Since the TSP Modernization Act went into force in September of last year, there are a number of new withdrawal options from your TSP. Before this, the TSP was miles behind comparable retirement accounts on the private side in terms of flexibility. While the act isn’t perfect, it is one of the first steps needed to get the TSP up to speed.
Withdrawal Options
There are basically three different options when it comes to pulling money out of your TSP. You can basically use them in whatever combination you’d like.
TSP Installment Payments- This is where you tell the TSP how much to pay you on a monthly, quarterly, or annual basis. You can also ask them to pay you a monthly amount based on your life expectancy. Although there is no guarantee, the idea is that it will spread out your TSP balance over your entire retirement. You would be able to change the amount anytime or even stop payments if desired.
Single Withdrawals- With this option you can request a one-time distribution from your TSP. However, there is a minimum of $1,000 and you can only do this type of withdrawal every 30 days. You could even withdraw your entire account balance if you want.
Annuity- With this option you would give your TSP balance or at least a portion of it, to an annuity provider (Metlife has the current contract to provide these to federal retirees if desired). They would guarantee you a fixed income for a certain amount of time. You can also tell Metlife that you want a payment for the rest of your life and the amount of your payment will be set based on your life expectancy. The major downside of this option is the limited flexibility and reversibility. Once you make this decision, it is very difficult to get access to your money other than what they pay you every month. This option offers incredible security but no flexibility.
Traditional and Roth
One perk that federal employees now enjoy because of the TSP Modernization Act is that they have more control over where their withdrawals come from. For example, before you had to take money out of your traditional TSP and Roth TSP proportionally. Now, you can choose which one you’d like to take your funds out of based on your tax situation in the current year. For example, in a year where you might have higher taxable income, it might make sense to draw only from the Roth side in efforts to stop yourself from bumping up to a higher tax bracket.
RMD’s
One thing that is very important to remember is that at age 72, required minimum distributions (RMD’s) are required for both the Roth and the traditional TSP. This basically means that you have to take out a certain percentage of your account balance every year after age 72. Because the TSP has many tax advantages, the government wants to make sure that you don’t avoid taxes completely by requiring that you start taking money out.
The TSP’s Remaining Pitfall
While the TSP is not perfect, it does a lot of things really well and serves as a great wealth accumulation tool throughout someone’s career. One of the major downsides however is the fact that you cannot decide which funds you withdraw money out of. Whenever you make a withdrawal, the money comes out proportionally based on what funds you are invested in. For example, if you had half your money in the G Fund and the other half in the I fund, a $1,000 withdrawal would take $500 from each fund. This may not be a big deal in some years but in years when the stock market is really low, it often makes much more financial sense to draw from the G fund and let stock market funds have more time to recover.
Conclusion
Investing your money in the TSP during your career is incredibly important, but knowing how to best take it out in retirement can be just as important. The TSP Modernization Act has made this much easier for federal employees. Now it is just up to federal employees themselves to take advantage of the new options.
