d)(8)(A), which is the IRA section of the tax code.
How the money moves also matters. If the full balance were paid to him first, the 20% withholding would hold back $260,000. A direct rollover avoids that withholding. The plan has to give him a written explanation of his options no earlier than 90 days and no later than 30 days before the distribution.
How an RMD on $1.3 Million Adds to the Pension
At age 73, the Uniform Lifetime Table divisor is 26.5 under 26 CFR 1.401(a)(9)-9(c). If the balance were still $1.3 million when his RMDs start, the first required withdrawal would be about $49,057. That would be taxable income on top of his FERS annuity, whether the money sits in the TSP or an IRA.
Missing an RMD costs the same in either account. Under 26 U.S.C. § 4974(a), the excise tax is 25% of the shortfall. Missing the full example RMD would cost $12,264.25. The rate falls to 10% if he adjusts the shortfall within the correction window in § 4974(e). Before December 30, 2022, the rate was 50%.
Roth money has different rules. The IRS states that “The RMD rules do not apply to Roth IRAs or Designated Roth accounts while the owner is alive.” Beneficiaries are still subject to them.
A $1.3 million pre-tax balance is exactly the setup that turns into an oversized tax bill the first year RMDs begin, and the years before retirement are when that bill is easiest to reduce (we walked through how to defuse it in a free guide here: The First-Year Tax Bomb).
Rule Changes to Track Before Retirement Day
The RMD rules are still being settled. In Announcement 2026-7, dated March 9, 2026, the IRS said parts of future final RMD regulations will apply no earlier than 6 months after they are published. Until then, taxpayers “must apply a reasonable good-faith interpretation” of the statute. The developments on record don’t set any RMD rule that applies only to the TSP. The same framework covers both accounts.
Over the next 18 months, he should keep three points in mind:
- An installment election of 10 years or more makes those payments ineligible for rollover.
- A direct rollover avoids the 20% withholding. Any amount he doesn’t roll over may count as taxable income.
- The $111,000 charitable exclusion for 2026 is available only through an IRA.
His FERS annuity will be paid the same way whichever path he chooses. What changes is the TSP side: who calculates his RMDs, which tax provisions he can use, and how much the plan deducts if he takes cash first.
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Jake has been been working in financial media for almost 15 years. He focuses on all things personal finance for 24/7 Wall St. with high hopes to educate and entertain. Most recently, Jake spent 12 years working various roles at The Motley Fool. He started copy editing fool.com content, worked on premium and marketing campaigns, and helped launch The Ascent, a personal finance brand.
His work has been featured on platforms like MSN, Yahoo Finance, USA Today, and more. He's written about credit cards, social security, ETFs, savings accounts, and just about anything else you can imagine when thinking about money. Jake love to cook, play golf, and tell people he's never had a cavity. (It's true!)
