Improvements to the TSP May Be Coming Soon!
by John Cooney on Jul 17, 2017
When I talk to people about the Thrift Savings Plan the most common complaint I usually hear is how difficult it can be to withdraw funds from your account. Well, you may not believe it, but there is a bi-partisan effort underway in Congress to improve these rules and allow for greater withdrawal flexibility for TSP participants. In April, Senate Bill 873, The Thrift Savings Plan Modernization Act was sponsored by Senators Portman and Carper, and at the end of June, a companion bill, HR 3031, was sponsored in the House of Representatives by Representatives Cummings, Meadows, and Norton. Together, these two bills represent a chance to address the longstanding complaints participants have had with the withdrawal rules and help improve the TSP.
How Can I Get My Money?
If you have money in a TSP account, there are three ways that you can withdraw that money, a loan, a withdrawal while you are still working, or a withdrawal after you are no longer working for the federal government. Loans from a TSP account should only be taken as a last resort, as it can significantly impact the amount of money you have in your account when you retire and are no longer earning an income. If you think you need to take a loan from your TSP account, I highly recommend you talk with a professional financial advisor to thoroughly examine what your other options may be. That leaves us with two other options for withdrawing your money, in-service withdrawals and post-separation withdrawals. In-service withdrawals refer to withdrawals made while you are still employed and can be made as either a financial hardship withdrawal or an age-based withdrawal. Post-separation withdrawals refer to withdrawals made after you leave federal service. The new legislation aims to address common complaints around age based in-service withdrawals and post-separation withdrawals, so we will talk a little bit more about both here.
How does the TSP fit into your Retirement Plan?
Age-Based In-Service Withdrawals
The federal government has provided tax advantages to retirement accounts like the TSP to help workers be better prepared financially once they retire. To discourage employees from withdrawing money intended for retirement before they retire, they impose a 10% penalty for non-financial hardship withdrawals made before the account holder turns 59 ½. Now, once you have turned age 59 ½, that money is yours to withdraw, and you can do so without paying a 10% early withdrawal penalty, although you are still on the hook for applicable income taxes. As a still serving civilian Federal employee, or a member of the uniformed military services, the withdrawal can be partial (as long as it is at least $1000) or a full withdrawal of your TSP account (even if it is less than $1000). Under the current TSP rules, you are only allowed to make one age based withdrawal from your TSP account, and if you do make one, you cannot make a partial withdrawal after you separate from federal service.
Withdrawals After You Separate
It is important to note, that even after you separate from service and have turned 59 ½, you are not required to make any withdrawals from your account. You can leave your TSP balance in your account and continue to let it accumulate all the way until the age of 70 ½. At that age, you will need to start taking mandatory distributions; hey the government has to start getting their tax money at some point. Now, just like with an in-service withdrawal, a withdrawal made after you separate can be either partial (as long as it is at least $1000) or full (even if the full balance is less than $1000). Under current TSP rules, you can only make one partial withdrawal. If you made a partial withdrawal while you were in-service, you cannot make a partial withdrawal after you separate. Under the full withdrawal type, you have three options for payment; lump sum, series of TSP monthly payments, and a life annuity. Lump sum is a single payment of your full account balance. It closes your TSP account and you are free to use the money as you see fit. You will be subject to income taxes on the amount, so if your balance is large, you can expect your tax bill for the year to be large as well. The monthly payment option allows you to spread out the full distribution over a series of payments made directly to you in an amount you specified to the TSP board. You can also have the TSP calculate a monthly payment amount that is based on your account balance and life expectancy. If you choose to have the TSP calculate the dollar amount, you can later decide to switch to a specified dollar amount, but you can only make this change once. If you choose the monthly payment option, at any point you can have the TSP stop the payments and provide a lump sum payment for the remainder of the money in the account. You are also only able to change the monthly dollar amount once a year. The third withdrawal option allows you to choose a life annuity that is purchased by the TSP on your behalf. The annuity then pays you a monthly amount for the rest of your life. When you choose a full withdrawal, you can select one or a combination of all 3 of the withdrawal options.
Wait, Congress is Actually Doing Something?
The restrictive withdrawal rules have led many TSP participants to roll over the balance in their TSP account to another retirement plan once they separate from service. Typically, the retirement plan they roll their account into will allow for more options when withdrawing their money. The money is transferred out, even though there are very few, if any, retirement accounts that have administrative fees as low as the TSP. The two bills currently being evaluated by Congress, HR 3031 and S 873 are an attempt to give TSP account holders more flexibility when withdrawing their money, in the hopes that less people will transfer their money out of the TSP. So what do these bills propose? Probably the biggest proposed change is to allow participants to make multiple partial age-based withdrawals. Currently, you can only make one partial withdrawal from your account after reaching age 59 ½, and if that withdrawal was made while you are still in-service, you will not have that option after you separate. The new proposals would eliminate that restriction and allow for multiple partial withdrawals, both in-service and post separation. A second feature of the proposed legislation would make changes to the periodic multiple payments. Currently, one full withdrawal option that you have is to specify a dollar amount that is paid to you each month until your account balance has been fully distributed. Monthly payments are your only current periodic payment option, and once a year you have the ability to change the dollar amount. The proposed legislation would now allow for payments to be made quarterly or yearly in addition to monthly and you would be able to change the distribution amount at any time, rather than be limited to only once a year. The last change proposed with the new legislation is to no longer require mandatory withdrawal election by April 1st of the year after you turn age 70 ½. Too often, people were conflating this requirement with the Required Minimum Distribution requirement and making a full withdrawal in error. Under the proposed legislation, the withdrawal election would no longer be a requirement at age 70 ½.
Both bills have been introduced in their respective chambers and have extensive bi-partisan support. While there is no time table for passage, with the broad support that they have, hopefully we will see them signed into law soon. In the meantime, if you are in-service, continue to build up your TSP account and if you are separated from service and frustrated with your withdrawal options now, keep up hope, changes for the better may be on the way soon.