Understanding TSP Required Minimum Distribution Rules for Separated and Retired TSP Participants

This column discusses the required minimum distribution (RMD) rules that apply to separated Thrift Savings Plan (TSP) participants.

Note that there are different RMD rules for a beneficiary TSP participant account. A beneficiary account is a TSP account inherited from a deceased TSP participant by his or her spouse. Beneficiary TSP participant RMD rules is discussed in this column.

What is a Required Minimum Distribution (RMD)

It is important to first discuss what an RMD is.

The Internal Revenue Code (IRC) requires that a TSP participant who has separated or retired from federal service to begin receiving distributions from his or her TSP account in the calendar year the participant becomes age 70.5 (if the participant was born before July 1, 1949) or in the calendar year the participant becomes age 72 (if the participant was born after June 30, 1949).

A separated TSP participant’s entire TSP account – that includes both the traditional and the Roth TSP accounts – is subject to TSP RMD. As will be explained below, the TSP will calculate a participant’s RMD each year based on the participant’s age, prior end-of year TSP account balance, and the IRS’ Uniform Lifetime Expectancy Table.

Deadlines for Receiving TSP RMDs

The first year a separated TSP participant is age 72 is called the participant’s “first distribution calendar year”. If the separated TSP participant does not withdraw enough to meet the requirement during his or her first distribution year, the TSP is required to disburse the first RMD to the participant by April 1 of the following year.

That April 1 is called the TSP RMD “required beginning date” and it happens during the participant’s second distribution calendar year. For administration purposes, the TSP will issue this RMD on March 1 (if a weekday) or the last business day before March 1 of the second distribution calendar year. The separated TSP participant’s deadline for the second distribution calendar is December 31 of that same year. The TSP will then send the participant’s TSP RMD for the second distribution calendar year in early December of the same year. That means two TSP RMDs will be sent in the second distribution calendar year. In subsequent years, the TSP will send the year’s RMD in early December. Only one TSP RMD will therefore be sent in subsequent years.

Making Sure a Separated TSP Participant Receives the Annual TSP RMD

A separated TSP participant can fully or partly satisfy his or her annual TSP RMD with any type of withdrawal the separated participant chooses. IF the separated participant does not make any withdrawals or if the amount of the withdrawals fall short of the required amount, the TSP will automatically send the separated TSP participant the amount that is required sometime in early December.

The following discussion explains the different rules that apply during the separated TSP participant’s first distribution calendar year and in the second and subsequent distribution calendar years. The discussion also presents how different withdrawal methods may have different effects on the participant’s TSP RMD. The scenarios described below assume that the separated TSP participant’s action taken in the first distribution calendar year is the first withdrawal taken and that the participant has not withdrawn his or her total TSP account balance. A total TSP account withdrawal automatically satisfies the TSP RMD.

Procedures for Meeting the TSP RMD During the First Distribution Year

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1. Installment payments.

A separated TSP participant’s installment payments will count towards satisfying his or her RMD. If the installment payments combined with any subsequent withdrawals the participant makes does not meet the first year TSP RMD by March 1 of the year following the year the participant becomes age 72, the TSP will automatically send the participant a supplemental payment on March 1 (or the last business day in February if March 1 falls on a Saturday or Sunday) of the following year in order to satisfy the participant’s first year TSP RMD.

The following example illustrates:

Example 1. Elizabeth, a retired federal employee, becomes age 72 on August 31, 2021. Her calculated TSP RMD for the year 2021 is $10,000. Elizabeth decides to start making TSP installment payments in September 2021. She notifies the TSP that starting in September 2021, $750 is to be withdrawn from her TSP account. For the period Sept. 1, 2021 through Feb. 28, 2022, (six months), Elizabeth would have withdrawn from her TSP account six months times $750 or $4,500. In March 2022 the TSP will send Elizabeth a check for $10,000 less $4,500, or $5,500 in order for Elizabeth to satisfy her first distribution year TSP RMD.

2. Single withdrawal.

If a separated TSP participant makes a single withdrawal at least the amount of the first year TSP RMD, then the first year TSP RMD will have been met. If the single withdrawal, together with any subsequent withdrawals the participant makes in the first year does not meet the first year TSP RMD by March 1 of the following year, the TSP will send the participant a supplemental payment in March of the following year in order to meet the first year TSP RMD by April 1 of that year.

3. Annuity purchase.

If a separated TSP participant purchases an annuity, then the TSP will send the participant a check for the full first year TSP RMD before the TSP purchases the annuity on behalf of the separated participant.

It is important to note that if a separated TSP participant elects to purchase a TSP annuity and uses either or both an installment payment and a single withdrawal, the TSP must send the participant a check for the full first year TSP RMD before processing any part of the participant’s withdrawal request.

Procedures for Meeting the TSP RMD Requirements During the Second and Subsequent Distribution Calendar Year

Since the deadline for the first TSP RMD distribution year is April 1 of the second distribution year, the TSP will continue to follow the rules explained above until the first year’s TSP RMD has been satisfied. Withdrawals made in the second year will not start counting toward the second year TSP RMD until the first year TSP RMD is satisfied. If, on March 1 the first year TSP RMD is not satisfied, the TSP will send the separated TSP participant a check for what remains of the first year TSP RMD. After that, all TSP withdrawals will count towards the second year TSP RMD using the same rules described above in the first distribution calendar year with two exceptions:

December 31 deadline.

After the TSP RMD first distribution year. the deadline for a given year’s RMD is December 31 of that same year. That means if a separated TSP participant has not satisfied the year’s TSP RMD by December 1 of that year, the TSP will send the participant a check for the necessary amount in December in order to fulfill that years’ TSP RMD requirement

Treatment of annuity purchases.

The rule about the TSP sending a check before processing any of a separated participant’s withdrawal request that includes an annuity purchase no longer applies after the participant’s first year TSP RMD has been satisfied. Any amount of a separated TSP participant’s account used to purchase a TSP annuity will satisfy a portion of the TSP RMD for that year in the following way: the portion of the TSP account used to purchase the annuity is the same percentage of the RMD that the purchase will satisfy. For example, if the separated participant chooses to purchase a TSP annuity with 20 percent of the TSP account balance, then 20 percent of the participant’s TSP RMD will be satisfied.

The same rules apply for the years that follow except that withdrawals taken during each month of a year count toward that year’s TSP RMD.

Some Examples of How the TSP RMD is Calculated

As explained above, the TSP RMD is calculated using a separated TSP participant’s age (and subsequent life expectancy) and prior year-end account balance. The latter includes both the traditional TSP and Roth TSP account balances. The IRS’ Uniform Lifetime Table (found in 2020 IRS Publication 590-B page 63 www.irs.gov/pub/irs-pdf/p590b.pdf) is used for life expectancy.

The following two examples will illustrate the calculation of the TSP RMD.

Example 2. Jason, age 73 during 2021, is a separated TSP participant who must take a TSP RMD during the year 2021(his third TSP RMD). Jason’s TSP account balance as of 12/31/2020 was $800,000 in his traditional TSP and $200,000 in his Roth TSP. The TSP computes his 2021 TSP RMD as follows:

$1,000,000 (total TSP account balance)/24.7 (Jason’s life expectancy age 73 From Uniform Lifetime Table)
equals $40,486

Example 3. Sharon, age 73, is a separated TSP participant who takes a TSP RMD during 2021 (not her first RMD. Sharon’s TSP account consists entirely of traditional TSP with an account balance of $800,000 as of 12/31/2020. The TSP computes her 2021 TSP RMD as follows:

$800,000 (total TSP account balance)/24.7 (Sharon’s life expectancy age 73 Uniform Lifetime Table)
equals $32,389

Suggestions to Reduce the Amount of the TSP RMD

Note that in examples 2 and 3 above, Jason and Sharon are both age 73 and had to take a different amount of TSP RMD during 2021. Jason’s TSP RMD for 2021 is almost $8,100 more than Sharon’s TSP RMD during 2021. The reason for the $8,100 difference is that Jason had $200,000 more in his total TSP account balance as of Dec. 31, 2020. Note the following:

$200,000/24.7 equals $8,097

The $200,000 is the balance in Jason’s Roth TSP account balance as of 12/31/2020.

It is important for TSP participants to understand that they have the option of directly transferring their entire Roth TSP account to a Roth IRA. In so doing, they will remove the Roth TSP from the calculation of the TSP RMD. In addition, a Roth IRA is the only type of qualified retirement account or IRA in which the Roth IRA owner is not subject to RMD. Ideally, the transfer of a separated TSP participant’s Roth TSP account will be directly transferred to a Roth IRA before December 31 of the year prior to the year a separated TSP participant will be subject to the TSP RMD rules. This will remove the Roth TSP account from the calculation of the TSP RMD in the next and subsequent calendar years.

For those separated TSP participants who do not have a Roth TSP account and who would like to reduce the amount of their TSP RMDs, there is something they can do. They can directly transfer their traditional TSP account to Roth IRAs. While this is a taxable event (full federal and state income taxes if applicable must be paid in full in the year of transfer of the traditional TSP to a Roth IRA), the transfer will reduce the traditional TSP account balance and therefore should reduce future TSP RMDs. Separated TSP participants may want to consider these transfers a few years in advance of their TSP required beginning date. In so doing, they can pay the taxes over a period of time rather than more in taxes should they wait until the last year or two before transferring, thereby having to transfer more and paying more in taxes in these one or two years rather than spreading the tax liability over a few years.

Finally, TSP RMDs cannot be transferred to any type of IRA or to an eligible employer plan. If a separated TSP participant chooses to transfer all or part of a withdrawal in which the participant has a TSP RMD, the TSP is required to make sure the participant satisfies the TSP RMD before any transfer takes place.

The TSP is required to withhold 10 percent in federal income tax from all TSP RMD unless the separated TSP participant either:

(1) waives withholding or

(2) requests withholding of more than 10 percent. They may do so by filling out and submitting Form W4-P (Withholding Certificate for Pension or Annuity Payments). If the separated TSP participant lives in a state which has an income tax, the participant is responsible for paying any state income taxes on TSP RMDs. The TSP does not withhold any state and local income taxes.