Five TSP mistakes in your last five years before retirement

1. Why the last five years are different

For thirty years the TSP has had one job: grow. You contributed, the agency matched, the funds compounded, and the right answer to nearly every question was “keep going.” In the final five years three things change at once.

First, the balance is at its peak, which means a percentage mistake is a dollar mistake of a size you have never faced. A 25% drawdown on $800,000 is $200,000, more than most people contributed in their first fifteen years combined. Second, the time to recover is nearly gone. A bad year at 35 is noise; a bad year at 60 sets the starting point for every withdrawal you take for the rest of your life. This is sequence-of-returns risk, and it is the reason the same allocation that was correct at 45 is dangerous at 62. Third, the rules change at separation. Loans come due, contributions stop, penalty exceptions appear or vanish depending on your age, and the TSP starts asking you questions it never asked before.

The five mistakes below are not exotic. Each one is a reasonable-seeming decision taken at the wrong moment or without one piece of information. Each is avoidable with a calendar and an hour.

2. The five mistakes on a timeline

Each mistake has a window in which it is made and a much longer window in which it is paid for. The timeline marks where each one happens relative to your separation date.

3. Mistake 1: the allocation cliff

The most expensive mistake is also the most common: changing your allocation all at once, on a single day, in reaction to a headline. It comes in two forms. The first is fleeing to the G Fund after a market drop, locking in the loss and then missing the recovery. The second, less discussed, is never leaving the C Fund because it has always worked, and arriving at separation 90% in stocks with a withdrawal schedule about to begin.

What it costs

Consider an employee with $800,000, 80% in C and S, who watches the market fall 20% in the spring of her final year. The balance is now $672,000. She moves everything to G. Over the next eighteen months the market recovers the loss and more, but her account earns the G rate, roughly 4%. She retires with about $700,000. Had she done nothing she would have had something near $850,000. The cliff cost roughly $150,000, and it was not caused by the market. It was caused by the timing of a single decision.

The reverse case costs just as much in a different order. An employee who retires 90% in stocks and starts $40,000-a-year installments is fine if the first three years are good. If the first year is a 30% drop, he is selling depressed shares to fund income, and the arithmetic of early losses plus withdrawals means his account may never recover to where it would have been, even if the market does.

The fix

Decide the target retirement allocation five years out and move toward it in steps, one rebalance a year, never in response to a market move. A common landing point is three to five years of planned withdrawals in the G Fund and the remainder in stocks, which for a retiree spending 4% of the balance works out to roughly 15–20% G. If you prefer a single fund, the L Fund closest to your retirement year does the gliding for you, though its glide path is designed for someone without a pension and is more conservative than most FERS retirees need. The point is not which target you pick. It is that the target is chosen in calm conditions and reached gradually, so that no single day’s decision can cost you six figures.

The pension changes the right allocation

Generic retirement advice, and the L Fund glide path, assume your portfolio is your entire income. A FERS retiree’s is not. If your pension and eventually Social Security cover your essential spending, the TSP only has to fund the discretionary layer and the long tail of late-life costs, and it can therefore carry more stock than the L Income Fund’s roughly 20% for decades without putting your groceries at risk. The mistake is not choosing a stock-heavy allocation; it is choosing one without first computing how many years of TSP withdrawals you actually need protected. Do that calculation, hold that many years in G, and let the pension do the job the bond allocation does for everyone else. The hidden wealth of a federal pension puts numbers on how much a FERS annuity is worth as a bond substitute.

4. Mistake 2: front-loading away the match

The FERS agency contribution has two parts: an automatic 1% of basic pay, and a match of up to 4% on your own contributions, dollar for dollar on the first 3% and fifty cents on the dollar for the next 2%. Contribute 5% every pay period and you receive the full 5% from the agency. The critical word is every. The match is calculated per pay period, not per year, and if you contribute nothing in a given period you receive no match for that period.

What it costs

The 2026 elective deferral limit is $24,500, with an $8,000 catch-up for anyone 50 or older and an $11,250 “super catch-up” for ages 60 through 63, for a total of up to $35,750. A high earner in his final year decides to max out fast, contributing 30% of pay. He hits the $24,500 limit in pay period 16 of 26. From period 17 onward his contributions stop automatically, and so does the 4% match. On a $150,000 salary, ten pay periods with no match is about $2,300 of agency money he was entitled to and did not receive. Doing this two or three years in a row is the price of a modest car, forfeited for no reason. The same trap is covered from the funding-order angle in why maxing the TSP first can be a mistake.

The final year has an extra twist. Contributions and matching end with your last paycheck. If you retire mid-year, you do not get to make a year’s worth of contributions in six months and still collect a full year of match. Plan the contribution rate against the pay periods you will actually work. And note that your annual leave lump-sum payment, which can be a large final check, is not basic pay: no TSP contribution or match comes out of it.

The fix

Divide the amount you want to contribute by the number of pay periods remaining in the year you will actually be paid, and set that as a dollar amount rather than a percentage. Verify it after the first pay period of each year, since the limits change. The per-pay-period math is spelled out with worked examples; the super catch-up rules cover the 60–63 window and the mandatory-Roth rule for high earners.

5. Mistake 3: carrying a loan into separation

A TSP loan is a reasonable tool while you are working: you borrow from yourself at the G Fund rate and repay through payroll. It becomes a problem the day payroll stops. Once your agency reports your separation, the TSP sends you a notice giving you roughly 90 days to repay the outstanding balance in full. Anything not repaid by the deadline is declared a taxable distribution, reported to the IRS on a 1099-R, and taxed as ordinary income in that year, on top of your final salary, your lump-sum leave payment, and any other income.

What it costs

An employee retires in October with a $35,000 general-purpose loan balance. She cannot repay it. In January she receives a 1099-R for $35,000. Stacked on a year that already includes ten months of salary and a $25,000 leave payout, that $35,000 lands squarely in the 24% or 32% bracket: $8,400 to $11,200 of federal tax, plus state tax. If she separated before the year she turned 55, add a 10% early-withdrawal penalty of $3,500. She has, in effect, paid a fifth to a third of the loan again, and the money is out of the TSP forever.

The fix

Three options, in order of preference. First, pay the loan off before you separate, by reamortizing to a shorter term a year or two out or by making extra payments. Second, if you cannot, know that the 90-day window is real and plan the cash for it. Third, if the balance is declared a taxable distribution because of separation, it qualifies as a qualified plan loan offset: you may roll the taxable amount into an IRA using your own funds by the due date of your tax return for that year, including extensions, and owe nothing. That is far more generous than the 60-day window that applies to ordinary distributions. The TSP loans guide walks through the reamortization and QPLO mechanics. And if you are 55 or older in the year you separate, no penalty applies to the taxed amount, only income tax.

6. Mistake 4: never starting the Roth clock

This one costs nothing to avoid and can cost tens of thousands to ignore. Roth earnings are tax-free only when the distribution is qualified: you are 59½ or older and five years have passed since your first Roth contribution. The Roth TSP and a Roth IRA each run their own five-year clock. The TSP clock starts with your first Roth TSP contribution. The IRA clock starts with your first contribution to any Roth IRA.

What it costs

An employee has contributed to Roth TSP for six years, so his TSP clock is satisfied. At retirement he rolls his Roth TSP into a new Roth IRA, opened that month, because he wants one account. The IRA clock starts now. For the next five years, earnings withdrawn from that IRA are taxable, even though they would have been tax-free had he left them in the TSP. If he draws $30,000 of earnings in that window at 22%, that is $6,600 of tax he did not need to pay, for the sake of an account he could have opened, with $100, in his fifties.

A second version: the employee never contributed to Roth TSP at all. In retirement, with a pension as his only taxable income, he is in the 12% bracket and wants to convert traditional TSP to Roth. He can now do that in-plan, but the Roth TSP five-year clock starts with the first conversion. Had he made even a token Roth TSP contribution five years before retirement, every conversion he does in retirement would already be past the clock.

The fix

At least five years before retirement, do two things. Direct at least one pay period of contributions to Roth TSP if you never have. Open a Roth IRA and fund it with any amount; if your income is above the Roth IRA limit, a small nondeductible traditional IRA contribution converted to Roth achieves the same result. Both clocks are now running. The details, including how the clocks interact after a rollover, are in Roth TSP vs. Roth IRA.

Two 2026 rules make Roth planning less optional than it used to be. Employees whose prior-year FICA wages exceeded $150,000 must make all catch-up contributions as Roth. And since 2024, Roth TSP balances are exempt from required minimum distributions for life, which makes the Roth side of the TSP the natural home for money you do not expect to spend.

7. Mistake 5: the rollover pitch

Somewhere in your last year you will be invited to a retirement seminar, and somewhere in that seminar someone will explain, warmly and reasonably, why you should roll your TSP into an IRA they manage. The pitch is not always wrong. It is almost always incomplete.

What it costs

Three things leave with the money. The G Fund, which pays a long-term Treasury rate with zero principal risk and exists nowhere else; there is no IRA equivalent, and any “stable value” substitute carries insurer risk and higher fees. The TSP’s cost, which runs a few hundredths of a percent; a typical advisory relationship charges 1% on top of fund expenses, and on $800,000 that difference is $7,000 to $8,000 a year, compounding. The Rule of 55: if you separated in or after the year you turned 55 and are not yet 59½, your TSP withdrawals are penalty-free, but IRA withdrawals are not. Rolling out before 59½ reinstates a 10% penalty you had already escaped. The fee-drag math and the honest case each way are covered in their own guides.

The fix

Decide the keep-or-roll question on its merits, on your own timeline, and in writing. The legitimate reasons to roll out are specific: you want investments the TSP does not offer and will actually use; you are 70½ and want qualified charitable distributions, which the TSP does not support; or you are consolidating several old accounts. A partial rollover is allowed and often the right answer: keep the G Fund and the low cost in the TSP, roll the piece you want to manage differently. And never roll out before 59½ if you are relying on the Rule of 55.

8. What the five add up to

None of these mistakes is catastrophic alone. The reason they matter is that they compound, and that the same person tends to make several. Here is a composite drawn from the patterns above: a GS-13 retiring at 60 with 28 years, $750,000 in the TSP, 80% in stocks, a $30,000 loan, no Roth IRA, who front-loaded contributions in her final two years and rolled to an advisory IRA at a seminar.

Add it up and this retiree, who saved diligently for 28 years and did nothing reckless, arrives at 85 with something like $300,000 less than she would have had with a calendar and five decisions made in advance. That is the size of the problem, and it is why the checklist in section 10 exists. The largest two items, the cliff and the fee, are also the two that are entirely within your control and cost nothing to get right.

9. The paperwork that quietly matters

None of these is a strategy mistake, and each has undone a plan.

10. Year-by-year checklist

Five years out

• Write down your target retirement allocation and the annual rebalance date you will use to reach it.
• Open a Roth IRA with any amount if you do not have one. Make at least one Roth TSP contribution if you never have. Both clocks start now.
• Write your market-drop rule and put it somewhere you will see it.

Three years out

• If you have a TSP loan, reamortize it to pay off before your planned separation date.
• Review Form TSP-3 and your spouse’s understanding of the withdrawal plan.
• Begin the annual rebalance toward the target; you should be roughly halfway there.

One year out

• Set contributions as a dollar amount divided across the pay periods you will actually work, so the match is captured in every one.
• Confirm the super catch-up if you are 60–63, and the Roth-only catch-up rule if your prior-year wages exceeded $150,000.
• Finish the rebalance. The G Fund should now hold your first three to five years of planned withdrawals.
• Decide keep-or-roll in writing, on the merits, before anyone pitches you.

Separation

• Loan balance at zero, or cash ready for the 90-day window, or a QPLO rollover planned.
• Address, login, and withholding election confirmed.
• If you rely on the Rule of 55, nothing leaves the TSP until 59½.
• Installments set up for income, sized against your withdrawal strategy, timed around the OPM interim-pay period.

11. Frequently asked questions