John Grobe, Federal Career Experts
The Thrift Savings Plan isn’t sitting still when it comes to making changes (improvements) to the TSP. We’re all aware (hopefully) that the TSP Modernization Act (TSPMA) is scheduled to be implemented on September 15, 2019. This will dramatically increase flexibility in the area of withdrawals. The Thrift Board felt that many participants were leaving the TSP because of the limited withdrawal choices and pushed legislation to increase withdrawal choices. The TSPMA was signed into law in November 2017. We have run articles on the TSPMA in the past and will run more before the Act is implemented.
In addition to the TSPMA changes, there are a couple more changes that will take place on September 15, 2019. One of them is that the six month suspension of contributions for those who take financial hardship in-service withdrawals will be eliminated. Ever since financial hardship in-service withdrawals have been allowed, there has been a six month prohibition on contributing to the TSP for those who have taken such withdrawals. This resulted in a lot of participants who took financial hardship in-service withdrawals during the recent furlough missing out on putting money in the TSP for a full six months. Whether or not a furlough (after which you will be paid for the time) is really a financial hardship is a matter for another article.
Also on September 15, 2019, withdrawals from the TSP will no longer have to be proportional between a participant’s traditional and Roth balances. This will allow most of those who wish to withdraw from the TSP prior to the age of 59 ½ to avoid the dreaded “Roth tax trap” by choosing to have their entire withdrawal come from their traditional TSP balance. Caution is still needed because, unless the participant specifies from which TSP balance they want their withdrawal to come, the withdrawal will still be taken proportionally.
The year 2020 will bring several changes as well. In 2020 the index tracked by the I Fund will change from the MSCI EAFE (Europe, Australasia and Far East) to the MSCI All World, which will bring many more countries into the I Fund. Another 2020 (October 1st) change will be that the default contribution for new hires will be raised from the current 3% to 5%. Hopefully this auto enrollment increase will result in higher TSP balances down the road for most participants.
A new contract for TSP life annuities will be awarded at the end of 2019, likely resulting in an improved annuity product being made available to participants sometime in 2020.
In September of 2020, the Thrift Board anticipates awarding a contract for the “Mutual Fund Window” (MFW). I suspect that we will have to wait until the award is announced to know how much more investing flexibility will be given to TSP participants. The MFW is not expected to be implemented until 2022.
There will be changes coming to the TSP’s Lifecycle (L) Funds in 2020 as well. One of the changes was expected for a long time – the elimination of the L 2020 Fund, which will be rolled into the L Income Fund when it matures in 2020. There’s another big change coming in 2020 as the L Funds will now come in five year intervals, rather than the current ten. We’ll see L Funds from 2025 to 2065 making their debut in 2020.
The Thrift Board has even announced a change that will take place in 2021. This change will affect those who are 50 or older (including if they turn 50 during the year) and want to make “catch-up” contributions. Currently, a participant who wants to make catch-up contributions has to make a separate election for those contributions. Beginning in January 2021, those who want to make catch-up contributions need only make one election. The TSP will ensure that they do not miss out on matching contributions by carefully monitoring what they contribute.
In the past the Thrift Board has not been as aggressive in making improvements to the TSP as they are now. It’s a good thing that they are making the TSP better for us.