The TSP is A-Changing
by John Cooney on Jun 26, 2020
Things are a changing over at the TSP. Whether it is temporary due to the Coronavirus or permanent to make the TSP more competitive to civilian retirement account options, there are more options for you and your TSP investment.
Temporary Changes in Response to the Coronavirus
TSP Loan Options
For persons affected by Covid-19, the TSP has increased the maximum loan amount that an account owner can request. To qualify for this option, a person affected by Covid-19 means they meet ONE of the three below requirements:
- Diagnosed with Covid-19 by a test approved by the Centers for Disease Control (CDC).
- Your spouse or dependent has been diagnosed with such virus or disease by a test approved by the CDC.
- You are experiencing adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary's delegate).
For those account owners who qualify, the maximum loan amount they can request out of their TSP account has been raised from $50,000 to $100,000. Additionally, the portion of your account that can be requested in a loan rises from 50% to 100%. The deadline for requesting a loan under the temporary rules is 18 September 2020. Just this week, the TSP announced they are now accepting loan requests for those who qualify under the Covid-19 rules via this online link.
Additionally, for those TSP participants who have an outstanding loan with the TSP or receive a loan prior to 30 November 2020, all re-payments towards the loan have been temporarily suspended. You can still make payments, but the option to suspend them is available for the remainder of 2020.
Withdrawal Options and Early Withdrawal Penalty Waiver
Another temporary measure instituted by the TSP, again available only to those who meet one of the three criteria listed above has to do with a direct withdrawal. Under the CARES Act, a TSP account owner can make a one-time withdrawal from their account up to $100,000. Under normal rules, any withdrawal prior to turning 59 ½ comes with a 10% penalty imposed by the IRS for an early withdrawal (although some exceptions to the penalty apply). However, under the CARES Act, the early penalty tax is waived. It is important to note though, that if you are withdrawing from a traditional TSP account, you will still be subject to income taxes on the withdrawal, although a provision in the CARES Act allows you to spread the income tax owed as a result of a Coronavirus related withdrawal over a period of three years. You can also request that the TSP withhold Federal/State taxes when they distribute the withdrawal to you, but you will have to specify this is the option you want, they will not do it automatically.
If you do make a Coronavirus related withdrawal, you will have the option to “pay-back” all or a portion of the withdrawal into your account, without affecting your contribution limit in 2020, 2021,2022, and 2023. This is because the CARES Act allows for a period of 3 years to pay back any Coronavirus related withdrawals from the date of the distribution.
Required Minimum Distributions
The CARES Act also made a change to Required Minimum Distributions (RMDs) for 2020. While normally those over 72 are required to take an RMD from their TSP accounts, those have been suspended for 2020. You can still make withdrawals, but they will not be required. Additionally, the TSP will not process any automatic RMD withdrawals in 2020. If you want to make a withdrawal, you will need to manually request one. The suspension of RMDs for 2020 applies to everyone, whether affected by the Coronavirus or not.
Not all changes are Coronavirus related. The TSP also recently announced some major changes to the family of Lifecycle Funds. The Lifecycle Funds are a professionally managed mix of all 5 of the core TSP Funds (C,I,G,S and F). These funds are designed to change the allocation of the funds from more aggressive to conservative as the year designated in the Lifecycle approaches. For most new investors into the TSP the Lifecycle Fund will be the default fund that their investment will go into unless another allocation is designated. I am a fan of the Lifecycle Funds, especially for those investors that do not want to be hands on and manually adjust the allocation on a regular basis. My only hesitation with the Lifecycle Funds is that I do believe they can be more conservative than is needed, but an easy way to hedge that is to designate a portion of your investment into one of the other TSP Funds, while having a majority going into the Lifecycle Fund. For example, you can have 80% of your investment going into the Lifecycle 2040 Fund and 10% going into the I (International) Fund and 10% going into the S (Small Stock) Fund. This puts the majority of your investment in a well-diversified, actively managed portfolio while also maintaining a slightly more aggressive tilt for long-term growth. This is just an example and not a specific recommendation. If you are looking for a specific recommendation on the TSP that fits your situation, schedule a call with me here. Now, onto the changes.
Retirement of Lifecycle 2020 Fund
The first of these changes is that the Lifecycle 2020 Fund will be retired. As with all Lifecycle Funds, now that it is the year the Lifecycle Fund is named for it becomes the Lifecycle Income Fund. This change will go into effect 1 July.
Addition of New Lifecycle Funds
While getting rid of one fund, the TSP will also be adding 6 additional funds to the Lifecycle Family. Currently, the options for the Lifecycle Fund are in 10-year increments; 2020, 2030, 2040, and 2050. Starting July 1st, the TSP will add additional Lifecycle Funds to make the increment every 5 years instead of 10, adding in the 2025, 2035, 2045, 2055, 2060, and 2065 Funds. The 5-year increments will allow investors to more precisely target the timeframe for their investment and brings the TSP more into line with the options that are available on the civilian side as well.
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