The Thrift Savings Plan (TSP) provides a savings venue for federal employees and members of the uniformed services. This article discusses some of the major TSP considerations associated with the program.
There are many working and retired federal employees who use the TSP throughout their careers, and will at some point begin taking withdrawals. The TSP itself, however, has limited resources available for servicing these accounts In order to make it manageable for the agency, the withdrawal options are limited to just a few. They include a one-time partial withdrawal, full withdrawal, a series of monthly payments or an annuity. Funds can also be moved to an IRA account, to be withdrawn from there.
One-Time Partial Withdrawal
You are eligible for a partial withdrawal only once in your lifetime. Therefore, there are a few considerations to keep in mind when mulling about this option:
- The minimum withdrawal is $1,000.
- Since you cannot repeal the partial withdrawal, all potential needs should be addressed and planned for before deciding on a withdrawal amount.
- This option is not available if an age-based withdrawal was taken while you are employed. Age-based withdrawals can only be taken by working employees over age 59 ½.
- The pretax portion of a withdrawal is not taxed if it is transferred to an IRA. If it is a direct distribution to a participant, income tax is withheld. If an entire distribution is not needed immediately, the income tax can be spread out by transferring it to an IRA first, and then taking the withdrawals from there.
A withdrawal of the entire TSP balance is allowed at any time during retirement. No income tax is withheld if the pretax balance is transferred to an IRA. A direct distribution to the participant is not typically recommended for a full withdrawal, since the entire income tax burden would be absorbed in one year, and could possibly push your income level into a higher tax bracket. It is possible to transfer the pretax amount directly to a Roth IRA as well, though income tax would be due and that strategy should be discussed with a financial planner before implementation.
A Series of Monthly Payments
One method of receiving regular funds from the TSP is through a series of monthly withdrawals. The amounts of the withdrawals can either be determined by the IRS life expectancy tables or a specific dollar amount determined by the participant. Here are a few additional considerations:
- Once withdrawal amounts are determined, by either method, they are fixed for an entire year and cannot be changed.
- Life expectancy withdrawals are designed to last for an entire lifetime, but that is not guaranteed. The tables are applied to the balance at the end of each year and the amount will vary based on investment performance.
- If the life expectancy method is used, there is a one-time option to change to the specific dollar amount method. There is no option to change from the specific dollar amount method to a life expectancy method.
- Withdrawals based on life expectancy tables cannot be transferred to an IRA, and income tax must be withheld.
- Specific dollar amount withdrawals can only be transferred to an IRA if they are expected to last less than ten years. If the amounts are projected to last longer than ten years, an IRA transfer is not allowed and income tax must be withheld.
Annuities are a contract with an insurance company that can provide income for life in exchange for an initial premium. There are many different options and types of annuities, which are constantly changing. Before considering any annuity purchase, you should review your specific situation with someone familiar with the options available to determine what type of contract is appropriate if at all. Once an annuity is purchased, the premium paid is committed and the funds may no longer be available.
Annuities that are purchased from within the TSP are all done through an exclusive contract with MetLife. MetLife offers standard options for fixed annuities, but does not offer any variable annuity options through the TSP. It is also possible to transfer funds to an IRA, and purchase any type of annuity within the IRA account. It is strongly recommended that you consider all of your options, including those available outside of MetLife, before purchasing any annuity contract. It is often possible to find either rates or options that are better or more appropriate for you.
Another option for accessing TSP funds is to first transfer them to an outside IRA account. From there, funds can be transferred without any restriction as to amount or timing.
There are a few details particular to the TSP program that should be considered when making withdrawals:
- TSP withdrawals come from all investment accounts equally. If a tiered strategy is being used and the money is intended to come only from a specific fund, a rebalancing may be needed after a withdrawal.
- TSP withdrawals also come proportionally from the pre-tax and Roth accounts based on existing balances, and there is no way to modify the proportion.
- An unpaid loan existing at retirement must be paid back within 60 days, or else it is declared a taxable distribution. The declaration can be made faster than 60 days if it is indicated that the participant does not wish to pay it back. This taxable distribution will be subject to the 10% early withdrawal penalty based on the same rules as any other withdrawal.
- Minimum distributions are required once age 70 ½ is reached, similar to other types of retirement accounts. This requirement can be satisfied by taking the monthly payment distribution option and selecting the IRS life expectancy table method. Minimum distributions are not required if the participant is still employed in federal service.
An overall TSP withdrawal strategy should be based on a solid and well-thought-out retirement plan, and is particular to your particular situation. As people are retiring earlier, living longer, and having more expensive lifestyles, it is more important than ever to have a solid foundation for the decisions that are made early in retirement.