Much has been said about required minimum distributions (RMDs) this year. Both of the “bad acronym acts” (SECURE and CARES) changed RMDs; one permanently and one temporarily. A required minimum distribution is an amount that must be taken out of the Thrift Savings Plan each year once a separated employee reaches a certain age.
RMDs are Uncle Sam’s way of getting his hands on some of the money that you socked away for retirement. The traditional TSP is tax deferred – not tax free; you will have to pay taxes eventually and when “eventually” occurs is determined by the tax law.
Up until January 1, 2020, separated employees had to begin taking RMDs when they turned 70 ½, the SECURE Act changed that for all RMDs for 2020 and later, moving the age by which one must begin withdrawing money to 72. Then, along came the CARES Act, saying that no RMDs are required at all for the year 2020. But, it’s extremely likely that minimum distributions will be required in 2021 and future years. It is important to note that current employees, even those older than the age of 72, will not have to take RMDs as long as they continue working at their federal jobs. The Thrift Savings Plan, like many other employer sponsored retirement plans, has a “still working” exception.
Assuming that RMDs are in your future at some point, here are five items of which you must be aware:
– You cannot roll over or convert a required minimum distribution into an outside IRA. In fact, the TSP won’t let you do so.
– You must take your RMD prior to taking any other distributions from the TSP. This is generally not a problem for those TSP participants who are taking installment payments. Installment payments, up to the required distribution amount are considered part of the RMD and subsequent distributions are not. The way RMDs are calculated, they are more often than not smaller than the amount that is withdrawn annually by someone taking installment payments.
RMDs are calculated by dividing the TSP balance on December 31 of the preceding year by a factor derived from the age the participant turns in the year of the RMD. So, if I was 73 and my year-end balance was $350,000, my RMD (using current charts) would be $14,170. That number was arrived at by dividing the $350,000 by 24.7, the factor for a 73 year old.
– You cannot aggregate the RMD from your TSP with any other required distributions from Individual Retirement Arrangements (IRAs) or from any other employer plans. This confuses many because IRA RMDs can be aggregated with each other.
– You cannot merge your RMD with that of your spouse, even if he/she is also a separated fed and is the exact same age as you are. You must each take your own separate RMD.
– You cannot take out more than your RMD is one year and compensate by taking out less in the next year. Your RMD is calculated separately each year.
Like the rest of the rules surrounding taxes and investing, the rules about required minimum distributions are confusing. It pays to keep abreast of changes in the law, and there’s no better place to do so than FEDweek’s TSP Investment Report.