Understanding TSP Withdrawal Options -
Part I: Partial Withdrawal
After leaving or retiring from federal service, Thrift Savings Plan (TSP) participants should know their options with respect to what they can do with their TSP accounts.
Given the likelihood that today's and future retirees could live into their 90's and later, there are a number of questions that soon-to-be retirees need to ask themselves before withdrawing their TSP accounts. Among the important questions that should be asked:
(1) How much will things cost during their retirement
(2) Will there be sufficient income during retirement to cover all of the retiree and family's expenses; and will their retirement savings last throughout their retirement?
- additional sources of pension income (CSRS or FERS annuity, military pension, IRAs and Social Security);
- whether or not there will be a mortgage after retirement;
- whether or not the retiree will be working after retiring from federal service; and
- will the retiree relocate to an area of the country or world in which expenses will be significantly higher or lower.
Every individual's withdrawal choices will be based on different circumstances. The important thing is for retirees to make well informed decisions. These columns will attempt to help TSP participants make these decisions and will discuss the advantages and disadvantages of each withdrawal option.
This column discusses the option of making a one-time partial withdrawal from the TSP.
Participants who have separated from federal service can make a one-time withdrawal of part of their vested account balance. The vested account balance includes: (1) employee contributions and rollovers from traditional IRAs and qualified retirement plans; (2) earnings on these contributions and rollovers; (3) all agency matching contributions for FERS employees and earnings on the matching contributions; and (4) the agency automatic one percent of an employee's gross pay for FERS employees who have at least three years of service from the start of the first pay period in which they made their first TSP contribution.
Form TSP-77 (downloadable from http://www.tsp.gov) is used to request a partial TSP withdrawal. The partial withdrawal must be at least $1,000. A departed employee is eligible to make a partial withdrawal provided that the individual did not request an "age-based" in-service withdrawal at age 59.5 or older from his or her TSP account while employed in federal service or as a member of the Uniformed Services.
A departed employee is not eligible for a partial withdrawal if:
- the annuitant's vested account balance is less than $1,000 the minimum amount for a partial withdrawal,
- the annuitant had previously made a partial withdrawal after separating from federal service; and
- the departed employee expects to be rehired after a break in service of less than 31 days. An employee must be separated from federal service for 31 or more days in order to be eligible for a post-employment withdrawal.
There are two ways to request a partial withdrawal: (1) by completing form TSP-77 and mailing it to the TSP; or (2) by using the TSP website at http://www.tsp.gov to begin the withdrawal request. For security reason, the request cannot be completed on the TSP Web site. Any individual requesting the partial withdrawal through the TSP Web site will be asked to print out the partially completed withdrawal request at the end of the online session. The form should be reviewed, completed, signed and mailed or faxed to the TSP (see address and fax telephone number below), along with any other required documentation. Any prefilled information should not be altered before mailing.
Some specific information when filling out Form TSP-77:
1. An applicant must provide his or her name, TSP account number (not the individual's Social Security Number), address, marital status and spouse's name if married.
2. Spouse's rights apply to all partial withdrawals from a TSP account as summarized in the following table.
For a married CSRS or CSRS Offset annuitant, the individual must complete the information about the participant spouse's address in order for the spouse to be notified of the partial withdrawal. In case the spouse's whereabouts is unknown, then form TSP-16, Exception to Spousal Requirements, must be completed and submitted.
3. A TSP participant may withdraw $1,000 or more. A whole dollar amount (no cents) (for example, $2,275) should be requested. If the vested balance in the account is less than $1,000 the form TSP-70, Request for a Full Withdrawal from a TSP account, should be used.
4. A TSP participant may elect to transfer all or any portion of the partial withdrawal payment to a traditional IRA, to an eligible employer retirement plan, or to a Roth IRA. If the partial withdrawal is transferred to a Roth IRA, then federal income (and, if applicable, state income) taxes must be paid on the amount transferred and in the year of transfer. Before making a transfer to a Roth IRA, a TSP participant is strongly encouraged to consult with a tax professional in order to be fully aware of the tax consequences of transferring money from the TSP to a Roth IRA.
5. Partial TSP withdrawals that are not transferred directly to a traditional IRA, eligible employer retirement plan or to a Roth IRA are subject to mandatory 20 percent federal income tax withholding. For example, a TSP participant who requests a partial TSP withdrawal of $2,000 will receive $1,600 as $400 (20 percent of $2,000) for federal income taxes will be automatically withheld.
6. Upon completing the partial withdrawal request through form TSP-77, a TSP participant should make a copy of form TSP-77. The original should be mailed to:
Thrift Savings Plan
P.O. Box 385021
Birmingham, AL 35238
or faxed to: 1-866-817-5023
Why would a TSP participant want to make a partial withdrawal?
There are a few possible reasons.
First, sometime during retirement a retired TSP participant has an emergency and is in sudden need for some cash. Rather than withdrawing funds from an IRA in which there could be an early withdrawal penalty, the participant instead taps into his or her TSP account. Note that in the case of a traditional IRA, the IRA owner must be age 59.5 or older to avoid the 10 percent early withdrawal penalty on pre-taxed monies (deductible contributions and earnings) when requesting a traditional IRA withdrawal. On the other hand, a TSP participant who is 55 or older sometime during or after the TSP participant retires or leaves federal service who can make penalty-free (no 10 percent early withdrawal penalty) withdrawals from his or her TSP account.
A second possible reason for making a partial withdrawal is a TSP participant who desires to add to an existing Roth IRA. The participant may be able to do so only by transferring funds from the TSP because he or she: (1) has no earned income and is therefore ineligible to contribute to any type of IRA; (2) has, or through a spouse has, earned income but expects to have adjusted gross income (AGI) for the year that exceeds the Roth IRA AGI contribution limits and is therefore ineligible to contribute directly to a Roth IRA and instead transfers funds to the Roth IRA through the TSP even though the transfer has tax consequences. While federal and state income taxes have to be paid in the year of transfer, it may turn out that in the year of transfer the TSP participant could be in a lower marginal tax bracket compared to the expected marginal tax bracket in future years. For example, the participant may have retired year last and in the current year is receiving less income -- perhaps only a CSRS or FERS annuity - and is subsequently in a lower marginal tax bracket. By paying the tax due in the current year, the participant will owe no tax due on any future withdrawals from the Roth IRA. This will be especially important if the participant expects to be in a higher marginal tax bracket in the future. Many tax professionals do in fact expect tax rates to increase in the future, perhaps starting as early as Jan. 1, 2013.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Financial Consultant, Chartered Life Underwriter, Registered Health Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in Silver Spring, MD -- and the owner of EZ Accounting and Financial Services, an accounting, tax preparation and financial planning firm also located in Silver Spring, MD. Zurndorfer is also is an instructor at federal employee retirement seminars throughout the country and writes numerous columns and books on federal employee benefits.