A look at the process of taking money out of your retirement savings.
Earlier this week, Government Executive’s Erich Wagner wrote about Thrift Savings Plan withdrawals as they relate to the COVID-19 stimulus package. The law liberalizes in-service withdrawal rules to increase the amount employees can take out or borrow from retirement savings accounts and lowers the taxes due on withdrawals. The TSP has provided an update on the changes on its website.
Requesting a withdrawal from your account while you are still employed is a process directly between you and the TSP, which disburses withdrawals each business day. You can log into My Account or call the ThriftLine to find out the status of your withdrawal request. You will be notified when the funds have been disbursed. You should expect it to take up to 10 days from the time the TSP receives your request until the time you receive the check.
But what if you’ve recently retired from federal service and you’re ready to begin withdrawing the money you’ve saved in the TSP to help provide retirement income?
Many new retirees will delay applying for a TSP withdrawal until after their final paycheck has been deposited and they’ve been paid for their unused annual leave. Some will delay withdrawals until they finish working in a post-retirement second career or part-time job. Others wait until they must take required minimum distributions at age 72 (or 70 ½ if you were born before July 1, 1949.) But under the recently enacted CARES Act, you do not need to make any withdrawals from your TSP account in 2020 to satisfy an RMD, regardless of your age or employment status. The TSP will not send any automatic RMD payments for 2020. If you make a withdrawal in 2020, the TSP will withhold federal taxes at the rate appropriate for the type of withdrawal you make, without regard to RMD rules that would otherwise apply. You can transfer or roll over to an IRA or eligible employer plan any otherwise eligible withdrawals you make.
Whatever the case may be, once you have decided it’s time to receive monthly installment payments from your TSP account balance, you might wonder how long it will take to begin receiving the money. If it’s been a few months since you retired, or maybe a few years, then the process is much like taking an in-service withdrawal.
To request a withdrawal, log into My Account on the TSP website and click on the “Withdrawals and Changes to Installment Payments” link on the menu. From there you’ll have access to an online tool with which to start your withdrawal. The TSP says you should allow up to 10 days from the time you submit your withdrawal request until payment is sent. You will be notified when your payment has been disbursed.
According to Kim Weaver, the TSP’s director of external affairs, once monthly payments begin, they are made generally about the same time each month, although holidays and other observances sometimes affect this routine.
If you’d like payments from your TSP account to coincide with your retirement, remember that you might experience a delay between your retirement and the time you can request to have your withdrawal request processed. That depends on how long it takes your agency to notify the TSP of your separation. It’s generally recommended that federal employees apply for retirement at least 30 days or up to 90 days before their planned retirement date. But it’s important to wait until after the TSP has been notified that you’re retired to apply for a post-employment withdrawal from your account.
I recently received an email from a Bill, a federal employee, who related a discussion he had with his human resources office about the time frame for receiving a post-retirement TSP withdrawal. He was told that it typically takes his agency between six to eight weeks to notify the TSP of an employee’s separation. (This isn’t true for all agencies. The TSP says it usually takes up to 30 days after the actual date of separation for this information to be submitted to the TSP.)
Many employees don’t need to take immediate withdrawals from the TSP when they retire, but if you need to create an immediate stream of income, you might consider an in-service withdrawal prior to retirement if you are retiring past age 59 ½.
You could also request a loan from your TSP account. You’ll have to make loan payments until you actually retire, but the loan does not have to be paid back after you retire if you are willing to declare the unpaid balance as a taxable distribution. Remember, though, that a $50 administrative fee will be deducted from your loan amount. In addition, you will have 90 days after the TSP is notified of your separation to decide if you want to fully or partially pay back the loan to keep the money for later use. A withdrawal cannot be processed from your account until your loan has been closed, which can delay your withdrawal by an additional three months.
Here are some things Bill learned after contacting the ThriftLine to ask about his post-retirement withdrawal options:
- The old TSP-70 application form for withdrawals is no longer used. The application is now completed online, following the same format.
- The “Separation Access” tab on your online account is locked until after the TSP receives a separation notice from your employing agency. Then it becomes available for your use.
- The TSP does not provide retroactive payments. Payments start after the TSP processes your application.
- Changes to monthly payment amounts or tax withholding are done online and processed by the TSP.
There are a variety of flexible withdrawal options for choosing installment payments directly from your TSP account balance. You can also purchase a TSP annuity using your some or all of your account balance. Or you could transfer some or all of your TSP account to an individual retirement account and take payments directly from your IRA.
It’s important to understand the differences between these various withdrawal choices, not only on the time it takes to process payments, but on the creating the income you need to support your life after retirement.