Understanding Your TSP Withdrawal Options in Retirement
Now that you have spent a lifetime saving for retirement, how will you access your Thrift Savings Plan (TSP) funds?
There are three main options for TSP withdrawals in
1. Leave the funds in your TSP
Funds may be left in your TSP until April 1st of the year following the year
you turn age 70 ½, when Required Minimum Distributions (RMDs) must begin. For
example: Tim turned 70 ½ this year. His 2012 year end TSP balance is $100,000
and his first RMD will be $3,650. To calculate your own RMD payment for TSP or
IRAs, click here. All subsequent RMDs must be taken by December 31 of each year.
2. Partial Withdrawal
You may take a partial withdrawal of at least $1,000 from your TSP account.
This is a one-time only option. If you have made a previous partial withdrawal
or an in-service age-based withdrawal, you may not choose this option.
3. Full Withdrawal
There are three ways to fully withdraw your funds from the TSP. You do not have to select only one; you may elect any combination of all three options.
This is a lump sum payment. You may have it sent directly to you (beware of taxes!) or transferred into an IRA, 401(k), etc.
You may select a certain dollar amount you would like to receive each month from your TSP. You can also let TSP choose the amount for you based on your life expectancy. You may change the dollar amount once per year. If you decide you no longer want monthly payments you may take a lump sum payout.
This provides guaranteed monthly payments for your lifetime. You must annuitize at least $3,500. There are many options available under the life annuity, consult a professional before choosing this option.
When withdrawing funds from the TSP, there
is generally a mandatory Federal tax withholding of 20%. This withholding does
not apply when transferring funds to an IRA, 401(k), etc. If you owe more or
less taxes on the amount withdrawn from your TSP, it will be settled when you
file your taxes for the year.
Important Note: If you retire in the year you reach age 55 or later, you can withdraw from your TSP before age 59 ½ and avoid the 10% penalty. The 10% penalty will apply on IRA withdrawals before
age 59 ½.
While the TSP provides a strong platform for saving towards retirement, the restrictive nature of the withdrawal options often leads retirees to move funds to IRAs. The IRA can allow for full flexibility of distributions, tax withholding and planning, and investment options.
About the Author
Brandon S. Christy, CPA, PFS, is president of Christy Capital Management (CCM) and founder of the Retirement Benefits Institute (RBI). RBI has provided benefits and retirement training sessions to thousands of federal employees. For a schedule of upcoming no-cost training, click here. CCM offers retirement analyses for federal employees. For a no-cost consultation or other planning needs, call 866-331-7749 or click here.
The information contained in this article should not be used in any actual transaction without the advice and guidance of a tax or financial professional who is familiar with all the relevant facts. The information contained here is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals' specific circumstances or needs and may require consideration of other matters.