Retirement & Financial Planning Report

A recent executive order may provide some relief for TSP investors—as well as investors in other tax-favored retirement savings plans—from the “minimum distribution rule” in the tax code.

That requirement to begin taking money out of such accounts long has been a sore point for some retirees who could otherwise afford to keep the money in them and let it continue growing on a tax-favored basis.

The rule requires investors to start drawing out their money by not later than April 1 of the year following the year they reach age 70 ½ (or after retirement, if still working at that age). A minimum distribution must be taken for all subsequent years by not later than each December 31. (Note: Someone who waits until April 1 of the year after reaching age 70 1/2 to take a minimum distribution must take two minimum distributions in the same year, one for the year in which he or she attained age 70 1/2 and the other for the current year.)

The amount of a minimum distribution is determined by dividing the aggregate balance in all of the taxpayer’s tax-advantaged plans (IRAs, the TSP and similar accounts) by the taxpayer’s life expectancy (or the joint life expectancy of the taxpayer and his or her beneficiary).

The executive order calls that policy “outdated” and says it can force retirees “to make excessively large withdrawals from their accounts — potentially leaving them with insufficient savings in their later years.” It ordered the Treasury Department to “examine the life expectancy and distribution period tables in the regulations on required minimum distributions from retirement plans and determine whether they should be updated to reflect current mortality data and whether such updates should be made annually or on another periodic basis.” That study is to be completed in early 2019.

The life expectancy figure used is based on an IRS table, although other tables—such as ones used by the insurance industry for other purposes—use longer expectancies. Increasing the expectancy numbers would reduce the required annual distributions, allowing retirees to keep more money in tax-favored status.

The executive order also is designed to encourage participation in employer-sponsored retirement plans by private sector employees in several ways, which do not impact the TSP.