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Two and a half years ago the Thrift Savings Plan embarked on the first of many changes that were designed to encourage federal employees to keep their money in the TSP after they separated from federal service. In surveys of participants and former participants, the Thrift Board found several reasons why former employees left the TSP and they identified two that they were able to do something about.
One reason was that the TSP had limited investment choices. You may have heard about the TSP beginning to offer mutual funds (accessed through a “window”) sometime this summer. The other major reason was the fact that the withdrawal options offered by the TSP were far more restrictive than options one would have in an IRA. The TSP dealt with this reason on September 15, 2019.
On that date, two and a half years ago, the Thrift Savings Plan Modernization Act (TSPMA) was implemented. While TSP withdrawal rules are still more restrictive than those imposed by IRAs, the TSP withdrawal rules were made far more flexible. In fact, if the TSPMA had been in effect when I retired, I would have left my money in the TSP instead of moving it to an IRA. What follows are some of the changes that were made by the TSPMA.
Up to four age-based withdrawals can be taken per year by an employee who is 59 ½ or older. In addition, taking an age=based withdrawal does not preclude taking a partial withdrawal after separation. Up until the change, only one age-based withdrawal was allowed; not one per year – just one! Back then, taking an age based withdrawal also precluded the employee from taking a partial withdrawal after retirement.
Separated participants can take a partial withdrawal as often as once every 30 days. Up until the TSPMA was implemented, only one (just one) partial withdrawal was allowed; and none at all were allowed if the participant had taken an age-based withdrawal while employed.
There were changes to installment payments as well. While installment payments were only monthly before TSPMA was implemented, now they can be monthly, quarterly, or annually. It used to be that once started, payments could never be stopped; not anymore, people can start and stop at will. Now you can change the amount and frequency of installment payments at any time, when before, it could only be done in an annual open season. And, while participants were once precluded from taking a partial withdrawal once they elected installment payments, that is no longer the case. A point of interest – the TSP recently announced that installment payments of a fixed dollar amount (as opposed to following the IRS life expectancy table) is the most popular withdrawal choice.
The Thrift Board even added a new flexibility that was not included in the Thrift Savings Plan Modernization Act; they did away with the proportionality requirement. Up until the change, all withdrawals from the TSP had to be made proportionally between the participant’s traditional and Roth balances. Now, while proportionality is still the default, participants are allowed to choose from which balance they want their withdrawal will come. Unfortunately, this did not do away with the requirement that withdrawals be taken proportionally between the TSP’s funds.
What a difference two and a half years makes!
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