Since Sept. 15 of this year, current and ex-federal workers and military employees have more options regarding accessing money from their Thrift Savings Plan.
The TSP executive director, Ravindra Deo, states that the TSP believes that the TSP members will enjoy these changes and also will meet the many demands for flexibility when it comes to withdrawing money from their accounts.
Before the new rules were implemented last month, the previous system was set up about three decades ago, since the TSP was born. And the old system was very restrictive when it came to withdrawals.
For those that are not aware of what the TSP is, it is a program for federal and uniformed employees that functions very similarly to a 401(k) plan. The TSP is the biggest employer-sponsored retirement savings program in the U.S. with almost $600,000,000,000 invested and about 5,700,000 participants in the program since July of this year.
Previously, when participants ended up leaving their federal or uniformed service, they were able to keep their TSP (until age 70 and a half) and were able to take funds from the account in the form of monthly installment payments or a lump sum.
Those limitations encouraged many participants to take the money and put it into an IRA or another eligible retirement savings program to have more flexibility when it came to accessing their savings.
With the new rules in place, those that choose to keep their TSP plan can take unlimited partial withdrawals as long as they are 30 days apart. Previously, only one partial withdrawal could be made in a lifetime.
For those that take installment payments are now able to change the amount and regularity of these payments at any time, instead of the once a year opportunity in October like before. They can select whether they wish to get paid every month, every quarter, or once a year.
For those that are actively working and have taken out hardship withdrawals, they are no longer applicable to the 6-month contribution suspension that was a standard system before Sept. 15. They are now able to continue investing in the TSP.
Also, employees that are still employed by the Federal Government can take up to 4 withdrawals without facing tax penalties every calendar year, as long as they are at least 59 and a half years old. This used to be only a once in a lifetime option.
These withdrawals used to take a proportional rate from your Roth balance and your traditional TPS balance. Now, participants can select what account they wish to withdraw from, or they can use them both as well.
Another significant change is that once you are 70 and a half years of age, you no longer have to elect on how you wish to withdraw your account completely. However, the IRS will notify you of a required minimum distribution amount that you will have to take.
The reason why the TSP has implemented these changes was due to an order by the TSP Modernization Law passed in 2017.
Another change that was added is that the TSP now allows withdrawal request forms to be done online along with changes, but the forms still need to be printed out, signed, and sent into the TSP. However, this is an improvement from the previous system of printing the forms, filling them out, and sending them in.
Last year, about 54,000 people out of 200,000 who withdrew during post-separation requested a transfer to another retirement savings account. Another 41,000 requested installed payments from their account, and another 2,000 participants purchased an annuity plan.
About 103,000 participants completely withdrew their savings from their account, which is very common among those that do not have a lot saved up. This action faces huge tax penalties for the tax year.
However, now with these new withdrawal options, this may encourage participants to keep their accounts and only to withdraw what they need when they need it, rather than large amounts. That way, they can continue to grow their savings in their TSP. Another reason to keep those funds in a TSP is due to low-cost admin fees and the ability to have higher interest rates accumulate with government bonds without the risk.
However, other reasons some participants leave the program is because there is a restricted range of options to invest in. There are only five basic finds that are linked to broad indexes. Five life cycle funds combine investments in those basic funds depending on the expected dates of withdrawals. Another reason that might still have participants move their funds is the long processing times for these withdrawals and also not receiving advice from the TSP, but only information. Many people wish to be able to have their money with a provider that will be able to help them navigate financial questions and challenges.
However, most people will say that these changes can be an excellent thing for many to have such flexibility to access their accounts when they need it.