Congress Clears Bill: Wider Withdrawal Options for Thrift Savings Plan Accounts
Thanks to a bill now passed by Congress, wider options for withdrawals could soon be available for all military personnel and federal employees with a Thrift Savings Plan account. Just recently, the Senate joined the House in supporting the bill with the main aim of keeping more money in the system. Currently, those who leave service tend to transfer their money to an IRA among other savings platforms.
Since its introduction in the 1980s, the TSP has played an important role for all federal employees and military personnel. If these changes get approval from President Trump, it could be the biggest adjustment in its long history. According to the most recent figures, over $500 million now sits in around five million accounts.
Currently, those who leave military or federal service have three options for their money. Depending on their needs, they can withdraw a lump sum, convert it into an annuity, or withdraw equal payments each month; if the account is left untouched, the tax code suggests minimum withdrawals. With two of these options, the money can be transferred to an IRA or any other savings vehicle.
For TSP officials, they believe IRAs are more attractive for most because of the many withdrawal options (most of which can be personalized). As a result, they move their money and instantly lose access to low administrative costs and a government securities fund which actually offers a higher return than most other investments.
After the Senate cleared the bill, praise quickly came from the National Active and Retired Federal Employees Association. As mentioned previously, the main aim of the bill itself is to provide investors more control over their money and, as a result, their future. Today, the changes being suggested are common within the private sector but are yet to make their way into TSP accounts.
What changes are being proposed?
Although the main withdrawal options would remain the same, the choices would be more flexible than ever before. For example, investors currently have the ability to take one withdrawal, unless financial hardship is experienced, during active duty or while still employed after the age of 59 and a half (where the tax penalty no longer exists). Furthermore, investors have access to just one partial withdrawal after leaving; though, this isn’t available for anybody who took a withdrawal during service. For the remaining account balance, a second choice must be designated.
With the new rules, numerous partial withdrawals will be allowed regardless of the age threshold and regardless of whether it’s before or after separation. For regular pay-outs, new options would also be introduced including the option to have annual and quarterly payments. If payments are started and stopped, the remaining balance can be split between a lump sum and an annuity while the amounts themselves can be changed more frequently.
When would the changes be introduced?
If President Trump gave the bill the go-ahead, the requirement of certain rules would mean an introduction in 2018. For those pushing for the change, it has been a long journey after starting in 2015. After finding that 40% of investors close their accounts quickly after leaving employment with the government, the TSP pushed for change. According to a recent report, 30% of those within a decade of retirement said they were planning to close the TSP account after leaving the government which perhaps further shows the importance of adjustment. On both occasions, a lack of withdrawal flexibility was cited as a key reason for the removal of funds.
Does the bill fix all problems?
Unfortunately, there’s another common issue for those with a TSP account and it’s the limitations in terms of investments. In total, five core funds are offered in a TSP account (passive and index-based) along with five life-cycle funds. For many years, the TSP has been allowed a window for investors to designate a percentage of their money for mutual funds. Although support of this has been strong, the governing board is only in the planning stage as of right now.