The Coronavirus relief bill newly signed into law would impact the TSP, along with other retirement savings plans such as 401(k)s, for both currently employed and retired account holders.
For retirees, the measure suspends for calendar year 2020 the requirement to take “minimum distributions” by April 1 of the year after turning age 72 (the threshold age was 70 ½ for those hitting that age before the end of calendar 2019). Those distributions are a percentage of the account that varies by the person’s age.
Says a Senate summary of the new law, “This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19”—primarily, in the case of retirees, the drop in stock markets that could require them to withdraw money at a loss even if they otherwise would want to leave the money on investment.
For active employees, the 10 percent “early withdrawal” penalty for taking a withdrawal before age 59 ½ will be waived for withdrawals of up to $100,000 for reasons related to the virus. That includes, according to the summary, “an individual who is diagnosed with COVID-19, whose spouse or dependent is diagnosed with COVID-19, or who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.”
The ordinary tax on such distributions could be spread out over three years “and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions,” it says.
Further, the measure “provides flexibility for loans from certain retirement plans for coronavirus-related relief” by raising the limit on loans from $50,000 to $100,000. Unlike withdrawals, loans must be repaid or else a taxable distribution will be declared with the 10 percent penalty potentially applying.
Both the IRS and the TSP likely will issue guidance on the provisions, although it is uncertain when that would occur.
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Some TSP Investors Have Fled but Most Standing Pat
TSP investors overall have been transferring money among the investment funds at higher than usual rates rate as stock markets have been falling in recent weeks, although a small minority of investors account for the bulk of that activity, the TSP has said.