Developing a TSP Withdrawal Plan

We’re in the midst of the end-of-year retirement season for federal workers who are ready to make the big transition from employee to annuitant.

In January 2017, the Office of Personnel Management received more than 15,000 new retirement claims for employees who filed at the end of 2016. The numbers for end-of-2017 retirements won’t be available until February 2018, but they’re likely to be high, too.

In addition to filing claims for retirement benefits under the Civil Service Retirement System or Federal Employees Retirement System, many retiring employees also file withdrawal elections for payments from their Thrift Savings Plan accounts.

Most employees file for CSRS and FERS retirement benefits long before their planned retirement date. The TSP, on the other hand, can’t process a post-separation withdrawal form until they have been notified by your agency’s payroll office that you no longer work there. The earliest a new retiree should submit a request for a TSP withdrawal is about 30 days after their retirement date. For example, if you are retiring on Dec. 31, 2017, then you may want to wait until after Jan. 31, 2018, to submit your application for a partial or full TSP withdrawal.

Two forms can be used for post-separation withdrawals:

• TSP 77: Request for Partial Withdrawal
• TSP 70: Request for Full Withdrawal

Besides waiting at least 30 days before submitting either of these forms, here are a few more tips to help you decide on a TSP withdrawal strategy:

• Before putting ink to paper on one of the forms, consider using the online TSP Withdrawal Wizard to help you with your withdrawal request. Based on your answers to a series of questions, it will prefill the appropriate sections of your form and help you avoid mistakes that could cause your form to be delayed or rejected.
• Carefully consider the benefits of taking your payments from the TSP rather than transferring your TSP funds to an IRA or another annuity product that might include higher fees or commissions.
• Although the TSP Modernization Act was recently signed into law, it will be awhile before the changes are be implemented. The TSP has prepared a Q&A to explain the situation. In the FERSGuide newsletter, Dan Jamison highlighted a quote from the Q&A that revealed a big surprise: “By the way, in addition to the changes made by the new law, we’re also adding the ability to specify how much of your withdrawal should be Roth and how much should be traditional; withdrawals currently come out pro rata from both sources.”
• According to the TSP, if you have an account balance when the new rules go into effect, even if you’ve begun receiving monthly payments or have taken a partial withdrawal before then, you will be able to take advantage of the new withdrawal options.
• Currently, separated employees can choose to take a one-time partial distribution of their TSP account balance. Once the TSP Modernization Act rules are implemented, separated employees will be able to elect multiple partial withdrawals even if they are already receiving monthly payments.
• The earnings associated with after-tax Roth TSP contributions are paid tax-free only if five years have passed since Jan. 1 of the calendar year in which you made your first Roth contribution, and you have reached age 59½ or have a permanent disability.
• There are three options to withdraw your TSP account: single payment, monthly payments (either a specific amount or an amount based on your life expectancy) or life annuity.
• A full withdrawal doesn’t mean that you have to withdraw the entire balance in one lump sum payment.
• You can estimate your monthly payments using the TSP Retirement Income Calculator.

Required Minimum Distributions

Some of you may be required to begin required minimum distributions from your TSP account if you’re already past age 70 ½ at the time of your separation from federal service. You will be notified by the TSP that you must begin monthly payments or elect another withdrawal option to avoid severe penalties for not making the required election.

If you don’t make a withdrawal election by the required deadline, your account balance will be forfeited to the TSP. You can reclaim your account, but your balance will not accumulate earnings after it is forfeited. Note also that if your TSP account record has an incorrect birth or separation date, or if your agency or service is late in reporting the date of your separation, you may not receive a payment that satisfies the minimum distribution requirement by the applicable deadline. If this occurs, you may be subject to an IRS penalty tax of 50 percent on the amount that was not paid to you on time.

For those of you who are retiring on Dec. 31, 2017 or earlier and are 70 ½ or older as of your separation date, the TSP is required to pay the first RMD by April 1, 2018. If you do not make a withdrawal, the TSP will pay the RMD in March 2018. If you make a withdrawal election, the TSP will ensure that the amount withdrawn satisfies the RMD. By retiring one day or even a few days later, the RMD is delayed until April 1, 2019. This can provide some breathing room instead of forcing you to make a withdrawal decision quickly.

When facing RMD, you don’t have to take all the money out at once. If your withdrawal election does not meet the RMD threshold for 2018, the TSP will issue a supplemental payment in December 2018 that ensures you have satisfied the 2018 RMD.

The TSP celebrated its 30th anniversary earlier this year and many federal employees have accumulated significant balances that will provide a stream of retirement income. When the time comes to decide on your withdrawal strategy, be sure to consider how your choice will create income and how it will impact your financial planning, tax strategy, and overall retirement planning. You can always use the TSP contact center, which handles about 2.5 million phone calls, 60,000 electronic messages and more than 80,000 pieces of written correspondence each year.

Photo: Flickr user Marco Verch