Changes Coming to TSP Withdrawal Options on Sept. 15, 2019
By Jennifer Rossettini, CFP®
The Thrift Savings Plan (“TSP”) is a 401(k)-style retirement savings plan for federal employees and military personnel. When these employees no longer work for the government, they have the option of leaving their accounts in place, but many decide to transfer the money to an outside IRA, citing limited withdrawal options as a main reason for doing so. Currently, participants have three basic withdrawal options: (1) lump-sum withdrawal or transfer to another account; (2) purchase an annuity; or (3) withdraw in equal monthly payments. If participants do not take the lump-sum withdrawal, the other two options prevent the account’s balance from growing any further. Further, once a monthly payment amount is chosen, participants cannot take intermittent lump sum withdrawals to pay for things like a new car, vacation or unexpected healthcare expenses. With the passage of the TSP Modernization Act, comes more options regarding withdrawals. The following is a summary of some of the important changes taking effect on September 15, 2019:
Before the effective date of the Act, TSP participants are limited to one partial withdrawal from their account during their lifetime. These partial withdrawals are either age-based, in-service withdrawals at 59 ½ or older, or post-separation withdrawals. After the effective date of the act, (1) participants will be able to take up to four age-based, in-service withdrawals per calendar year; (2) there will be no limit to the number of partial withdrawals participants can take after separating from service; (3) participants will be able to take partial withdrawals while they are receiving post-separation installment payments; and (4) having taken age-based, in-service withdrawals will not prevent participants from taking post-separation partial withdrawals.
Withdrawing from Roth/Traditional Balances
As a reminder, the funds comprising the Roth balance of a participant’s TSP were contributed after taxes and are, therefore, generally income tax free when withdrawn. On the other hand, the funds comprising the Traditional balance of a participant’s TSP were contributed before taxes and are therefore taxed as ordinary income when withdrawn. Before the effective date of the Act, participants are required to take their withdrawals on a pro rata basis from both their Roth balances and their Traditional balances. This means that if 75% of your account is traditional and 25% is Roth, any withdrawal will have to come 75% from traditional and 25% from Roth. After the effective date of the Act, participants can choose which balance to withdraw from based on their personal financial needs and income tax situation.
Prior to the effective date of the Act, participants are required to make a full withdrawal election once they turn 70 ½ and are separated from federal service, or else the governments begins an account “abandonment” process. After the effective date of the Act, participants will no longer be required to make a full withdrawal election, and if a participant’s account has already been abandoned, they will be able to restore their balance without making a full withdrawal election. The only withdrawal that a participant will be required to make going forward will be an amount equal to the Required Minimum Distribution under IRS rules.
There are several things changing with regard to installment payments: (1) instead of having to receive installment payments on a monthly basis, participants can now receive payments quarterly or annually; (2) instead of being limited to the open season between October 1 and December 15 of each year to change the amount of the monthly payment, participants will now be able to change the amount and frequency of installment payments at any time during the year; (3) instead of being forced to take a final withdrawal if they want to stop their monthly payments, participants will now be able to start and stop payments at any time.
While these changes are positive, there are still some drawbacks to TSP’s, including the limited investment options available and the inability of a beneficiary of a TSP account to stretch payments over a longer time period than one year. Fortunately, with the ability to take more withdrawals from the TSP, participants have more opportunities to move assets from the TSP toward more retirement-appropriate accounts with fewer limitations. It also allows more opportunity to be able to pay for things outside of one’s monthly budget.
As with any major financial decision, TSP participants should seek the advice of a financial advisor before taking advantage of these expanded withdrawal opportunities.
Ask Kit Kat: Goat Brush Cutters
Hook Law Center: Kit Kat, what can you tell us about how Portugal is using goats to manage underbrush, and thus help reduce fires in rural regions?
Kit Kat: Well, this story really caught my eye! Apparently, Portugal is more prone to fire in rural areas, because they are suffering from extreme drought—more than most areas in Europe. As rural areas have become less populated, there are no longer enough people to prune steep, hilly areas as there was in the past. The few people they do have are elderly, and they are no longer able to do the task. Using tractors isn’t feasible, because the land is too hilly. Thus, enter the goatherd and goats! Portugal is actually is paying a few hearty souls to pilot a program in which a goatherd manages the job machinery cannot. In the village of Vermelhos in southern Portugal, Leonel Martins Pereira, 49, manages a herd of 150 Algarve goats who are keeping the area free of brush, and thus safe from fire.
The Algarve is a breed native to the area which has dark spots on a white coat. So far, they are doing a super job! They really love to munch, and their favorite target is the strawberry tree, which is actually a bush. It has a sticky coating which can be set on fire very quickly. The pilot program has 40-50 goatherds across the country who tend to approximately 10,800 goats across an area of about 6,700 acres. According to Nuno Sequeira, a board member for the forestry department, the problem in this plan was not funding, but finding enough goatherds. “It just became very hard to find people willing to do this hard work and live in such areas.”
Some of these areas are significantly declining in population. Vermelhos, the town in which Mr. Pereira operates from, is down to 25 residents from a high of 100 in the 1980s. The primary school is closed. In his youth, the town had about 10 shepherds. The pay for such work is meager. He earns about the equivalent of $3.35 per day, and it is a 7-day per week job. Mr. Pereira admits his work is a vocation, but that may not be enough to sustain him in the long term. The government’s position is that this is a pilot program, and that changes will eventually be made if overall they find it is worth the investment. Stay tuned to see how this program develops. (Raphael Minder, “Scorched Portugal Turns to the Goat as a Low-Cost Firefighter,” The New York Times (Europe), August 17, 2019)