Federal Employee Retirement Planning | What You Need to Know About the Thrift Savings Plan
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.
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 They maintained that the old distribution rules had become outdated and irrelevant in the wake of several new rounds of federal legislation.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 Restrictions Lifted
Plan participants who take a hardship withdrawal from their TSPs are no longer prohibited from making contributions for the next 6 months.
The Federal Retirement Thrift Investment Board will be notifying over 60,000 participants who took a hardship withdrawal within the past 6 months that they can start making contributions again, effective immediately.
Increased Privileges for TSP Beneficiaries
Beneficiary participants will have all of the same new privileges as plan participants. Spouses who inherit a TSP balance can take withdrawals in any way they choose under the new rules.
Additional New Options for TSP Account Holders
Plan participants can take advantage of the new distribution rules even if they were already receiving a fixed payout from their plans or have already taken a one-time distribution.
The only stipulation here is that participants are still not allowed to switch a “dollar-amount” series of payments to one that is based on their life expectancy.
TSP Withdrawal Requests
TSP participants who want to elect one of these new distributions need only to log on to TSP.gov and download the appropriate forms.
Many of the forms on the website have been changed and updated to reflect the new rules. In some cases, a distribution request of a certain type may still need to be notarized.
But most of the forms themselves can be filled out electronically. Participants can then simply print them off and send them in to the TSP for processing.
Final Thoughts on TSP Withdrawal Changes
TSP participants and beneficiaries have a wealth of withdrawal options now available to them that didn’t exist before. Even those who are now receiving a payout under the old rules can use the new rules to modify their distributions.
Basics of a Life Annuity
You can take part or all of your TSP account balance as a life annuity, giving you monthly benefits for the rest of your life. You must purchase an annuity priced at a minimum of $3,500.
You get to choose your annuity amount over $3,500 because, as mentioned above, you have the freedom to combine income options. You may not want to put all your funds into the TSP life annuity, which your plan purchases from MetLife, the plan provider. Depending on the annuitization option you choose, the insurer may keep your balance once you pass away.
This reinforces the importance of investigating and evaluating your options. At JenniferLangFinancialServices.com we approach annuities with a holistic approach. We work with over 100 carriers to find you the best competitive annuity rate, combined with long term care benefits and the opportunity to leave an inheritance to your heirs.
Other Considerations if Retirement is Close
As retirement nears, federal employees will want to shift their mindset from an accumulation focus to an income focus.
Now is the time to put an income plan in place because living well in retirement is the result of having a tax-wise and fee-smart income plan.
Questions federal employees will want to consider:
*Will my TSP account and other retirement assets be enough to provide me secure income for life?Are my future income streams mapped out?How long will they generate income?*How will I maximize my overall benefits?What medical and healthcare needs must I plan for?
Federal employees have some of the best benefits of any organization in the world, but they can also be complicated.
Having a game plan that details how to make the most of these benefits will serve plan participants well by completing their retirement and financial pictures. That way they know just what to expect as they begin and journey through the end of retirement.
Putting Your Future in Place
Are you a federal employee needing guidance in coordinating your benefits with the rest of your financial picture? Do you need assistance in planning for a financially comfortable and secure retirement? We can help. Contact us today.