After much speculation, the TSP agency, the Federal Retirement Thrift Investment Board, has revealed more news on the CARES Act loan help reported not so long ago. For example, we know that the $50,000 maximum has been extended to $100,000. What’s more, the 50% limit has been abandoned, and participants can now withdraw up to 100% of their balance.
As of yet, we’re unsure of a deadline, but we know that the application process is likely to end in September. Additionally, there’s an optional 12-month suspension option for TSP participants who are generally required to make payments. If you need a break from payments, you’ll need to apply before the end of 2020.
When will these loan options become available? We don’t know yet, but it’s thought to be somewhere towards the end of June; the FRTIB said before June 22. With the CARES Act, participants can take withdrawals (of up to 100%) without worrying about the standard 10% penalty.
In terms of the withdrawal options, they will be active under the CARES Act at some point in July, and this will run until December. Unfortunately, the options aren’t available to everybody. Instead, you’ll need to prove one of the following:
• Either you or a spouse/dependent has contracted COVID-19 (with a Centers for Disease Control and Prevention approved test).
• You have been furloughed, laid off, or quarantined, which has affected your financial position. Even if work hours have been reduced, or you’ve been forced into time off to care for a child, you will qualify.
At the moment, TSP participants have access to the pre-existing withdrawal options, and the FRTIB said that this is hopefully helping many families. Elsewhere, the TSP noted that current federal employees older than 59 1/2 have the option of in-service withdrawals as well as hardship withdrawals. If you’re no longer in service, single-payment and installment-based withdrawals should be accessible for yourself and beneficiaries.
For some TSP participants, it might be possible to take up to $100,000 from an entire retirement account portfolio while enjoying a tax break (as long as the previous qualifications are met). If you were to make a withdrawal as a result of Coronavirus and place it on the 2020 tax return, you wouldn’t have to pay the 10% early withdrawal penalty.
Don’t worry; you don’t need to note all withdrawals in one tax year. You can spread this income over three years. Let’s say you take $15,000 in Coronavirus withdrawals; you could essentially report $5,000 per year over the next three years.
What if you want to pay the money back into your retirement account? Well, you have three years to do this also. There’s no federal income tax when distributions are repaid because it’s treated like a plan-to-plan transfer. You can pay back into the same retirement account or another plan.
The Future of the I Fund
Since the initial announcement of the I fund moving to a different index, the TSP has taken much criticism from the Trump administration and Congress. Using a benchmark that involves Chinese equities, experts have said it could lead to significant economic risk. Now, it seems the TSP has reversed the decision after three years of planning.
In May, one of the President’s national security advisers, Robert O’Brien, teamed up with Larry Kudlow, director of the National Economic Council, to pen a letter to the FRTIB. It seems the FRTIB is welcome to search for a new index, but it must exclude China. In the letter, the pair stated that there were ‘special risks’ with China.
This isn’t the first time the plan has been challenged, and a FRTIB member even shared their concerns back in November. As the new Senate-confirmed members enter the FRTIB, a debate is likely to rage on as time passes. We’re sure the I fund will expand to include a diverse range of international equities, but it seems China will be excluded from this.
