The tax deferred status of the funds can be retained if funds are left in the plan or rolled over. Image: Cherdchai101/Shutterstock.com
By: John GrobeHow does the Government Accountability Office agree with the Temptations? They both think that it’s a “ball of confusion, that’s what the world is today”. The Temptin T’s 1970 hit referred to the world, the GAO’s report referred to the fact that most retirement plan participants do not understand distribution options. Regardless, it’s a ball of confusion.
The GAO surveyed over 1,000 401(k) participants as to their knowledge as to what they could do with their plan balances when they separated from their employer. Though the Thrift Savings Plan is not officially a 401(k), the rules are almost identical.
The GAO survey showed that 4 out of 5 plan participants didn’t know that they have four options after they leave their employer.
These four options are available to separating TSP participants.
1. You can leave your funds in your current employer’s plan.
2. You can roll over the funds to an Individual Retirement Arrangement (IRA).
3. You can take a lump sum distribution.
4. You can roll over the funds into a new employer’s plan.
Surprisingly, more than half of the survey respondents weren’t aware that they could leave their funds in the current employer’s plan.
Two out of five respondents didn’t understand the tax consequences of their distribution decision.
Major areas of misunderstanding were:
• The tax deferred status of the funds can be retained if
-Funds are left in the plan
-Funds are transferred by means of a direct rollover to an IRA, or a new employer’s plan
• A lump sum distribution will result in
-20% withholding
• A 10% early withdrawal penalty if separating before the year in which the participant
-Reaches the age of 55
-Reaches the age of 50 or achieves 25 years of qualifying service if a special category employee
• Taxes will be due on indirect (60-day) rollovers unless additional funds to make up for the withheld money are added to the account to which the plan funds are rolled over within 60 days.
“And the band played on”. To paraphrase the Temptations: “So round and around and around we go, how our funds are treated nobody knows.
TSP Withdrawals
When you decide to withdraw your account balance after separation, you can have the TSP provide it to you in lump-sum payments, as an annuity, as a series of installment payments based either on life expectancy or on a set dollar amount, or a combination. (More on TSP withdraws and RMDs).
An unlimited number of lump-sum withdrawals is allowed, ending a prior policy of allowing only one partial withdrawal lifetime. Also since that time, there is more flexibility in the installment payment option–including allowing annual or quarterly payments in addition to monthly payments–and account holders with both traditional and Roth balances have the option to designate lump-sum or installment payment withdrawals from only one type of balance or to choose what used to be required, taking withdrawals from both on a prorated basis.
John Grobe is a retired federal employee and retired retirement educator with over 30 years of experience in helping federal employees understand their retirement.
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See also
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