taxes on your earnings entirely, provided you  

follow the rules for taking your money out. 

The accounts best suited for retirement 

include employer-sponsored plans, such as TSP,  

401(k)s, 403(b)s, and 457s, and individual retire-

ment accounts (IRAs). You can open an IRA with 

a financial services institution, such as a credit 

union, bank, mutual fund company, or brokerage 

firm. With IRAs and some employer plans, you 

have the choice of tax-deferred or tax-free  

Roth accounts.

The accounts designed to help you save for 

education include state-sponsored 529 college  

savings plans, Coverdell education savings 

accounts (ESAs), and, in some states, what are 

known as baccalaureate bonds. You invest after-

tax income in these accounts, but earnings are 

free of federal income tax if you use the money  

to pay qualified education expenses. Interest on 

US savings bonds may also be tax free. 

You can always use taxable accounts to  

invest for any goal, including retirement and  

education. You may do so, for example, if you 

reach the contribution cap on tax-deferred or 

tax-free accounts or you want greater flexibility. 

With taxable accounts, there are no limits on the 

amount you can invest or on how or when you can 

use the money. But you will owe income tax on 

your earnings and any capital gains in the year 

you realize them.

If your after-service job is with the federal govern-

ment, you can continue contributing to your Thrift 

Savings Plan (TSP) account as you did on active 

duty. If you’re working in the private sector or for 

a state government, you have a number of options 

for handling your TSP account balance. You may:

 Leave it in the TSP until you turn 

70½, when you must begin to take 

required minimum distributions. 

But if you retire earlier, you may 

begin withdrawing without penalty 

any time after you turn 59½ 
 Roll it over to an IRA that  

you open with a custodian of  

your choice
 Roll it over to a 401(k), 403(b), 

457, or similar employer plan, pro-

vided the plan accepts rollovers

Sticking with the TSP is often a smart move. 

The fees are low, the investment choices are 

diversified, and you can continue to adjust the 

way your money is invested in the available funds.

While you can’t make additional contributions 

to your TSP account unless you go back to work 

for the government, you can take advantage of 

one special alternative that’s not typical of other 

employer-sponsored retirement plans: You can  

roll over IRA assets or account balances from  

former employers’ plans to consolidate your  

savings in the TSP. 

Another thing you can do, but should try to 

avoid if you possibly can, is to use the money in 

your TSP account to meet current needs. If you 

withdraw money before retirement, you’ll owe 

income tax on the full amount you take plus a  

10% tax penalty if you are younger than 59½.  

And worst of all, you’ll have to start saving for 

retirement all over again. 

TAX-DEFERRED OR TAX-FREE?

When you are ready to open an IRA or start 

participating in an employer’s retirement 

plan, which should you choose—the tax-

deferred account or the tax-free Roth? 

If you think you’ll be earning more in 

the future than you’re earning now, there 

are good arguments for choosing a Roth. 

While you’ll be paying income tax now on 

your contributions at your regular tax rate, 

in the future your withdrawals will be tax 

free if you’re at least 59½ and your account 

has been open at least five years.

THRIFT SAVINGS PLAN

veterans HanDBOOK