Update On Relaxing Restrictions on TSP Withdrawals

Earlier this year, an article discussing potential changes to the Thrift Savings Plan appeared in FEDweek’s TSP Investment Report.  Who would have thought that some action would be taken on one of these changes as early as April?  Certainly not this writer!

Senators Rob Portman (R-OH) and Tom Carper (D-RI) introduced bill S. 873, the TSP Modernization Act on April 6th.  This bill is designed to make it easier and more flexible to withdraw money from the Thrift Savings Plan.  In a recent press release, the Thrift Board stated that Senators Portman and Carper introduced this legislation “at the TSP’s request”.

Almost two years ago, in July 2015, the Thrift Board announced that it was going to look into relaxing the restrictions on TSP withdrawals.  The stated reason for this was to encourage plan participants to leave their money in the TSP after they retire, rather than roll their account over into an IRA where the withdrawal rules are far more flexible.  This is a valid concern and it is good to see it being addressed.  I was one of the many TSP participants who rolled my account into an IRA when it was time for me to begin taking money out, as I did not want to put up with the TSP’s draconian withdrawal restrictions.

So, what does this new legislation propose to do?  First, it would allow multiple age-based withdrawals for current federal employees who have reached the age of 59 1/2.  Under present rules, a current employee who is 59 ½ or older is allowed only one age-based withdrawal and, if they take one, they will not be allowed to take a partial withdrawal after separation.

Second, it would allow separated participants to take multiple partial withdrawals.  Currently, a separated participant may take only one partial withdrawal – and only if they had not taken an age-based withdrawal while still employed and they had not started taking monthly payments.

Third, it would change the rules regarding periodic payments.  Currently periodic payments:  1) can only be done on a monthly basis; 2) can only be changed once a year in an annual open season that runs from October 1 through December 15 of each year; 3) cannot be stopped unless a participant withdraws their entire TSP account (though they can be reduced to as little as $25 a month); and 4) preclude those taking periodic payments from either taking a partial withdrawal or purchasing a TSP Annuity.

The legislation would:  1) allow periodic payments to be scheduled either monthly or quarterly; 2) allow periodic payment amounts to be changed anytime; 3) allow those taking periodic payments to stop payments and leave the remaining balance in the TSP; and 4) allow the election of a partial withdrawal or the purchase of a TSP annuity while still receiving periodic payments.

Fourth, it would eliminate the TSP’s requirement that a participant make a post-separation withdrawal election by April 1 of the year in which they turn 70 ½ or separate from the service, whichever is later.  Participants would still be subject to IRS rules regarding required minimum distributions, but they could satisfy that requirement without having to make a post-separation withdrawal election.  This change is a bit arcane and would be unlikely to affect many TSP participants.

This all sounds great for TSP participants; in fact, if these rules had been in effect when I wanted to begin withdrawing money from the TSP, I would not have rolled my account over into an IRA.

But there are some questions that need to be answered.  First, will the TSP’s computer system be able to handle all the additional transactions?  This is especially important as the TSP’s system will be strained by the upcoming implementation of “blended retirement” for the military (which is expected to dramatically increase military participation in the TSP).  I speculate that the computer system will be up to the task; otherwise the Thrift Board wouldn’t have asked Senators Carper and Portman to introduce the legislation.

Second, will the financial services industry fight the legislation?  If the TSP’s withdrawal options are more flexible, then less money will be rolled into outside accounts.  In light of how fiercely the financial industry (apparently successfully) opposed the DOL regulation that required all those providing retirement advice to act as fiduciaries, financial sector opposition to S. 873 could be forthcoming.

Third, how much will TSP expenses increase?  It’s a given that they will go up, as more transactions will be processed if more flexibility is given to participants.  And, how much of an increase will the TSP tolerate before they consider restricting the number of allowed transactions?

Fourth, what about adding more flexibility to the TSP annuity option?  That was another item that the Thrift Board identified back in 2015.  Once the current annuity contract (with MetLife) is up, will there be more annuity options allowed?  Particularly onerous is the current rule that the election of a TSP annuity is an irrevocable choice.

Fifth, will action be forthcoming on other improvements the TSP is interested in?  Specifically, when will we hear about the implementation of the “mutual fund window” and the elimination of the requirement that TSP withdrawals be proportional between Traditional and Roth balances?