This is the second of five columns discussing the various withdrawal options for separated Thrift Savings Plan (TSP) participants. Separated TSP participants include civilian federal employees or members of the Uniformed Services who have retired or left federal service or the Uniformed Services, respectively.
Also included in the category of separated participant is a “beneficiary” participant who is a spousal beneficiary of a deceased federal employee/retiree or a deceased Uniformed Service participant, and who established a TSP account in his or her name.
SEE ALSO: TSP Withdrawals Fixed Payment Option
This column will discuss the withdrawal option of TSP payments based on life expectancy. The first column on TSP withdrawal options discussed the fixed payment withdrawal option. This option includes monthly, quarterly or annual payments of a fixed dollar amount.
The TSP has on its web site a publication entitled “Distributions.” The publication presents the various withdrawal options from the TSP including payments based on life expectancy. The publication is not comprehensive and presents no examples.
The following is the information the publication presents on TSP installment payments based on IRS life expectancy tables:
“You can have us compute your installments based on IRS life expectancy tables. (See Glossary of Terms on page 14). Your initial installments amounts will be based on your age and your account balance at the time of the first installment. Life expectancy installment amounts are calculated using your entire account balance even if you choose to take your distributions from your Roth balance first or your traditional balance first.
(See “traditional, Roth or Both” on page 6). Each January, we will recalculate the amount of your installment. The recalculation will be based on your age and your account balance at the end of the preceding year. We will also recalculate if you roll over money to your TSP account or take an additional distribution from it. In that case, the recalculation will take place on the first business day following the month of the transaction.”
The following are two comments with respect to the TSP statement on installment payments based on life expectancy:
1. There are two IRS single life expectancy tables and one IRS joint and last survivor life expectancy tables. Each of these tables can be viewed in Appendix B of IRS Publication 590-B (Distributions from Individual Retirement Arrangements). The TSP is not explicit in stating which table is used in the computation of the payment based on a “single life expectancy.”
One table is a single life expectancy table for all ages and the other single life expectancy table is the IRS’ Uniform Lifetime table used to compute lifetime required minimum distributions (RMDs).
2. One helpful learning tool lacking in the TSP “Distribution” publication are actual examples. To help TSP participants better understand how installment payments based on life expectancy work, an example is presented here in which a TSP participant is requesting payments based on life expectancy:
About one month after retiring from federal service, Murray requested online (using Form TSP-99: “Withdrawal Request for Separated and Beneficiary Participants – Civilians”) that his entire TSP account, consisting of $500,000 in the traditional TSP and $100,000 in the Roth TSP, be withdrawn via monthly payments based on life expectancy.
TSP computes Murray’s monthly payments for the year 2020 based on his TSP account balance as of December 31,2019 and Murray’s single life expectancy (age 70 during the year 2020) from the IRS’ single life expectancy table (Table 1 in IRS Publication 590-B; see below a reproduction of a portion of that table).
Monthly payments will be computed based on the account balance on the previous December 31 and Murray’s new life expectancy.
For 2020: Murray’s annual payment is computed:
$600,000 (total account balance as of 12/31/2019)/18.8 (life expectancy factor)
= $31,915 (annual payment)
= $2,660 (monthly payment)
Murray’s annual and monthly payments for the years 2020 – 2023, based on life expectancy are summarized in the following table:
Some observations from the table:
1. As Murray gets older, the life expectancy factor decreases.
2. Murray’s $600,000 account balance fluctuates through the period 2020 – 2023. The reason for the fluctuation is that while monthly withdrawals are made throughout the period, the TSP funds remaining in the account are accruing earnings at a faster or at a slower rate compared to the annual percentage withdrawal rate.
3. If Murray is uneasy with the annual fluctuations in his payments, he can switch to fixed installment payments. For example, because of high inflation Murray may need more in monthly payments rather than less in order to pay his monthly bills. With the fixed installments, Murray can change the amount he needs to withdraw annually.
The only restriction in fixed payments is that once Murray reaches his required beginning date (the date he must receive a TSP required minimum distribution which is when Murray is age 72), the amount that Murray withdraws each year must be at least equal to his TSP RMD. Note that if Murray continues to receive based on life expectancy (which are determined using Table 1 of Appendix B in IRS Publication 590-B), the annual payments are more than the TSP RMD amount.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER®, Chartered Life Underwriter, Chartered Financial Consultant, Registered Health Underwriter and Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019