Last week’s column, Understanding Your TSP Options, left at least one commenter wanting to know more about the issue of required minimum distributions from the Thrift Savings Plan:
I would like to hear more about payout options because I don't think it's wise to leave money in the TSP past age 70 due to the withdrawal limitations and risk of an RMD (required minimum distribution) penalty. Can anyone convince me otherwise?
The Internal Revenue Code requires that you receive a portion of your TSP account beginning in the calendar year when your age reaches 70½ and you are separated from service. The portion you’re required to take is called a required minimum distribution, or RMD.
Your entire TSP account is subject to the required minimum distributions. When you have traditional and Roth balances in your account, any withdrawals will be paid proportionally from each balance. Likewise, if you have an account that has both taxable and tax-exempt contributions, your distribution will be paid proportionally from each.
The TSP calculates RMDs based on your account balance and your age, using guidelines set by the IRS. The RMD computation will vary depending on the withdrawal option you’ve chosen, ranging from a series of monthly payments based on a life expectancy computation to a set dollar amount each month. There is also a lifetime annuity option and the choice of a partial or full lump sum payment. For more information, see the TSP publication Important Tax Information About Your TSP Withdrawal and Required Minimum Distributions.
Active federal employees can continue to contribute to the TSP and are not subject to RMD rules until after they retire. So if you’re still working past age 70 ½, you can continue to leave your money in the TSP.
Once you’re retired and over 70 ½, the TSP will help you avoid the penalty for not taking the correct amount of distributions. For example, if you choose to receive your TSP balance as a series of monthly payments of $200 per month, for example, and the RMD for that year based on your account balance and your age is $5,000, then the TSP will send you a lump sum payment of $2,600 at the end of the year to meet the $5,000 withdrawal requirement for the year.
If you choose the withdrawal option that provides a series of monthly payments based on life expectancy, the TSP will automatically compute your payout based on the RMD amount when you turn 70.
Finally, the TSP notifies separated employees who will turn 70 the following year to let them know that they need to make a withdrawal election from their TSP to avoid the penalty for not meeting the RMD.
Your RMD payment cannot be transferred or rolled over into another Individual Retirement Account or employer plan. If you withdraw your account in a single payment or monthly payments in a year during which the RMD applies, before transferring any money the TSP will calculate your RMD amount and mail it directly to you (or, if applicable, to the savings or checking account designated to receive your direct deposits).
Here’s more information from the TSP regarding RMD payments.