This article is written for those that are at – or over – the age at which required minimum distributions (RMDs) are required. The current age at which individuals are required to take RMDs is 72, and there is discussion in Congress about raising it to 75. We will touch on two items which need to be kept in mind by those required to take RMDs, whether they are still working (unlikely) or are retired (much more likely).
If you are considering a rollover, either from the Thrift Savings Plan (TSP) to an Individual Retirement Arrangement (IRA), or from one IRA to another, and are old enough to be required to take a minimum distribution, you are required to take your RMD before completing the rollover. If you do not do so, the amount that should have been taken as a rollover is considered as an “excess contribution” to the IRA. If the excess contribution is not removed from the IRA by October 15 of the year after the year in which it was made, there is a 6% penalty for each year in which the contribution remains in the IRA. A good financial advisor is likely to be aware of this rule and will advise you to first take your RMD. However, not all financial advisors are good. In addition if you’re a financial do-it-yourselfer you might not be aware of this rule.
Not many readers are likely planning to work at their federal jobs past the age at which minimum distributions are required. The TSP, like many other employer sponsored retirement plans, allows a “still working” exception. Minimum distributions are not required to be taken from the TSP if you are still employed, regardless of your age. So, a still employed individual could roll over part, most, or all of their TSP to an IRA without having to worry about an excess contribution. As long as the rollover from the traditional TSP was made to a traditional IRA there would be no tax consequences.
Tax laws are confusing, and the penalty for not understanding them can be steep. Make sure that you understand them or are working with an advisor who does.