Expectations vs. Reality of the TSP Modernization Act Sponsored by: Todd Carmack

The main reason for saving money in retirement savings accounts like your Thrift Saving Plan account is to keep some income for yourself in your retirement.

TSP is one of three income benefits of an employee under FERS retirement, but it’s the only source of income whose income is calculated by the account balance – based on your savings and investments.

There are two distinct phases to plan retirement savings: accumulation and distribution. The biggest challenge here is, more people emphasize the first phase and not the second one. Let’s study both of them in detail.

First Phase: Money into TSP (Accumulation)

The TSP has made it SIMPLE to move money into your TSP. An employee can quickly sign up and put some percentage or dollar figure from his or her paycheck, and over time, an employee’s money is moving into the TSP throughout the career. An employee can set investments in two areas: the place to move new contributions and the placement of total account balances. The aim here is to save for retirement.

Second Phase: Money out of TSP (Distribution)

In the second phase, an employee needs to consider retirement on priority moving money into TSP that is Phase 1, to investing for the next 20+ year withdrawal period that is Phase 2. Planning your TSP for a successful Phase 2 can make a lot of difference between your secured retirement and an unsecured one where a person will find it difficult to survive and meet the needs for his lifetime.

TSP Modernization Act made it easier… or not

Well, we can say that the TSP Modernization Act made it easier to some extent. This act was introduced to open more withdrawal options from the TSP to add flexibility to retirees’ payments.  

With the act, TSP added options to stop/start/change payments and move payments between traditional TSP, Roth TSP, or both. This was a sign of relief from the “take it or leave it” like options that were available in the previous act.

A vital factor stayed the same

An essential element in a withdrawal strategy was not changed in the TSP Modernization Act.

No option to select the fund(s) to take a withdrawal from was given in the new act also

An employee was forced to withdraw the amount proportionately from each fund he or she had — even if he or she saw losses in the fund(s).

It is imperative to develop a strategy, especially in retirement. For example, the approach helps people avoid economical difficulties and stock market losses by choosing one investment strategy over the other for a withdrawal, but the TSP participants are not allowed to do that — you have to withdraw proportionately from each of your funds so that the investment percentage remains the same. This may put retirees in a less-than-favorable situation: they may skip their withdrawal and save themselves from selling too many shares of a stock market fund going into losses.

As part of your retirement strategy, it is advised to estimate your TSP funds to make sure they’re proportionate with your withdrawal schedule.

Present Day: What you want, and what to ask for

There are some aspects of the TSP Modernization Act that ask you to go digital. Their withdrawal process has gone online. This has many advantages and disadvantages. The good news here is that you need to take seven steps online, as the form has been generated based on these steps only.

The bad news here is that you have to make your decision without any support. You have to select both the options: Withdrawal and the income tax that is best suited for you. That means you must know what you want before you start withdrawing online because you will not get any external support.  

Check your math twice!

There’s an old saying that says check your math twice! While withdrawing money, get complete information on what options are being offered to you. You get four options to use for retirement income withdrawal from the TSP:

  • Scheduled Installment Payments: This is a scheduled payment option wherein you can pick the amount you want to receive, and you are asked to mention whether you want it monthly, quarterly, or annually. You will continue to get payments unless you stop them, or your account balance becomes zero. There are different federal tax options depending upon your account balance.
  • One-time Withdrawal: Withdrawal is considered an unscheduled payment wherein an employee can withdraw $1,000 or more from his account as a one-time payment. No limit has been imposed on the number of single withdrawals, but the TSP can only process one in 30 days.
  • Buy an Annuity: You can use some or all of your TSP account to buy an annuity with their outside vendor. You can use your money and get control of it for a guaranteed lifetime monthly payment. You are advised to check the TSP fact sheet annuities to get more information on this matter.
  • Shift Your Withdrawal: You can shift some or all of your TSP account balance to an IRA or an eligible employer plan. You need to consult your IRA provider or plan administrator to check which transfer is acceptable in your case.

Most people find this process challenging because you are making the most important decisions of your life, and the technology may not be right for you.

Try to get answers to your questions directly from the TSP’s publications, someone who represents TSP or is a well-qualified advisor to give you legitimate answers. Do not look for a ‘TSP Transfer Specialist’ who cannot explain the benefits of TSP but is trying to sell his or her product.

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