Advantages of Substantially Equal Monthly Payments Withdrawals From Your TSP

Substantially equal monthly payments is the most popular withdrawal choice and, other than choosing payments of a fixed dollar amount, you can have the choice to have your payments calculated based on the IRS life expectancy table; this second choice is the topic of this article.  At the risk of repeating myself from the previous article, you make your withdrawal election on form TSP-70 (Request for Full Withdrawal) or on form TSP-77 (Request for Partial Withdrawal When Separated).

If you choose payments based on the IRS life expectancy table, the TSP will calculate the amount of your payments each year based on the previous year-end balance of your account and your remaining life expectancy.  When you attain the age of 70 ½ this calculation follows the rules for required minimum distributions.  Let’s look at an example of an individual who retires at the age of 57 with a balance of $250,000 in their TSP account.  Their TSP investments will continue to grow at a rate of 5% per year.

At age 57 the monthly payments begin at $746.71.

By age 65 they have reached $1,060.41 per month.

At age 69, just before reaching the age for required minimum distributions it is $1,241.21 per month.

When RMDs kick in at 70 ½, the monthly amount drops to $800.13.

If the individual lives to age 90 they will be receiving $1,682.52 per month and will still have over $200,000 in their TSP.

The two preceding paragraphs probably made you scratch your head and say. “That’s goofy!”  Yes it is.  When you hit 70 ½ your spending is unlikely to drop 36%.  An active 70 year old might choose to eschew the life expectancy based withdrawals and switch to substantially equal monthly payments of a fixed dollar amount from there on.

You are allowed to change the payment methodology during the annual open season which runs from October 15th through December 15th, with the changes becoming effective in your January payment.  Note that once you switch from monthly payments following the life expectancy table to monthly payments of a fixed dollar amount, you will not be able to switch back.

The Thrift Board has indicated that they will allow more frequent changes in monthly payments, as well as to other types of withdrawal in the future, though they have not indicated exactly when this modification will take place.

Of course withdrawals from your traditional TSP are subject to federal income tax at your rate for ordinary income.  What makes a difference is how the taxes are withheld from the payments.  Substantially equal monthly payments based on the IRS life expectancy table will have federal income taxes 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 based on the IRS life expectancy table should choose to have extra money withheld for federal income tax in order to avoid a nasty surprise on April 15th.  Payments based on the IRS life expectancy table are not considered an eligible rollover distribution (they are called periodic payments) and cannot be rolled over into an IRA.