National Institute of Transition Planning- In The Know

What to do with all of this wealth?
Part 1 of a 4-part Series

TSP Withdrawal Options This is part one of a 4-part series on TSP withdrawal options. Part 1 will briefly overview the different withdrawal options currently available from the TSP and also provide information about changes to the withdrawal options to be put into practice under the new recordkeeping system that will be implemented sometime in the future. The other three articles in the series (to be published June, July, and August) will focus on the following subjects: Leaving your investment in the TSP vs transferring it to an IRA; Cashing out or electing a series of monthly payments; and The TSP Annuity option... a safe haven or a bad deal? The focus will be mainly from a "benefits" viewpoint, although financial planning and tax issues will be addressed.

The Thrift Savings Plan is morphing once again as it adds two new investment options this month and gradually allows employees to contribute more than the original limits over the next few years. You may find information about these changes in your personnel office or at the TSP Website. This article and the three that will follow deal with the other side of coin, or is it the other end of the rainbow? The Pot of Gold! Once you separate from Federal service, what will become of your TSP? What options for withdrawal are available and what are the disadvantages and advantages of each?

First of all, we must realize that employees separate from Federal service for various reasons and with various needs for the funds they've invested in the TSP. Some are leaving at mid-career or even beginning career level to move on to other employment or to take a career break to return to school or raise children. Many employees these days are moving into retirement as the Federal workforce continues its mass exodus at the rate of 55,000 - 80,000 retirements annually! Consider your needs for the money in the TSP as you plan your separation or retirement from your Federal career.

Currently, the TSP is an "all or nothing" proposition when it comes to making a withdrawal option. For instance, if you choose the TSP Annuity option, you must use all of your TSP investment to purchase this benefit. There a few other "all or nothing" choices that are offered that include cashing out your account, selecting a series of monthly payments, and transferring your account to an Individual Retirement Arrangement (IRA) or other employer sponsored savings plan. Under the new recordkeeping system these withdrawal options will be modified to allow for a "mixed" withdrawal option! This new system has not yet been implemented since it is currently being "debugged" by the TSP and the American Management Systems (the contractor who developed the new software).

Under the future plan, separating employees will be permitted to take a one-time partial distribution of their account to transfer to an IRA or cash out...rumor has it being called the Winnebago clause! Get it? Take out enough immediately after retirement to buy the "Winnebago" or around-the-world cruise or capital for start up of a post-retirement business... The remainder of the TSP may be left in the plan to use later. When later comes, the account may be divided between the annuity option; series of monthly payment option; transfer to IRA; or cash payment.

For instance... let's say you have $100,000 in your TSP when you retire. After you have been separated for a minimum of 30 days, you could elect a partial withdrawal of $20,000 from your account. This amount would be included in your taxable income for that year (and the TSP would kindly withhold 20% from the payment to assist you with paying your income taxes). The remaining $80,000 could be left in the TSP until later. If you decide, after 10 years, to take advantage of the TSP withdrawal options, you could choose to have $60,000 paid out in a series of monthly payments over 20 years. In addition, you could elect for another $20,000 to be cashed out. And finally, you could buy an annuity with the remaining $80,000. How did you end up with $160,000? Well... since you left $80,000 in the TSP 10 years ago... it happened to double due to the earnings accrued! (This example is for illustration only; results are not guaranteed!)

The mixed withdrawal feature will be part of the TSP under the new recordkeeping system that is being implemented in 2002 (no firm date has been set as of this article). Since you are in no hurry to withdraw your TSP funds, check back next month to explore the advantages and disadvantages of leaving your investment in the TSP vs transferring it to an IRA after you separate from Federal service.