TSP Withdrawal Options Are Changing
New rules could soon mean more flexibility.
By 2020, federal employees with Thrift Savings Plan (TSP) accounts should have new withdrawal choices for their invested assets. New rules are to be implemented through the TSP Modernization Act, permitting TSP participants more flexibility.[1]
The TSP withdrawal rules have been strict for years. Too strict, in the opinion of many—especially compared with the private-sector workplace retirement plans that the TSP takes after. Once a federal worker makes a partial withdrawal, they are locked into three choices:
Choice one is converting the remaining balance to a life annuity (which the federal worker must buy and which is not the same as a TSP monthly payment or the annuity that the employee gets with a retirement package).[2,3]
Choice two is cashing out the remaining TSP balance.[2,3]
Choice three is arranging a sequence of monthly payments that may be altered only once a year.[2,3]
Moreover, if a federal worker makes an age-based withdrawal from the TSP while still employed by the federal government, they lose the ability to make partial withdrawals after retiring. As for retirees who avoid age-based withdrawals, they can make one partial withdrawal once retired under the current rules but are subsequently left with full withdrawal options.[4]
These restrictions often prompted federal employees and retiring service members to roll their TSPs into IRAs at retirement, even though investment fees for many IRAs exceeded those for the TSP.[2]
The TSP Modernization Act addresses two crucial issues. The new law strikes down the withdrawal election deadline, allowing TSP participants to arrange and revise the amount and frequency of their withdrawals whenever they want. It also removes the curbs on partial withdrawals.[2,4]
In addition, TSP participants who have made both traditional and Roth contributions no longer have to take them out pro rata or proportionally distributed. Soon they will gain the ability to specify how much of a withdrawal should come from Roth TSP assets and non-Roth TSP assets.[1]
The new rules will take time to roll out. Forms, webpages, and publications need to be revised, and a public comment period on the changes is required by law. While some of these revision steps were taken pursuant to the passage of the TSP Modernization Act, some are forthcoming.[1]
Until the new rules are implemented, TSP participants must abide by the old rules. A TSP fact sheet on the forthcoming withdrawal choices notes that TSP participants facing their withdrawal deadlines can choose monthly payments of as low as $25 and let their remaining TSP balances sit until the new options are available, if their financial situations allow.[1]
TSP participants who have account balances when the new rules are in effect may take advantage of the expanded options, even if they have made a partial withdrawal or already begun to receive monthly TSP account payments. Of course, if a participant changes the time period for their payments, there may be tax implications.[1]
The change in TSP withdrawal rules is welcomed by many. In sum, federal workers will gain the ability to make multiple age-based withdrawals during their careers and will still be able to make partial withdrawals once retired. As the National Treasury Employees Union president, Tony Reardon, commented last year: “The rules for how federal employees can manage their accounts have not kept pace with the modern workforce, and these changes [make] the TSP a more attractive and user-friendly choice for employees and retirees.”[4]
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations
1 - tsp.gov/PDF/formspubs/tspfs10.pdf [12/17]
2 - kiplinger.com/article/retirement/T047-C000-S002-federal-retirees-get-a-break-on-tsp-withdrawal-rul.html [2/1/18]
3 - tsp.gov/PlanParticipation/LoansAndWithdrawals/annuities/purchasing.html [4/9/18]
4 - federalnewsradio.com/legislation/2017/07/new-bill-would-loosen-restrictions-on-tsp-withdrawals [7/27/17]
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.