Understanding TSP Withdrawal Options -- Part V:
Required Minimum Distributions
One of the advantages of contributing to a defined contribution retirement plan such as the Thrift Savings Plan (TSP) is the potential tax-deferred growth of both contributions and earnings. An employee who retires from or leaves federal service is not required to withdraw anything from his or her TSP account until he or she becomes age 70.5. But during the year the TSP participant becomes age 70.5 and every year thereafter, the TSP participant is required to make a required minimum distribution (RMD). This column discusses the RMD rules with respect to the TSP and how the RMD is computed.
The Internal Revenue Code (IRC) requires a TSP participant to receive a portion of his or her TSP account -- the RMD - no later than April 1 of the year following the year the participant becomes age 70.5. This is known as the first distribution calendar year. If a participant does not withdraw his or her account balance or begin receiving payments from the account during the first distribution calendar year or within the first two months of the following calendar year, the TSP is required to make the RMD for the participant by April 1st of the following year (the second distribution calendar year). For administrative purposes, the TSP will issue the RMD on March 1st or the last business day before March 1st of the second distribution calendar year.
Each year the TSP calculates a participant's RMD based on the prior year ending account balance and a life expectancy factor based on the participant's age, using the Treasury Department's Uniform Lifetime Table (published in the Federal Register on April 17, 2002) or the joint life expectancy table (found in IRS Publication 590 and may be downloaded from http://www.irs.gov/pub/irs-pdf/p590.pdf). The Uniform Lifetime Table and a portion of the joint life expectancy table are reproduced below.
Table 1. Uniform Lifetime Table for use in calculating the RMD of a TSP participant, age 70 and older, and whose beneficiary is a spouse whose age is within 10 years of the TSP participant's age, or who has a non-spousal beneficiary (no matter the age difference between the TSP participant and the non-spousal beneficiary), or who has not designated a beneficiary.
Table 2. Joint Life Expectancy Table*. For use in calculating the RMD of a TSP account owner age 70 and older and whose beneficiary is a spouse in which there is more than a 10 year age difference between the spouses.
The following examples illustrate:
Example 1. Jim, a federal retiree became age 70.5 on Aug. 15, 2010. His beneficiary is his wife Joan who is age 68. Jim must make his first RMD from his TSP account no later than April 1, 2011. His account balance as of Dec. 31, 2009 was $185,000. Using Table I (since Joan is within 10 years of Jim's age) Jim's RMD for 2010 was calculated as:
$185,000/27.4 = $6,751.82
Example 2. Carol, a federal retiree became age 70.5 on Aug. 30, 2010. Carol is married and her husband Alex is age 55. Carol must make her first RMD from her TSP account no later than April 1, 2011. Her account balance as of Dec. 31, 2009 was $375,000. Using Table 2 (since Alex is more than 10 years younger than Carol), Carol's RMD for 2010 was calculated as:
$375,000/31.1 = $12,057.88
For participants who make their withdrawal during the first distribution calendar year, the following will occur:
- if the entire account is withdrawn as a single payment, the RMD is included in that payment.
- if the entire account is withdrawn as a series of monthly payments, the monthly payments will count towards the RMD. If necessary, the TSP will send the participant a supplementary payment by March 1 of the following year to satisfy the RMD.
- if the entire account is withdrawn in the form of a TSP annuity, the annuity payment will satisfy the RMD.
- if a "mixed" withdrawal -- an annuity and a single payment, an annuity and monthly payments, or a combination of all three -- is requested, the TSP will send a separate check before the annuity is purchased plus a check for the single payment and another check for the monthly payments. This will satisfy the RMD.
- if a partial withdrawal is requested, the payment will be used to satisfy the RMD. However, if the withdrawal is not sufficient to satisfy the RMD, then the participant has until the following March 1 to withdraw any remaining RMD for the first distribution calendar year.
During the second distribution calendar year, the following will occur if the withdrawal is made after January 1 and before March 1:
- if the entire account is withdrawn as a single payment, the participant's RMD for the first and second distribution calendar year will be included in that payment.
- if the entire account balance is withdrawn in a series of fixed monthly payments, each monthly payment will be used to satisfy the RMD until the total amount of that distribution has been satisfied for that year. Note if the first distribution calendar year RMD is not satisfied before March 1 of the second distribution calendar year, a supplemental check will be mailed to the participant to satisfy the remaining RMD.
- if the entire account is used to purchase a TSP annuity, the annuity purchase will satisfy the RMD.
- if a partial withdrawal is requested, then the partial payment will be used to satisfy the participant's first distribution calendar year's RMD. If that amount is not sufficient then the participant's full withdrawal election -- which must be completed by April 1 --will be used to satisfy both the first and second calendar years RMD. If the full withdrawal is not completed by April 1 of the second distribution calendar year, then the remaining account balance will be forfeited to the TSP.
How is the second distribution year RMD calculated?
To calculate this amount, the TSP participant will need to find out his or her TSP account as of Dec. 31 of the first distribution calendar year and divide that number by the appropriate number from Table 1 or Table 2. The following examples illustrate:
Example 3. Same information as in example 1 except that it is the second distribution year. Jim's TSP account balance as of Dec. 31, 2010 was $172,000 and the factor from Table 1 (Jim is now age 71) is 26.5. Jim's RMD for the year 2011 is calculated as:
$172,000/26.5 = $6,490.57
Note that Jim must receive from his TSP account - no later than Dec. 31, 2011- a distribution of at least $6,490.57.
Example 4. Same information as in example 2 except it is the second distribution year. Carol's TSP account balance as of Dec.31, 2010 was $354,000 and the factor from Table 2 (Carol is now age 71 and her husband is age 56) is 30.1. Carol's RMD for the year 2011 is calculated as:
$354,000/30.1 = $11,760.80
Note that Carol must receive from her TSP account - no later than Dec. 31, 2011- a distribution of at least $11,760.80.
Note that in both examples the RMD for the second distribution year decreased as a result of the decrease in the TSP account balance at the end of the first distribution year. But the second and subsequent year RMD can increase because the TSP account balance at the end of the year can increase. Calculations of the participant's RMD for subsequent years are done in the same manner.
What happens if the TSP participant dies before all of the TSP account is distributed? In that case, the beneficiary must receive an annual RMD on December 31 of every year following the year of the participant's death. For the year of death, the RMD must be made by year-end and will be based on the prior year-end TSP account balance and appropriate factor from either Table 1 or Table 2 above (based on the deceased participant's age in the year of death). Subsequent year RMDs will be calculated in the same manner.
RMDs cannot be transferred to a traditional IRA, eligible employer retirement plan or to a Roth IRA. Each year, the TSP will calculate the RMD for all retired or departed TSP participants age 70.5 and older and will mail RMD information to the TSP participants. TSP participants age 70.5 and older should therefore make sure the TSP has the participant's current address.
Payments that are made out to the TSP participant - either by check or through direct deposit - are subject to mandatory federal income tax withholding of 20 percent. A TSP participant may request additional federal income tax withholding by filling out and submitting to the TSP form W-4P.
TSP participants who live in states that have state and local income taxes and tax TSP withdrawals are responsible for paying any state income taxes due. State income taxes may be paid either through state income withholding from another source -- such as wages or a pension, or by paying quarterly estimated state incomes taxes. For more information about TSP withdrawals and taxes, a tax professional should be consulted.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner, 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. He is an instructor at federal employee retirement seminars throughout the country and writes numerous columns and books on federal employee benefits.