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Substantially Equal Monthly Payments From Your TSP

The most popular TSP withdrawal choice is called “substantially equal monthly payments” and there are two ways that an individual can elect their monthly payments.  By the way, you would make your election on form TSP-70 (Request for Full Withdrawal) or on form TSP-77 (Request for Partial Withdrawal When Separated).

One choice is to take payments of a fixed dollar amount.  You will elect the amount that you want to receive each month before taxes.  You will then receive that amount each month, unless you change it.  You will only be allowed to change the amount during the annual open season which runs from October 15th through December 15th, with the changes becoming effective in your January payment.  The Thrift Board has indicated that they will modify this (i.e., allow more frequent changes) in the future, though they have not indicated exactly when this modification will take place.

When taking payments of a fixed dollar amount, how taxes are withheld depends on how long the payments are expected to last.  In estimating how long the payments are expected to last, the TSP will divide your account balance by the amount of each monthly payment.  In performing this calculation, the TSP assumes that your account will neither increase nor decrease in value.  For example, if you had a TSP account balance of $100,000 and chose a monthly payment amount of $750 a month, you could expect to receive a total of 133.3 monthly payments.

What follows discusses the taxes on the traditional balance within your TSP.  For the Roth balance, there will be no taxes if your withdrawals are qualified.  In order for a Roth withdrawal to be qualified, you must have had the Roth balance in your TSP for at least five years and you must be at least 59 ½ at the time of the withdrawal.

If the payments are expected to last for ten years or less, taxes will be withheld at a default rate of 20%.  You can increase the withholding rate, but you cannot decrease it.  This is likely to cover taxes for many of those who are withdrawing from their TSP account, but you should double check to be sure you have enough withheld.  You could also rollover these payments to an IRA, as payments for ten years or less are considered to be an eligible rollover distribution by the tax law.

If the payments are expected to last for more than ten years, taxes will be withheld as if you were married, filing jointly and claiming three dependents.  This is a very low rate of withholding and will, almost certainly, result in not enough being withheld for federal income taxes.  Someone who is electing monthly payments that will last for ten years or more (e.g., most of us) should choose to have extra money withheld for federal income tax in order to avoid a nasty surprise on April 15th.  Payments that are expected to last for ten years or more are not considered an eligible rollover distribution (they are called periodic payments) and cannot be rolled over into an IRA.