John Grobe, Federal Career Experts
Why did the amount of my TSP installment payments go down? If you are receiving installment payments based on the IRS life expectancy table, you are likely asking yourself this question. It’s a bummer to have your income cut during a period of time when expenses are rapidly increasing due to inflation, but that’s what the TSP has done to a large number of separated participants who chose to use a life-expectancy based withdrawal strategy.
The change (lowering) of payments is a direct result of the transition. In the information the TSP sent out prior to the transition, they said that all participants who were subject to RMDs would have their payments recalculated based on their account balance at the end of May. Everyone (except those who were all G) had a smaller balance at the end of May than they did at the end of December (when the RMD was originally calculated), so their payment went down.
Life-expectancy based payments are calculated annually based on the previous year end balance (i.e., 2021 for this year’s payments) and the age you attain this year (i.e., 2022). The Thrift Board elected to re-calculate the annual payments based on your pre-June balance.
I’ll bet that the balance in your TSP account at the end of May 2022 is lower than it was on December 31, 2021. And the age you attain this year certainly will not change. If you do the math, this results in a lower installment payment going forward. My wife’s monthly payment dropped by almost 5%, and I suspect that those with more aggressive account allocations have seen a higher percentage drop in their payments.
What remains to be seen is how the TSP will handle the life-expectancy based payments as we approach the end of the year. The IRS still looks at the 12/31/2021 balance and expects the amount withdrawn over the year will match the result of the calculation made back in January. With the TSP’s re-calculation and lowering of payments mid-stream, participants will not have taken out enough money by the end of the year to meet the IRS’ number. Here’s some items to be aware of:
• The TSP will make a payment in December to ensure that the exact amount required is paid out by the end of the year for those who are required to take minimum distributions. This will shield participants from the 50% penalty for not taking an RMD
• What is unclear deals with Substantially Equal Periodic Payments (SEP or 71(t)) which many younger separated participants (i.e., those who have separated prior to the year in which they turn 55 (50 for special category employees) and have not yet reached 59 ½) follow in order to avoid the early withdrawal penalty. The Thrift Board has yet to make a statement as to whether this category of employee will also receive a make-up payment in December. Even if they do receive a make-up payment in December, will the fact that substantially equal payments were not made for over half a year cause the IRS to rule that those taking 72(t) payments are deemed to have deviated from the rule and are subject to retroactive 10% early withdrawal penalties? Stay tuned.