The TSP has issued final rules effective immediately to carry out a previously announced intention to widen policies regarding one form of post-separation withdrawal, the installment payment option.
Under that option, those who have retired or left the government for other reasons may designate part or all of their account balance to be paid out over time in installments to be paid either monthly, quarterly or annually. Those payments can be either for a fixed dollar amount or parceled out as lifetime payments based on life expectancy tables.
Under current rules, account holders who elect fixed-dollar installment payments may not switch to life-expectancy-based installment payments. In addition, although those receiving installment payments may stop the payments at any time, if they stop life-expectancy-based payments, they may not later elect to restart such payments.
A notice in the Federal Register said that many separated TSP participants choose to take life-expectancy-based payments in order to satisfy the requirement to take certain minimum distributions after age 72. If their accounts suffer investment losses, the current restrictions “put these participants in an untenable situation–they must either continue to receive payments and forego the chance to let their account balances recover, or stop their payments and forego the ability to restart life-expectancy-based payments in the future,” it says.
“Moreover, over the years, separated participants of all ages have expressed a desire for more flexibility to change between fixed dollar and life-expectancy-based installment payments,” it says.
Effective January 1, it says, the policy will change so that “participants who are eligible for installment payments to elect to receive payments based on life expectancy whether or not they previously started and then stopped installment payments.”
“In order for a TSP participant who is currently receiving fixed dollar installment payments to receive installment payments calculated based on life expectancy, the participant must first stop his or her existing installment payments. The participant can then make a new withdrawal election to receive life-expectancy-based installment payments,” it says.
The notice adds that such an action would be subject to spousal consent rules applying to withdrawals and that tax penalties may apply to those who started life-expectancy-based payments before age 55 and then stop them before within five years or before reaching age 59 ½.