Will the TSP modernization legislation that is moving through Congress change the number of former federal employees who leave their money in the TSP, as compared with rolling it over to an IRA or other more flexible account? That’s what the Thrift Board hopes.
Recent statistics provided by the TSP show that 45% of participants empty out their TSP accounts within a year of their separation from federal service. The Thrift Board suspects there are two reasons for this exodus from the TSP; lack of investment choice and overly restrictive withdrawal choices. The current legislation that is working its way through Congress addresses the overly restrictive withdrawal choices, but does nothing about the lack of investment options within the TSP.
Currently, a separating employee can: 1) take a partial withdrawal if they have not taken an “age-based” withdrawal while employed; or 2) take a full withdrawal. The full withdrawal can be a single payment, a series of monthly payments (which can be changed once a year and never stopped), or a life annuity, or a combination of 1, 2 or 3 of these choices.
If passed into law, the current legislation would allow more than one individual payment (I guess we can’t call it a “single payment” if we can take more than one). It would give a quarterly payment option as well as continuing monthly payments. It would allow those taking periodic (monthly or quarterly) payments to start and stop them and to make changes to the payment amount more than once a year.
The legislation won’t make the TSP as flexible as an IRA, but it would make leaving money in the TSP more appealing to separating employees. (Personally, I would have kept my retirement money in the TSP if there had been more flexible withdrawal choices. When I wanted to begin taking money out of the TSP, I immediately moved my account to a more flexible custodian.)