If you’re a government worker who has recently taken—or is considering taking—a government resignation offer, you’ve probably asked yourself what the financial consequences might be. While stepping away from a long-term government role can open doors to new opportunities, it also carries serious financial implications, especially when it comes to your Thrift Savings Plan (TSP). In this post, we’ll explore why consulting with a financial and tax advisor before taking the plunge is a critical step—and how DNA Financial & Associates can help.

1. What Is the Resignation Offer and Why Does It Matter?

Occasionally, government agencies offer employees an incentive to resign or retire early. This might include a lump-sum payment, bridge benefits, or a severance-style package. While it can be tempting to accept, especially if you’ve been contemplating a career change, there are several factors to consider beyond the initial payout—such as your future health and retirement benefits, pension, and TSP distributions.

The Role of Your TSP

Your Thrift Savings Plan is the federal government’s version of a 401(k). It’s a crucial component of your overall retirement plan because it:

• Allows for tax-deferred (and, for Roth TSP, tax-exempt) growth of your retirement savings.
• Offers relatively low administrative fees.
• Typically has a variety of investment options, ranging from conservative to more aggressive funds.

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2. The Current Status of Resignation Offers

Not every government agency is offering resignation or early retirement incentives, but many are looking for ways to restructure or manage costs. If you’re one of the employees who did receive such an offer, you may find yourself in a strong position to negotiate or transition. However, keep in mind that accepting any offer without a long-term plan could jeopardize the benefits you’ve worked years to accumulate—particularly your TSP, pension, and health insurance options.

3. Why You Need a Financial & Tax Advisor

Before finalizing your decision, a qualified financial advisor can help you:

• Assess your short-term needs versus long-term retirement goals.
• Understand how a lump-sum payout will affect your overall investment strategy and tax situation.
• Determine if you should take a TSP distribution, leave your funds in place, or roll them over into another retirement account.
• Evaluate how your decision affects other government benefits, such as pension, healthcare, and life insurance.

A tax advisor or CPA is equally important because tax consequences can vary dramatically based on:

• Your annual income (including your spouse’s if you file jointly).
• Your age (particularly whether you are under or over age 59½).
• The amount of your TSP withdrawal or distribution.
• The state you live in and its specific tax rules.

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4. The Consequences of TSP Distributions

Taking money out of your TSP might sound like a quick solution—especially if you need immediate funds—but it can have a long-lasting impact on your retirement security. Key considerations include:

1. Taxable Income: TSP distributions are generally taxed as ordinary income. Withdrawing a large sum could push you into a higher tax bracket, increasing your overall tax liability.
2. Early Withdrawal Penalties: If you’re under 59½, you may face an additional 10% early withdrawal penalty on top of regular income taxes (subject to certain exemptions).
3. Reduced Retirement Savings: Depleting your TSP now means less money compounding for you later, which may force you to work longer or adjust your lifestyle in retirement.
4. Loss of Future Growth: The funds you remove no longer benefit from the TSP’s low fees and any potential employer contributions (if you’re still in service and receiving matching).

4A. Example Tax Liability: Single Filer, Two Children, Earning $100,000/Year

Let’s look at a hypothetical situation:

• Income: $100,000/year
• Filing Status: Head of Household (HOH) if you’re the primary caregiver for two children.
• Proposed Distribution: $50,000 from TSP

Under 59½

• Regular Income Tax: This $50,000 would be added to your $100,000 salary, potentially pushing part of your income into a higher tax bracket.
• 10% Early Withdrawal Penalty: That’s an immediate $5,000 penalty on the $50,000 distribution (in addition to regular income taxes).
• Total Additional Tax Liability: Could easily exceed $10,000-$15,000 (or more), depending on your specific deductions, tax credits, and exact tax bracket.

Over 59½

• No 10% Penalty: You avoid the early withdrawal penalty, but the $50,000 still gets taxed as ordinary income.
• Potential Higher Bracket: Combining $50,000 distribution with your $100,000 income could bump you into a higher tax rate for part of the distribution.

4B. Example Tax Liability: Married Filing Jointly, Two Children, Earning $150,000/Year

Now consider a married couple:

• Combined Income: $150,000/year
• Filing Status: Married Filing Jointly
• Proposed Distribution: $50,000 from TSP

Under 59½

• 10% Early Withdrawal Penalty: $5,000 on a $50,000 withdrawal.
• Combined Income: $200,000 could place you in a higher bracket than before, leading to a significant jump in taxes owed.

Over 59½

• No 10% Penalty: You avoid the penalty, but the extra $50,000 is still taxed at your marginal rate, which could be 24% or higher, depending on your deductions and credits.

Note: These examples are simplified. Actual tax liability can vary widely depending on additional factors like itemized deductions, tax credits, and state/local taxes. Always consult a tax professional for guidance specific to your situation.

5. How DNA Financial & Associates Can Help

Before making any decision about your resignation offer or your TSP, it’s vital to have a clear, personalized plan. That’s where DNA Financial & Associates comes in:

1. Retirement Benefit Review: Our team can thoroughly review your current government benefits—including your TSP, pension, and healthcare—to understand exactly what you stand to gain and lose by accepting a resignation offer.
2. Long-Term Financial & Retirement Planning: We work closely with you to develop a holistic financial roadmap, taking into account your short-term goals (like immediate cash needs or career transitions) and long-term retirement objectives.
3. Tax Consequence Analysis: Our experienced tax advisors will run the numbers on potential TSP distributions to help you minimize tax liability and avoid unforeseen penalties. We explore various options—like rollovers, partial withdrawals, or leaving your funds in TSP—to determine the most tax-efficient route for your unique situation.

By partnering with DNA Financial & Associates, you gain access to a team dedicated to protecting your financial well-being and maximizing your retirement potential. We’ll help you navigate this pivotal career crossroads with confidence, ensuring you have a strategy that addresses both the immediate and long-term implications of your decision.

Final Thoughts

Resigning from government service is a major life decision with far-reaching effects on your financial future. Whether you’re under 59½ and concerned about early withdrawal penalties or over 59½ but at risk of a higher tax bracket, the importance of professional guidance can’t be overstated.

Before signing any paperwork, make time to consult a qualified financial planner and tax advisor. For a comprehensive review and tailored strategies, DNA Financial & Associates is here to help you assess your current benefits, outline a long-term plan, and navigate the tax consequences of any TSP distributions.

Your future self will thank you for the careful planning you do today.

Disclaimer: The information provided here is for illustrative purposes only and does not constitute legal, financial, or tax advice. Always consult with qualified professionals for guidance tailored to your individual situation.

AI Disclaimer: This blog post was created with the assistance of an AI language model. While every effort has been made to ensure accuracy, completeness, and clarity, the content should not be construed as legal, financial, or tax advice. For personalized recommendations, please consult with a qualified professional.  DNA Financial & Associates disclaims any liability arising from the use of the information provided.

Referenced Sources

1. Thrift Savings Plan (TSP) Official Website‍

https://www.tsp.gov/
Explains the rules for contributions, withdrawals, and other TSP-related matters.

2. Internal Revenue Service (IRS) Early Distribution FAQs‍

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals
Details federal guidelines and penalties for early withdrawals from retirement accounts.

3. U.S. Office of Personnel Management (OPM) – Retirement Services

https://www.opm.gov/retirement-services/
Offers comprehensive information on federal employee retirement benefits, including eligibility and pension details.

4. IRS Publication 575, Pension and Annuity Income

https://www.irs.gov/publications/p575
Provides guidance on tax treatment of distributions from pensions and annuities, including TSP.

5. IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)

https://www.irs.gov/publications/p590b
While focused on IRAs, offers insight into early withdrawal rules and exceptions that often parallel TSP regulations.

6. Federal Employees Retirement System (FERS) Handbook

https://www.opm.gov/retirement-services/publications-forms/csrsfers-handbook/
Provides detailed information regarding retirement calculations, benefits, and special provisions for federal employees.

Always verify the most up-to-date information directly from official sources or consult with a qualified professional for personalized guidance.

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