Most of us are years away from withdrawing money from our Thrift Savings Plan accounts. For that reason, you probably haven’t paid too much attention to how you actually take money out in retirement. You just get onto your TSP account and request money be sent to you, right? Well, not exactly. There is more to it than that, and historically there has been a lot more to it. The rules for withdrawing your money were actually pretty inconvenient for a lot of users, especially those who want to maximize their tax planning. The solution is the TSP Modernization Act.
History of the TSP Modernization Act
When the TSP was set up, they created withdrawal rules that are significantly more restrictive than most 401k, 457, and 403b retirement accounts. For this reason (as well as others that are beyond the scope of this post), many people transferred their money out of the TSP when they left federal service. That’s not great, because by doing so they were leaving behind some of the things that make the TSP great. Namely, easy investment options and super low fees.
This meant that accumulating money in the TSP was easy, but withdrawing it was hard. So the Federal Retirement Thrift Investment Board (the organization that runs the TSP) and Senators Portman and Carper and Congressmen Cummings and Meadows set out to fix it.
Understanding TSP Withdrawals
Before we get started, you need to understand a little bit of the TSP definitions for some of the language we’ll be using.
- Full withdrawal: you can choose the single payment option if you want to withdraw your entire account at one time. It is sometimes referred to as a “lump sum” payment.
- Partial withdrawal:You can make a partial withdrawal if:
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- You have not made a prior partial withdrawal or have one that is currently pending, and
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- You did not make an age-based in-service withdrawal while you were still employed by the Federal Government or the uniformed services, and
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- You request $1,000 or more from your account.
- Full withdrawal via periodic payments: you can choose monthly payments if you want to withdraw your entire account in a series of payments spread over time. The TSP offers two choices of monthly payment.
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- Specific Dollar Amount. You may request a specific dollar amount that you will receive each month until your entire TSP account has been paid out to you. The amount you request must be $25 or more.
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- Life Expectancy. You may request to have the TSP calculate your monthly payment for you using the Internal Revenue Service’s (IRS) Life Expectancy Tables. Your first payment amount will be based on your age and your account balance at the time of the first payment. The TSP will recalculate your monthly payment every year.
- Full withdrawal via annuity: You can withdraw all or part of your TSP account as a life annuity as long as the amount used to purchase it is $3,500 or more.
- In-service withdrawal: this is when you remove money from your TSP account while still working. This isn’t a TSP loan that you have to pay back. It’s when you take the money out permanently to use for something else.
Current TSP Withdrawal Rules
The current withdrawal rules include things like:
- All withdrawals have to be made proportionally from your Traditional and Roth accountsThis is bad for tax planning, because you can’t choose to take money from either side based on that year’s tax situation.
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- It also isn’t good if you want to do a Roth IRA conversion ladder. The Roth IRA conversion ladder is a key tactic for people looking to retire early, so this is an annoying limitation.
- One-time only in-service withdrawalsCurrent federal employees who are TSP participants can only take an age-based withdrawal if over the age of 59.5, and then can only do it once. Want to withdraw a big chunk at age 60 to pay for a child’s education and then another chunk at age 65 to buy a house? Not possible. Even though you are over the required age for pulling money out of retirement accounts penalty free!
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- Additionally, if you dared take an in-service withdrawal while working you were prohibited from taking partial withdrawals later on, even after retiring. WHAT?
- Post-separation from federal employment (retirement or not) you also only have one shot at a partial withdrawal, assuming you didn’t already take an in-service withdrawal.
- Periodic payments can only be set to monthly and can only be adjusted once per year, so you’d better get it right when you set it up. Periodic payments cannot be stopped unless you withdraw the entire remaining amount. If you are using periodic payments, you cannot do a partial withdrawal or purchase an annuity.
TSP Modernization Act Implementation
The TSP Modernization Act was introduced to make TSP withdrawals easier. Signed into law on 17 November 2017, the TSP Modernization Act (Public Law 115-84) will fix many of those problems.
The reason I delayed talking about it, though, is that the law won’t be fully implemented until the end of 2019. The TSP was given two years to create the processes necessary to implement the TSP Modernization Act, meaning so far nobody has seen the benefits. But they are on the way! The TSP plans to implement these changes in September 2019, slightly ahead of the requirement.
The Public Law is short – less than 2 pages – so go ahead and take a look at it if you, like me, like primary sources. But it’s written in legalese, so I’ll explain it more below.
TSP Modernization Act Summary
The changes to TSP withdrawal options include:
- Multiple in-service withdrawals after age 59.5. Remember how before you could only take one in-service withdrawal? Well now, you can take as many as you want! This is good because it can help set you up for a successful retirement. Want to pay off your house so your fixed expenses are lower in retirement? That could be one withdrawal. And then want to start convert your Traditional TSP into a Roth IRA? There’s another withdrawal or five while you are still working. Have more money than you need? Go ahead and take some out to give to your kids for their education or to buy a house! After ensuring you have enough, of course.
- Unlimited post-separation withdrawals. The rules also used to say you could only make one partial withdrawal after leaving government service. So even when you were retired, you weren’t allowed to choose how to spend your money! That’s changed, too. Now you will be able to take as many partial withdrawals as you’d like. This can help a lot if you normally want to only take out fixed periodic payments but occasionally need to take out larger amounts to handle other financial needs.
Even More TSP Withdrawals Changes
Additionally, TSP is making some changes that aren’t required by the TSP Modernization Act. And they are good!
- Currently you have to withdraw money proportionally from your Roth and Traditional accounts if you have both, right? That requirement is going away! You’ll be able to withdraw just from Roth, just from Traditional, or any mix of the two in the amounts you want. This is going to be huge for people (like me!) who want to convert their Traditional TSP holdings into a Roth IRA but don’t mind keeping the Roth TSP portion in the TSP. It will also be great for helping people do tax optimization in retirement. I like this change!
- You’ll have the option to choose monthly, quarterly, or annual periodic payments, instead of just monthly payments. You’ll also be able to start, stop, or change the payments at any time. You might be thinking “monthly seems better anyway” and that may be true for you. But if you aren’t living on the TSP withdrawals and are instead withdrawing them to do conversions or spending it down by giving it away before Required Minimum Distributions bite you, this can help you plan out your withdrawals better.
- Annoyingly (perhaps stupidly) the current withdrawal rules require TSP participants to make a full election withdrawal at age 70.5 if you have left federal service. That requirement is going away! You will still have to take Required Minimum Distributions if you are over 70.5 (duh….Required) but you can leave the TSP intact while you do it. Thank goodness.
You can read more about the upcoming TSP withdrawal changes here. There are some FAQs and additional details in that link, so I recommend reading it if you are anywhere close to starting TSP withdrawals.
Good summary thanks! Looking forward to the official training and documentation from TSP.
Fingers crossed the updates get released on schedule!
So is it a good idea then to do an in service withdrawal to fund a Vangaurd Roth IRA?
Well you’d be taking money out of a retirement account to put it back into a retirement account, so I’m not sure why you would do that instead of just rolling it into a Roth IRA when you leave service. But talk to me more about your thinking on why you’d want to do this.
I’m currently receiving monthly payments from the TSP. While the upcoming changes are welcome, TSP does not seem driven by a customer service attitude. A telling example is that their key forms are not fillable PDFs, forcing information to be written in by hand (and you have to use the forms, as there’s no online alternative). There’s currently no way to tell from the website if TSP received your forms changing withdrawal amounts or destination (you have to call if you want confirmation). Even after the changes, the TSP apparently will not allow account holders to designate how to fund withdrawals; if you have 80% C Fund and 20% G Fund, they’ll sell that ratio. Like the current traditional/Roth business, that’s not forced by law, it’s just the way TSP does it. It probably will continue to be wise to transfer a good chunk of your TSP money to Vanguard to minimize dealing with the TSP’s withdrawal bureaucracy and ensure flexibility.
Wondering if Military Dollar has any news re the status of implementing regulations for the TSP Modernization act. For example, are they likely to meet the Sept. 2019 implementation date? Have draft or final regulations already been published and if so, where can they be read? Thanks,
Drew
I wish I did! I’m hearing rumors that at least parts of the implementation will be furthered delayed, but haven’t found anything official one way or the other. I’ll keep looking!
Asking for a friend.
She is a disabled veteran with approximately $6400 in a TSP account. She would like access to this money but is currently told she will need to pay 10% of it as a penalty for early withdrithdrawal and another 20% for taxes. She is not employed and does not make any income and does not have to pay annual taxes because she has no income to report. Should she be able to transfer to a Roth IRA account with Vanguard with no penalty? Or at least to a Traditional IRA and then make the contribution to Roth IRA to have access to it in 5yrs if she desires?
I feel like there must be a way for her to not have to lose 30% of those funds to penalties and taxes.