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Updates to TSP Withdrawal Options

updates to tsp withdrawal options

The TSP Modernization Act has finally arrived. 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. These provisions came into effect on September 15, 2019.

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 They maintained that the old distribution rules had become outdated and irrelevant in the wake of several new rounds of federal legislation.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 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.

Visit www.TSP.gov for more information on the new payout rules. Also, consult with a federal retirement planning-knowledgeable financial professional who can help you better understand your options.

If you, as a federal employee, are looking to minimize mistakes, maximize your benefits, and make the most of your money, help is a click away at SafeMoney.com.

Use our “Find a Financial Professional” section to connect with a financial professional directly. You can request a no-obligation appointment to discuss your questions, concerns, goals, and situation. Should you need a personal referral, call us at 877.476.9723.

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