New TSP Withdrawal Options
Beginning September, 15, 2019, federal employees and retirees will have more withdrawals options available to them thanks to the TSP Modernization Act. Prior to the passage of the TSP Modernization Act, withdrawal options were quite restrictive compared to withdrawal options available to those in the private sector.
The information below is designed to highlight and compare the old rules and the new rules.
After separation of service from federal employment, you were allowed one (1) partial withdrawal and any withdrawal thereafter would have to be a full withdrawal.
You are allowed to take multiple post-separation partial withdrawals.
Age-based In-Service Withdrawals (Age 59 1/2 and still working)
If you have attained age 59½ and still employed by the federal government, you were allowed to withdraw, one time only, any portion (partial or full) of your TSP, and roll it over into an Individual Retirement Account (IRA) and continue the tax-deferred status. You could have also taken the distribution without rolling it over but taxes would apply to the total amount withdrawn. If only a partial withdrawal was made, the next withdrawal was required to be a full withdrawal.
You are allowed to take up to four (4) in-service withdrawals each year. Any amount withdrawn that is not rolled over or transferred to an IRA or similar tax-deferred account will be subject to taxes.
Any type of withdrawal made was done on a proportionate basis between the available in the Traditional TSP and the Roth TSP. For example, if a federal employee has a total TSP balance of $150,000 with $120,000 in the Traditional TSP and $30,000 in the Roth TSP, percentage-wise, that’s an 80%-20% breakdown between the two. If you were to take a partial withdrawal for $50,000, 80% or $40,000 would come from the Traditional TSP and 20% or $10,000 would come from the Roth TSP.
If you had $150,000 total in the TSP with $120,000 in the Traditional TSP and $30,000 in the Roth TSP and you wanted to take a partial withdrawal of $50,000 from the Traditional TSP only, you can do so under the new rule. Conversely, if you only wanted to withdraw all $30,000 in the Roth TSP, you can now designate that too.
Full Withdrawal Required at Age 70 1/2
After separation of service from federal employment and you reached age 70½, you were required to take a full withdrawal from the TSP.
You are no longer required to take a full withdrawal from the TSP at age 70½ after you’ve separated service. You can leave your funds in the TSP, but you will still be required to make required minimum distributions (RMDs) starting at age 70½
After separation of service from federal employment, you are only able to receive installment payments from your TSP on a monthly basis. Any changes to the amount of those payments had to take place during open season (October 1 through December 15). Stopping monthly payments required the remainder of the account to be taken as a full, final withdrawal.
Under new rules, installment payments can be monthly, quarterly, or annually. Now you can change the amount and/or frequency of installments payments at any time throughout the year. Installment payments can be stopped and/or started at any time without the full withdrawal requirement.
While these changes to the TSP are welcomed and provide more flexibility to federal employees, these modifications do not permit withdrawals to come from earnings only. Depending upon the amount, installment payments will continue to be comprised of principal AND earnings. For example, in the last 10 years, from 2009 through 2018, the G Fund’s total return was as low 1.47% in 2012 and as high as 2.97% in 2009; in 2019, it was 2.91% (source: https://www.tsp.gov/InvestmentFunds/FundPerformance/annualReturns.html).
On a TSP balance of $100,000 that’s 100% allocated to the G Fund, in 2018 it earned $2,910; $2,910 divided by 12 months is $242.50 per month. If a federal employee set their monthly installment at $400 ($4,800 annually), $242.50 would have come from earnings and the remaining $157.50 would have come from principal.
In 2012, using the same example of $100,000, when the G Fund’s total return was 1.47%, to provide a monthly installment of $400, $122.50 would have come from earnings and $277.50 would have been come from principal.
Life expectancies are greater today than they’ve ever been and will likely continue to increase. If you have a withdrawal strategy that doesn’t involve taking from principal, but only from earnings, it’s less likely that the funds in your TSP will be depleted if you live into your 80s or beyond.
Martavius Jones of the Jones Wealth Management Group is a Chartered Federal Employee Benefits Consultant (ChFEBC) and has been a financial advisor since 1994. He works with federal government employees across the country and has shown them strategies that provide monthly income potential that doesn’t involve drawing down from principal, but is derived from EARNINGS only. Click here to contact him or dial 901-312-9166 to schedule a no-cost consultation.