5 Mistakes to Avoid When Making TSP Required Minimum Distributions

Many federal employees will be retiring over the next 10 years. One to two months after they retire, a federal retiree receives the first of lifetime monthly CSRS or FERS annuity checks. Some federal retirees elect to start receiving their Social Security monthly retirement benefit starting as early as age 62. Depending on the age they retire, some retirees elect to immediately make Thrift Savings Plan (TSP) withdrawals. But there are a number of federal retirees who elect to delay making TSP withdrawals until their “required beginning date” (RBD). The RBD is the date a TSP participant must take his or her first TSP required minimum distribution (RMD).

Until Jan 1, 2020, an individual’s RBD was April 1 following the year the individual becomes age 70.5. With the passage of the SECURE Act in December 2019 followed by the passage of SECURE Act 2.0 in December 2022, the RBD changed. For individuals born before July 1,1949, the RBD remains April 1 following the year the individual becomes age 70.5. For individuals born after June 30,1949 and before January 1,1950, the RBD is April 1 following the year the individual becomes age 72. For individuals born after December 31,1950 and before January 1,1960, the RBD is April 1 following the year the individual becomes age 73. Finally, for individuals born after December 31,1959, the RBD is April 1 following the year the individual becomes age 75.

The following table summarizes the TSP “RMD age” (the age at which a retired federal employee takes his or her first TSP RMD and continuing every year thereafter until the retiree dies) according to birthdate:

The TSP is subject to the RMD rules in which a federal retiree (annuitant) with a TSP account and who has reached his or her RBD must take a TSP RMD each year. Annuitants who have reached their RBD are reminded that the TSP will mail them a letter each January reminding them of the amount of their RMD for that calendar year. As a service to TSP participants (who have retired from federal service and reached their RBD), the TSP calculates a TSP participant’s RMD every year. The TSP also makes sure that the annuitant takes his or her TSP RMD by early December of that year in order to avoid the IRS’ “excess accumulation” penalty.

It is important for federal employees and annuitants to understand the RMD rules because of the hefty IRS penalties for failing to receive the correct amount of the RMD. The TSP is not the only retirement plan in which participants are subject to the RMD rules. Qualified retirement plans (401(k(, 403(b) and 457 retirement plans) and traditional IRAs are subject to the RMD rules.

This column discusses five common RMD mistakes to avoid with respect to TSP RMDs. While the topic of RMD is one of the simplest areas in the Internal Revenue Code to understand, RMDs unfortunately seem to generate many mistakes. Also presented are RMD planning opportunities for employees and annuitants who own multiple retirement accounts including traditional IRAs and qualified retirement accounts that they had previously participated in.

Mistake #1: Deferring Other Qualified Retirement Plan and Traditional IRA RMDs Too Late

A federal employee who continues in federal service past his or her TSP RBD is not required to take his or her first TSP RMD until April 1 following the year he or she retires from federal service. However, if these same employees own other retirement accounts that they previously participated (such as 401(k) or 403(b) retirement plans and/or traditional IRAs), then they must take separate RMDs from each of these retirement accounts starting no later than the April 1 following the year they reach their RBD age. The following example illustrates:

Example 1. Chris, age 72, is a federal employee and has a TSP account. Chris intends to retire from federal service on Dec.31, 2026 when he will be 74 years old. Chris also owns a traditional IRA and currently has several thousands of dollars in his 401(k)-retirement plan that he previously contributed to when he worked for a private company. Starting in the year 2025 when Chris becomes age 73, Chris will have to take an RMD from both his traditional IRA and from his 401(k)- retirement plan. If Chris were to transfer his traditional IRA and his 401(k) retirement plan assets into his traditional TSP (this is done online using Form TSP-60) before the year Chris becomes age 73, then he will not have to take RMDs from his traditional IRA and 401(k) plan when Chris becomes age 73. This is because these retirement assets would be contained within Chris’ traditional TSP account. Note that as long as Chris continues working in federal service, he can defer taking his first TSP RMD until April 1 following the year Chris retires from federal service. Since Chris intends to retire on Dec.31,2026, he can defer taking his first TSP RMD until Apr.1, 2027.

An important planning point with respect to direct rollovers of traditional IRAs and qualified retirement plans into the TSP. Timing is the key for transferring traditional IRA and qualified retirement plan assets into the TSP. No later than Dec. 30 of the year preceding the year that the TSP participant reaches his or her RBD should the traditional IRA and qualified retirement plan assets be transferred into the traditional TSP. This is because the traditional IRA and the qualified retirement plan first year RMD is based on the fair market value of the traditional IRA and the qualified retirement plan as of December 31 of the year preceding the year the TSP participant reaches his or her RBD. If the fair market value of each retirement account is $0 on December 31 (as it will be if the assets of each retirement would be if they were previously transferred to the TSP prior to December 31) then the first year RMD is $0.

Mistake #2: Withdrawing from the Wrong Accounts to Satisfy the RMD

Federal employees or annuitants who own multiple retirement accounts (for example – the TSP, traditional IRAs and a 401(k)-retirement account) cannot choose which retirement account to take an RMD in a given year. Upon reaching his or her RBD, an individual must take an RMD from each retirement account he or she owns. In Chris’ case in Example 1, unless he transfers his traditional IRA and 401(k) retirement accounts into his TSP, upon retiring from federal service Chris will be required to take each year a separate TSP RMD, traditional IRA RMD and a 401(k)-retirement plan RMD. Each RMD is computed separately and subject to federal and state income taxes.

Note that inherited (“death”) IRAs are not included in this aggregation of retirement accounts. An individual cannot mix inherited IRAs with personal IRAs for the purpose of fulfilling RMD requirements. Inherited IRAs have their own RMD rules. Also, Roth IRA owners are not subject to RMD.

Mistake #3. Not Taking Advantage of Qualified Charitable Distributions

For federal annuitants aged 70.5 and older who have both the TSP and traditional IRAs, qualified charitable distributions (QCDs) can be especially useful and result in federal and state income tax savings. QCDs became a permanent part of the Internal Revenue Code at the end of 2015. With a QCD, an individual aged 70.5 and older can satisfy his or her traditional IRA RMD by transferring the RMD amount directly from his or her traditional IRA to a qualified charitable organization. While the individual does not get a charitable donation tax deduction that year for the QCD, the amount distributed from the traditional IRA will not be included in the individual’s taxable income that year, thereby resulting in federal and state income tax savings. During 2024, an individual can make a maximum $105,000 in QCDs to qualifying charitable organizations.

By using the QCD, a TSP participant aged 70.5 and older and who also owns a traditional IRA will have to take only one RMD from his or her TSP account, avoiding having to take an IRA RMD. Note that QCDs cannot be taken from the TSP. Those annuitants who are younger than RMD age may want to start directly rolling over some of their traditional TSP account to a traditional IRA so that by the time they reach their RBD, the size of their traditional TSP has been reduced (thus resulting in smaller TSP RMDs) while their traditional IRA RMD can be satisfied with a QCD.

Mistake #4. Combining RMDs With a Spouse

Married couples own many financial assets including real estate, brokerage accounts, bank and credit union checking accounts and savings jointly (with rights of survivorship). However, retirement accounts are not among these financial assets. Retirement accounts are owned individually. Because of that, individual retirement account responsibility applies to each spouse taking their own RMDs.

Some married couples often miss this distinction, especially because they file their federal and state income tax returns as married filing joint. They wrongly assume wrongly that an RMD taken from one spouse’s retirement account will satisfy the RMD on the other spouse’s retirement account.

For example, suppose there is a married couple in which one spouse is a federal annuitant over age 73 with a TSP account. The other spouse is also over age 73 and owns a traditional IRA. If the spouse who takes his or her traditional IRA RMD as a result of the federal annuitant withdrawing additional funds from his or her TSP account in order to satisfy both spouses’ RMD, the result is a host of IRS tax problems including: (1) The spouse missed taking his or her traditional IRA RMD, resulting in an IRS “excess accumulation” penalty; and (2) The retired federal employee has overdistributed by taking more from his or her account than was necessary. This will result in a larger federal and state liability for the federal retiree. The RMDs fully taxable. A married couple who overdistributes will also pay more Medicare Part B monthly premiums based on the higher income.

Mistake #5. After Reaching RBD, A Federal Annuitant Directly Rolls Over the Entire TSP Account to the Traditional IRA in Order to Avoid TSP RMD

A TSP participant over age 59.5 is allowed to directly rollover his or her any or all of his or her traditional TSP account into a traditional IRA. But if a TSP participant works past his or her RBD, the TSP RMD amount for the year in which the TSP participant retired (due April 1 following the year the TSP participant retired) is not eligible for a direct rollover. The TSP RMD must be taken before the direct rollover before April 1. If the entire traditional TSP account is directly rolled over in the year the TSP participant retires and the traditional IRA custodian accepts the TSP RMD amount directly rolled over together with the rest of the traditional TSP account, action must be taken to remove the TSP RMD amount. Technically, the TSP RMD amount attributed to the traditional represents an “excess contribution” to the traditional IRA. The RMD amount for the traditional TSP must be removed as a return of the “excess contribution” to the IRA (not a normal distribution) and returned to the TSP participant. The penalty for not removing an excess contribution to a traditional IRA is 6 percent of the excess contribution amount. In this case, which amounts to 6 percent of the traditional TSP RMD.

The following example illustrates:

Example 2. Simon, a federal employee, became aged 72 years old on November 1, 2022. Because he was in federal service at the time he reached his RBD (April 1, 2023), Simon was not required to take his first TSP RMD. Simon retired from federal service on March 30,2024 at the age of 73. Simon’s first TSP RMD is due April 1, 2025. His traditional TSP account balance account as of December 31,2023 was $1,250,000. On June 1,2024, Simon requested a direct rollover of his entire traditional TSP to his traditional IRA held at his bank. The bank IRA custodian accepted the entire amount of the traditional TSP rollover.
Simon erred in requesting a direct rollover of his entire traditional TSP account. Simon’s first TSP RMD is due no later than April 1,2025 (April 1 following the year Simon retired). The amount of Simon’s first TSP RMD is equal to:

TSP account balance (as of December 31. 2023)/ IRS Uniform Lifetime Expectancy – age 73)

$1,250,000/26.5 = $47,170

Simon must request from his bank that $47,170 of the direct rollover be directly transferred back to his TSP account. He must do this before December 31,2024 in order to avoid a 6 percent IRS excess contribution penalty (6 percent of $47,170 = $2,830) for 2024. The excess contribution penalty continues every year in which Simon does not rollover the $47,130 to the TSP.