You receive many benefits working for the federal government. Health insurance and generous paid leave are what initially attract many potential employees. However, the government’s Thrift Savings Plan (TSP) offers one of the most significant long-term advantages. Unfortunately, many people overlook TSP mistakes that could increase their lifetime taxes.

As the federal government’s 401(k)- style plan, the TSP provides retirement financial security to federal employees and uniformed service members. However, it’s also similar to traditional plans in the fact that small errors can have major effects. The consequences of such decisions aren’t clear while contributing funds. They only become apparent once you retire.

Since the choices you make today can affect you for decades to come, it’s important to make purposeful decisions. The following TSP mistakes are among the most impactful for your retirement.  Fortunately, they are also the most avoidable.

1. Taking a Lump-Sum Withdrawal Without a Tax Plan

People often need quick cash when they retire. For instance, nearly 40% of retirees relocate after leaving the workforce. Imagine one of these people takes a lump-sum withdrawal from their Thrift Savings Plan. This person may not realize it, but this large withdrawal is treated as ordinary income. This TSP mistake can have major tax implications.

The effects of this decision can be immediate. It’s possible that a person could fall into a higher tax bracket from this large withdrawal. However, this isn’t where the implications end. That single year of elevated income could raise Medicare Part B and D premiums due to Income-Related Monthly Adjustment Amount (IRMAA) charges.

Someone who takes out a lump-sum withdrawal may also find fewer opportunities to use lower tax brackets in future years. Put simply, you could lose flexibility for managing taxes. Unfortunately, too many retirees think taking their money “all at once” will be easier. In reality, it’s typically wise to have a tax plan before taking large withdrawals.

Reviewing how Medicare income thresholds work is a wise place to start.

2. Not Considering the Tax Impact of Withdrawals

It’s not uncommon for federal employees to begin taking TSP withdrawals without fully understanding how they’ll interact with Social Security benefits, FERS pension, and other income sources. Treating withdrawals as isolated decisions — rather than as part of an overall income picture — can easily lead to higher lifetime taxes.

Many retirees are surprised to learn that the tax code treats each retirement income stream differently. When TSP withdrawals are layered on top of a FERS pension and Social Security benefits, the combined income can land a person in a higher tax bracket. Withdrawal size will obviously affect taxable income, but the timing and sequencing could also have impacts.

Unfortunately, this TSP tax mistake often isn’t obvious until the retiree starts drawing Social Security. When TSP withdrawals are taken without a broader plan, a larger portion of SSI benefits could be taxable. Retirees may find it usefulto learn how the FERS pension sets a baseline income level and how varying withdrawal levels can affect taxable income.

3. Ignoring the Low-Tax Window Between Retirement and Social Security

The average federal worker retires in their early 60s. This means around half retire even earlier — often in their late 50s. By doing so, the retiree creates a period before Social Security benefits, when their taxable income is lower than it will be later. Overlooking this lower-income window can reduce your opportunities to manage long-term tax exposure.

During these early retirement years, federal retirees often rely on their FERS pension as their primary source of income. Often, people don’t recognize that this lower tax bracket (before Social Security and required minimum distributions begin) offers the opportunity to reduce cumulative taxes over retirement.

Some assume that taxes will naturally decline, regardless of other income sources phasing in. Don’t make this mistake. Understand that the typical income pattern for federal retirees means taxes increase once additional income streams begin. This knowledge can help you evaluate long-term tax exposure and recognize that retirement income is rarely uniform.

4. Staying Too Conservative With TSP Investments – and Not Accounting for Inflation and Taxes

Relying heavily on the G Fund and other conservative allocations may feel reassuring. Many federal retirees who value stability see this as a safe option. However, investment growth could easily fall behind inflation and future tax obligations. If this happens, the long-term purchasing power of your TSP balance can erode.

While slow growth may seem safe, it can cause the need to take larger withdrawals in the future to maintain the same standard of living. Since these withdrawals are treated as ordinary income, taxable income can increase as well. This common TSP mistake can compound across decades and reduce flexibility once income sources begin to layer.

The unfortunate part is that these effects may not be immediately apparent. One day, you might realize that a higher percentage of your income comes from taxable TSP distributions. Remember, the “safe” route isn’t always ideal. Understand the distinction between short-term safety and long-term purchasing power, and remember that inflation can play a major role.

5. Delaying Roth Conversions Until After RMDs Begin

Imagine that a retiree has built up a nice nest egg and believes their savings and pension will provide more than enough. In such a situation, that person may believe that waiting until required minimum distributions (RMDs) are mandatory will offer some benefit. However, this ignores the fact that waiting until RMDs begin increases the tax rate a person will face.

This misconception can become a problem for Roth conversions. The mandatory income you receive fills lower tax brackets before conversions are taken into account. This means conversions completed after RMDs begin can push retirees into higher tax brackets. It can also leave you with less room to shift money over time, and this can increase cumulative taxes across retirement.

The implications of waiting for RMDs in your Thrift Savings Account will become most evident in your early 70s. This period is when RMDs will stack on top of your FERS pension, Social Security, and any additional withdrawals. Just keep in mind that these distributions can change the structure of your taxable income, and tax flexibility diminishes significantly after RMDs start.

6. Contributing Too Heavily to Traditional TSP Late in Career

As the service years of federal employees wind down, many increase their contributions to the Traditional TSP to reduce current taxable income. It’s a common misconception that lowering today’s taxes is always the most efficient long-term choice. Unfortunately, this belief is often upended when retirees find themselves with a larger taxable income pool.

It’s important to remember that TSP contributions only defer taxes. They do not eliminate them. Federal employees — particularly those with higher incomes — may end up converting today’s higher tax bracket into lifelong taxable withdrawals. As your TSP balance grows, so does the portion of your retirement income that’s subject to ordinary income tax.

Once again, this becomes a significant problem when the FERS pension, Social Security, and TSP withdrawals start working together. A larger TSP balance means higher required withdrawals — particularly after RMDs begin at age 73. If you take time to consider how contributions affect your taxable and non-taxable retirement income, you can avoid this common TSP mistake.

7. Not Planning for TSP RMDs

Thrift Savings Plan RMDs can increase taxable income when compounded with other forms of retirement income. However, these distributions can also cause significant damage on their own if they’re not properly planned for. Without advanced planning, mandatory withdrawals can result in higher taxable income than expected.

Once a federal retiree reaches age 73, they must take RMDs every year. Each of these distributions is taxed as ordinary income. When a large TSP balance has accumulated over a career, required withdrawals can be substantial. This can result in landing in higher tax brackets or increasing the taxable portion of your Social Security benefits.

Even more surprisingly, your Medicare premiums could increase due to IRMAA surcharges. This price hike takes many retirees by surprise as their taxable income grows faster than expected. Don’t make the mistake of believing your RMDs will be modest or skippable. Take time to review how RMDs interact with your other benefits.

Doing so can help you see how all these pieces fit into the broader retirement tax landscape and avoid major TSP mistakes.

Planning Now to Help Your Future

Whether you’re about to retire or simply getting an early start on planning, it’s important to remember that all your retirement decisions are interconnected. What seems like a safe TSP investing decision could increase taxes on your pension and SSI benefits for decades. However, just because these are common mistakes doesn’t mean they’re unavoidable.

While avoiding the most impactful TSP mistakes may reduce lifetime taxes, the most important step a person can take is thinking in terms of long-term planning rather than individual decisions. There’s no way to predict the future. However, understanding how all these pieces fit together can help you approach retirement with more confidence and fewer surprises.

Knowledge is more than power when it comes to retirement planning. It’s everything. Make sure you’re ready for what the future holds.