• Retirement and Annuity Advisor Jennifer Lang

Federal Employee Retirement Planning | What You Need to Know About the Thrift Savings Plan

Updated: Feb 24

While many private-sector workers build their nest eggs through 401(k) plans, federal employees and members of the uniformed services have their own retirement savings and investment plan. This is called the Thrift Savings Plan (TSP).

With more than 5 million participants and close to $500 billion in assets, the TSP is recognized as the largest defined-contribution retirement plan in the world.

The TSP Modernization Act provisions went into effect on September 15, 2019. With it comes a host of new rules designed to give plan participants more freedom with taking distributions from their TSP accounts.

The new provisions have greatly expanded the withdrawal options that are available to TSP retirement savers under various circumstances.

TSP investors haven’t wasted any time in taking advantage of these new rules. In the weeks following the release of the new rules, there were about 5,000 distribution requests in the hopper.

It’s not clear whether the avalanche of new requests is a show of accumulated demand or just that participants are willing to explore the new rules. But the number of requests is likely to continue at this rate for the foreseeable future.

The act has given the Federal Retirement Thrift Investment Board until November of 2019 to make the necessary changes in order to facilitate the new rules.

Public Reaction

Many financial planners are big fans of the new rules. They maintained that the old distribution rules had become outdated and irrelevant in the wake of several new rounds of federal legislation.

TSP retirement savers and retirees will now have the luxury of keeping their retirement plans under the TSP umbrella after they stop working. Now they can do so without having to roll their plans over into an IRA or move them into another qualified plan with a new employer.

However, the complexity of the old rules has effectively left many former and current employees at something of a loss when it comes to knowing how the new rules will affect them.

They can sense that the new rules will be better, but they are still unsure of what they can do now that they couldn’t do before.

Highlights of the New Rules

Although it would be too exhaustive to list all of the rule changes, here is an outline of some of the major provisions.

More Flexibility with TSP Distributions

All plan participants can now take a distribution once every 30 days. Those who have retired from federal service will now have no other limitations of any kind placed on the timing of their distributions.

It’s even possible for retirees to take out additional distributions on top of scheduled monthly or quarterly income from their plans.

Greater Number of TSP Withdrawals Now Possible

Employees who are still working for Uncle Sam and are at least age 59 ½ can now take up to four distributions per year.

The 30-day limit still applies, meaning that a participant couldn’t take three distributions within a two-month period.

More Timing Options for TSP Withdrawals

Participants can now take their distributions on either a monthly, quarterly, or annual basis. They can also stop or restart them at any time or adjust the amount of their withdrawals.

Fewer Restrictions When Required Minimum Distributions Start

It is no longer necessary to have to withdraw the entire TSP balance when a participant must begin taking required minimum distributions.

The old rules effectively forced plan participants to withdraw the entire balance in their TSP accounts. Or they had to decide where they wanted to move their plan balances when they reached age 70 ½.

Now they can just start taking RMDs directly from their TSP balances and leave their plans where they are.

More Flexibility with TSP Plan Loans

Plan participants who leave federal service with an outstanding loan now have two choices. First, they can simply keep the remaining outstanding loan balance and thus have it taxed as a distribution. Or they can repay the loan and escape taxation and possible penalties.

They may also be able to roll the distribution into another IRA or qualified plan without tax or penalty, as long as they do it within 60 days.

More Options for Traditional and Roth TSP Distributions

Federal employees can now elect to take their distributions either from the traditional account of their TSP balances or the Roth account.

Under the old rules, every distribution taken contained a portion of both balances on a pro-rata basis. But now TSP account holders can elect which one to take it from, thus allowing them to plan their income taxes more efficiently.

However, federal employees must specify which account to draw from at the time the distribution request is made. Furthermore, they still aren’t allowed to choose which fund to withdraw from.

For example, it isn’t possible to take a withdrawal from only the G fund or C fund, or from one of the Lifecycle funds.

TSP Hardship Withdrawal Restric