At the end of each calendar year the TSP changes its processing schedule – which is a good thing for most people who are receiving installment payments from the TSP. The primary reason for this schedule change is to ensure that all of those who are required to take a minimum distribution do so. Any separated employee who was age 72 (or older) by the end of 2021 must take a distribution.
Why are participants required to begin taking money out of the TSP (and similar plans) when they reach 72? So that Uncle Sam can start getting his tax money – that’s why! Taxes are deferred in the traditional TSP, but you have to pay them at some time; and the IRS has determined that required IRA and TSP distributions should begin in the year you turned 72. Both the traditional and Roth TSPs require that minimum distributions be taken beginning the year in which separated participants turn 72. This is also true for traditional IRAs, but not for Roth IRAs.
The change in processing schedule will not affect those who normally get their TSP payments between the 1st and 15th of the month; they will get their payment on the normal date. However, any payments that are scheduled to be made between the 16th and the 31st will be made on the 16th The IRS considers these payments to be income for 2021. For example, my wife who would normally get her payment on the 4th Tuesday of the month (December 28) will get it on the 16th (the 3rd Thursday). We won’t complain.
Residual RMDs will be paid out on December 17th for beneficiary participants and on December 20 for civilian and uniformed service participants. These residual payments are made to those who have not taken enough money out to satisfy their RMD. If you had not taken any withdrawals and were required to take a RMD, the entire amount of your RMD would be paid to you on this date. If you had taken withdrawals, but not enough to satisfy your RMD, the remainder of the required amount would be paid to you. This is also considered income for tax year 2021.
What about those who want to take a partial or full individual withdrawal in December? Any withdrawals processed through Wednesday, December 29th will be disbursed and will be reported to the IRS as income for 2021. Withdrawals processed on December 30th and 31st will be disbursed in early January and will be reported as income for 2022.
If you’re thinking of taking a year-end withdrawal, it would be wise not to wait until the end of the year. If you are a married participant who is covered by FERS, you need your spouses signed notarized consent for any withdrawal.
When you use one of the TSP “wizards” for your withdrawal, you will have to print off a copy, have your spouse sign it, get it notarized and mail or fax it in – that all takes time. Then, the completed withdrawal form has to arrive at the TSP in time to be processed by December 29th to be considered income for 2021.
Plan ahead for any year end withdrawals.