By: Karen Schaeffer, CFP®
Published: September 2019
You’re Going to Love the New and Improved TSP!
For years (ok, let’s be honest, decades) when participants in our retirement classes learned of the limited withdrawal options from the Thrift Savings Plan (TSP) they were stunned. For Traditional TSP accounts the choices amount to:
• Take a full withdrawal – and report it all as taxable income and give up the continued tax deferral of the earnings, no thanks.
• Take a partial withdrawal – better, but only once in your entire lifetime. Wow, that doesn’t sound user friendly.
• Take an annuity option – but retirees already have steady predictable income from Federal pensions (and Social Security for the FERS folks), not a high demand choice.
• Take a monthly withdrawal – guess this is the best of the bunch, but be cautious because there are no do-overs for the rest of the year. Ask for too much and you’ll be paying taxes on the money you didn’t need to spend; request too little and the credit card balance might be hard to pay off.
Participants with Roth TSP accounts saw their Roth balances withdrawn prorated with their Traditional balances. Good news, no taxable income to report on the Roth portion. Bad news, no opportunity to withdraw between Roth and Traditional TSP balances to optimize one’s personal tax plan and no more tax-free earnings on the withdrawn amount. Clearly, some things had to change.
Drum roll please; Thrift Modernization Act (PL.115-84) 2017 to the rescue!
Beginning September 15, 2019, we’ve got a whole new world of choices:
• Take a partial withdrawal whenever you want (limited to once a month) – now we’re talking!
• Take monthly, quarterly, or annual withdrawals and start and stop whenever you want – way to make planning easy!
• Mix and match partial withdrawals with monthly, quarterly, or annual as you see fit – be still my heart!
But wait, there’s more!
• Up to four partial withdrawals are allowed each year for employees 59 ½ or older before they retire – may not be a great idea for healthy participants with 25-30+ years of life expectancy but sure is nice to know it’s an option for those instances that are really tough to anticipate.
• The website will now include enhanced online tools – all designed to make withdrawals much easier and reduce the potential for clerical errors. I’m not going to miss those horrible stories of retirees who thought they were completing a rollover only to have submitted incorrect paperwork that triggered a total taxable withdrawal.
• The full withdrawal election for participants over the age of 70 ½ is a thing of the past – finally, TSP is looking more and more like an IRA, and that’s a good thing.
To be clear, there are still many differences between the TSP and an IRA, with pros and cons that stack up very differently from one participant to another. The critical issue “to transfer or not to transfer” has not gone away, but leaving money in TSP just got a whole lot more attractive. There will be plenty of time to compare and contrast the two options, but for now please join me in congratulating everyone involved in making these thoughtful and thorough changes. Well done!