At the end of each calendar year the Thrift Savings Plan 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 change in schedule is to ensure that all of those who are required to take a minimum distribution do so. One would have to be 70 ½ or older by the end of 2019 and separated from their federal job to be required to take a distribution.
Why are participants required to begin taking money out of the TSP (and similar plans) when they reach 70 ½? 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 back in 1974, when the Individual Retirement Arrangement (IRA) was created, an actuary decided that required IRA distributions should begin in the year you turned 70 ½. Both the traditional and Roth TSP require that minimum distributions be taken beginning the year in which separated participants turn 70 ½.
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. For example, my wife who would normally get her payment on the 4th Tuesday of the month (Christmas Eve in 2019) will get it on the 16th (the 3rd Monday). We won’t complain.
On December 17th and 18th, the TSP will process any residual RMD payments. Residual payments would generally be for those whose installment payments didn’t cover the entire RMD amount, or who haven’t started taking payments. With the advent of the Thrift Savings Plan Modernization Act, those who have not made a withdrawal decision by the year in which they turn 70 ½ will automatically be paid the required amount before the end of the year. Earlier articles in the TSP Investment Report describe how required minimum distributions are calculated.
What about those who want to take a partial or full individual withdrawal in December? Any withdrawals processed through Friday, December 27th will be disbursed and will be reported to the IRS as income for 2019. Withdrawals processed on December 30th and 31st will be disbursed in early January and will be reported as income for 2020.
This does not mean that you can start the withdrawal process the week of December 23rd and receive your payment in 2019; maybe, but there’s no guarantee. 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 takes time. Then, it has to arrive at the TSP in time to be processed by December 27th to be considered income for 2019.
More on tax treatment or federal benefits and TSP distributions at ask.FEDweek.com