There’s a 10% early withdrawal penalty, but it will not apply to withdrawals from your Traditional TSP if you separate from your federal job in the year in which you turn 55, or later. Image: vipman/Shutterstock.com
By: FEDweek StaffWill the current offer of “deferred resignation” have anything to do with the Thrift Savings Plan? The short answer is “no”; the choices a separated employee has with their TSP are the same, regardless of whether the separation is due to resignation or retirement.
Of course, you can leave your money in the TSP to access later, or you can choose to roll it over to an IRA or the retirement plan of a subsequent employer. If you’re rolling over, make sure that you make a direct rollover, as no taxes will be withheld. Most IRA custodians and representatives of employer plans are aware of this.
How do moving your money to an IRA and leaving it in the TSP compare? The following table shows the advantages of each.
TSP
Lower expenses and no annual fees;
Penalty free withdrawals are allowed as early as age 55 (age 50 or 25 years of qualifying service for certain special category employees) in many circumstances.
IRA
Wider choice in investment vehicles;
More flexible withdrawal options.
To execute a rollover, you would utilize the appropriate TSP withdrawal wizard and choose either a full or a partial withdrawal. Then have a representative of the firm to which you are rolling the TSP monies complete the transfer section of the form.
When it comes to taking money out of the TSP, if you haven’t done so already, review the TSP publication, Withdrawing From Your TSP Account For Separated and Beneficiary Participants, which can be found at https://www.tsp.gov/publications/tspbk02.pdf,. This will give you all the information you need about the different withdrawal options.
Taking a full or partial withdrawal is an option. You can take a partial withdrawal as often as you want and may take one even if you are already taking installment payments. Anyone who is considering taking a large single payment should investigate the tax consequences of doing so, because, in addition to taxes, there may be penalties for failing to have enough tax withheld. The default withholding rate for this type of payment is 20%.
Installment payments you leave your money in the TSP and withdraw it on a monthly, quarterly or annual basis in payments that are equal, or substantially so. You may choose to change the amount of your payments whenever you want. You can also start and stop your payments at will.
There are two ways to receive installment payments:
1) Payments of a specific dollar amount that must be greater than $25.
2) Payments figured on the IRS life expectancy table. The payments are re-calculated each year based on your account balance and your age. This option meets the requirements of IRS section 72(t) for substantially equal periodic payments and satisfies the IRS rules on required minimum distributions.
Another way to receive monthly payments from the Thrift Savings Plan is with a TSP annuity. In this option, you purchase an immediate life annuity from an insurance company chosen by the TSP. The current insurance company is MetLife. You can use all or part of your account balance to purchase the annuity. Purchasing a TSP annuity is an irrevocable choice that cannot be changed, even if your situation changes. The annuity option offered by the Thrift Savings Plan is referred to as a “single premium immediate annuity” by insurance professionals.
If you take money from your traditional TSP after separation, be aware that it will be taxed at your rate for ordinary income. If you take qualified withdrawals from your Roth TSP it will not be taxed.
There’s a 10% early withdrawal penalty, but it will not apply to withdrawals from your Traditional TSP if you separate from your federal job in the year in which you turn 55, or later.
Most retirees will be at least that age when they separate, but those who separate from their federal job before the year in which they turn 55 will be subject to it. This is likely to affect most of those who opt to resign. There are, however, ways to avoid the penalty:
You can elect installment payments based on the IRS life expectancy table and continue those payments for five years, or until they turn age 59 ½ whichever is longer; or
They purchase a TSP annuity.
There is an exception to the above rule for Law Enforcement Officers, Firefighters, Customs and Border Protection Officers, Air Traffic Controllers, Supreme Court and Capitol police officers, nuclear materials couriers and DSS Special Agents in the State Department. They are exempt from the early withdrawal penalty if they separate from service in the year in which they turn 50 (or later) or when they have 25 years of qualifying service.
Most retirees will be at least that age when they separate, but those who separate from their federal job before the year in which they turn 55 will be subject to it. This is likely to affect most of those who opt to resign.
There are, however, ways to avoid the penalty:
• You can elect installment payments based on the IRS life expectancy table and continue those payments for five years, or until they turn age 59 ½ whichever is longer; or
• They purchase a TSP annuity.
There is an exception to the above rule for Law Enforcement Officers, Firefighters, Customs and Border Protection Officers, Air Traffic Controllers, Supreme Court and Capitol police officers, nuclear materials couriers and DSS Special Agents in the State Department. They are exempt from the early withdrawal penalty if they separate from service in the year in which they turn 50 (or later) or when they have 25 years of qualifying service.
In addition, there is no early withdrawal penalty, regardless of your age if your TSP distributions are:
• Made because you are totally and permanently disabled
• Ordered by a domestic relations court
• Made because of the death of the account holder (beneficiary participant accounts only)
• Made during a year in which you have deductible medical expenses exceeding 7.5% of your adjusted gross income
There is a tax trap associated with the Roth TSP. You get tax free growth if you make qualified withdrawals. But, for a withdrawal to be considered qualified, your Roth TSP must have been established for five or more years, and you must be at least 59 ½ when withdrawing the money. If you do not meet those criteria, the portion of your Roth withdrawal that is due to earnings on your contributions is subject to tax. Even some retirees can get caught in the Roth tax trap. Roths will also apply the early withdrawal penalty to taxable withdrawals.
If you’re thinking of resigning, you have a lot to think of and a limited time to do so. Choose wisely.
What if you have a TSP loan? If you leave federal service without repaying an outstanding loan, the TSP will give you a choice of how to resolve the loan. Expect it to take at least 30 days after separation for them to contact you.
You can:
• Pay the loan back in full;
• Set up monthly payments to pay off the loan within the original time period; or
• Take a taxable distribution
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.
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