Changes to Withdrawal Options: TSP Modernization Act Takes Effect 9/15/19

Here are the changes that took effect on September 15 2019 from the TSP Modernization Act

Edward A. Zurndorfer

As a result of the passage of the TSP Modernization Act of 2017, Thrift Savings Plan (TSP) participants will have new and expanded withdrawal options from their TSP accounts. The expanded withdrawal options will begin Sept. 15, 2019. This column discusses these new and expanded withdrawal options and how they can benefit TSP participants.

Among the most significant new withdrawal options, a TSP participant will be able to start, stop or change installment payments and make additional partial withdrawals whenever a participant needs to. Even with these changes, TSP participants will continue to benefit from the TSP’s low administrative fees.

The following tables summarize the new and expanded withdrawal rules and options, together with a discussion on some of the advantages and disadvantages of the new options:

  Table 1. Type and Frequency of TSP Withdrawal Options

New Rules, Post Sept. 14, 2019 Old Rules, Pre-Sept. 14, 2019
1. In addition to monthly payments, annual payments & quarterly
payments are permitted for
receiving post-separation TSP
installment payments.

2. Change annual, monthly, or
quarterly payments at any time
during the year.

3. Change from receiving post-
separation monthly payments
based on life expectancy to post-
separation fixed monthly payments at any time during the year.

4. A TSP account owner can start,
stop, or make changes to post-
separation payments at any time.
1. Monthly payments are the only frequency option a TSP account
owner has for post-separation TSP
installment payments.

2. Change the amount of the
monthly payment once a year
between Oct. 1 & Dec. 15.

3. Can only change one time from
receiving post-separation monthly
installment payments based on life expectancy to post-separation
fixed monthly payments.

4. If TSP account owner stops post-
separation monthly installment
payments, then the rest of the TSP
account must be withdrawn in a
final withdrawal or transferred to
an IRA or qualified retirement plan

Those TSP participants who have been receiving monthly payments or who have taken a partial withdrawal before Sept. 15, 2019, when the new rules take effect, will be able to take advantage of the new withdrawal options.

Advantages to New Type and Frequency of TSP Withdrawal Options

More flexibility in receiving post-separation payments, especially when deciding how much to receive in monthly payments early in retirement versus later in retirement at which time required minimum distribution (RMD) rules come into play.

Disadvantages to New Type and Frequency of TSP Withdrawal Options

With more flexibility to withdraw TSP funds, there may a tendency to neglect properly investing the TSP funds that remain in the account. That is, to invest the funds in a way that will allow for long term growth so that the TSP account owner will not run the risk of “outliving” his or her TSP account. 

              Table 2. Full Withdrawal Election Requirement

New Rules, Post Sept. 14, 2019 Old Rules, Pre-Sept. 14, 2019
A TSP participant never has to
make a full withdrawal election.

When a TSP participant needs to
make an IRS-mandated required
minimum distribution (RMD) at
70.5 & every year thereafter, the
TSP will automatically send the
participant the right amount, if the participant does not withdraw
enough during the year.
A full withdrawal election is
required the year a TSP participant
is separated from federal service and 70.5 or older, or a TSP
participant’s account becomes
abandoned.

Advantages to New Non-Full Withdrawal Election Requirement

There are few, if any, advantages to taking a lump sum payment from a qualified retirement plan or the TSP. With respect to paying federal and state income taxes, a lump sum payment will likely result in paying the highest amount of federal and state income taxes.

Disadvantages to New Non-Full Withdrawal Election Requirement

None

Table 3. Mechanics of Requesting TSP Withdrawals or Changes to Existing TSP Withdrawals

New Rules, Post Sept. 14, 2019 Old Rules, Pre-Sept. 14, 2019
TSP participants request
withdrawals easily, using fast and
secure online tools by logging into My Account on www.tsp.gov
Participants must submit paper
forms by mail or fax to make a
change or withdrawal election.

Advantages to New TSP Withdrawal Requests Procedures

Much easier, faster and more efficient to process TSP withdrawal requests online.

Disadvantages to New TSP Withdrawal Requests Procedures

Some TSP account owners – especially those in their 80’s and 90’s – may not have access to secure online computers to access their accounts and the TSP.

 Table 4. Requesting Payments from Traditional TSP and/or Roth TSP Accounts

New Rules, Post Sept. 14, 2019 Old Rules, Pre-Sept. 14, 2019
A TSP participant can choose to
withdraw from their traditional
TSP account only, Roth TSP account only, or a proportional amount of
both.
All withdrawals include both
traditional TSP account funds and Roth TSP account funds; must be
done as a pro-rata distribution.
This is called a proportional
distribution.

As an example, if 80 percent of a TSP account consists of traditional TSP funds and 20 percent of a TSP account consists of Roth TSP funds, then under the old (pre-Sept. 6, 2019) rules any TSP withdrawal will consist of 80 percent traditional TSP funds and 20 percent Roth TSP funds. Under the new (post-Sept. 14, 2019) rules, the TSP account owner can request that the withdrawal come only from traditional TSP funds, only from Roth TSP funds, or withdrawn pro-rata (80/20 traditional TSP/Roth TSP) like the old rules.

Advantages to New Rules for Requesting Payments from Mixed TSP (Traditional and Roth) Accounts

Allows TSP account owner to preserve either TSP account for as long as possible (until age 70.5 at which RMDs occur for both accounts). But Roth TSP account owner can wait until they are in the last months of their 69th year and then transfer their entire Roth TSP account to a Roth IRA. In so doing, the Roth TSP account will avoid having to take RMD as the Roth IRA is not subject to RMD.

Disadvantages to New Rules for Requesting Payments from Mixed TSP (Traditional and Roth) Accounts

By keeping both the traditional and Roth TSP accounts, more paperwork. Both TSP accounts are subject to RMD at later of when the TSP account owner retires or becomes age 70.5

Table 5. Requesting Age-Based (Post-age 59.5) In-Service and Post-Separation Partial TSP Withdrawals

New Rules, Post Sept. 14, 2019 Old Rules, Pre-Sept. 14, 2019
Any in-service age-based (post-age 59.5) withdrawals made have no
effect on the number of post-
separation partial withdrawals a
TSP participant can make. A TSP
participant can make partial
withdrawals even if the participant receives installment payments.
Only one in-service age-based (post-age 59.5) or one post-separation
withdrawal is allowed in a lifetime. Then a full withdrawal election is
required.

Advantages to New Rules on Requesting Age-Based and Post-Separation Partial TSP Withdrawals

More flexibility in making withdrawals from one’s TSP account. Especially useful early in one’s retirement when one is waiting for his or her first full CSRS or FERS annuity check (3 to 10 months after one retires) and needs some money to pay bills. 

Disadvantages to New Rules on Requesting Age-Based and Post-Separation Partial TSP Withdrawals

With more opportunities to make partial TSP withdrawals, there is the possibility that some TSP account owners may treat their TSP accounts as “liquid” savings accounts and withdraw money from the TSP accounts “at-will”. The TSP has to last throughout the TSP account owner’s retirement years and making frequent partial withdrawals could result in a depletion of the TSP account early in one’s retirement. Also, too many partial TSP withdrawals from the traditional TSP in any one year could result in severe tax consequences.

Finally, it would be a good idea for TSP participants to review their investment goals and fund allocations between now and Sept. 15, 2019. Logging onto My Account gives a TSP participant access to manage a portfolio, send secure messages to TSP representatives, and complete certain transactions.

After logging onto My Account, a TSP participant may want to consider taking these actions:    

  (1) verifying that his or her mailing address is correct;

(2) choosing a Lifecycle (L) fund or a fund asset allocation appropriate to a TSP participant’s investment goals and risk tolerance; and

(3) becoming familiar with the online tools and calculators that are available to TSP participants.

Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD.  Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652.  Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. RMD’s are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation.