No Lifetime RMDs for Roth TSP Participants: Ramifications for Current and Future Federal Retirees

As discussed in a previous column, the recent passage of SECURE Act 2.0 brings some significant changes to qualified retirement plans (for example, 401(k), 403(b) plans), to the Thrift Savings Plan (TSP), and to traditional IRAs.

Some of these changes took effect January 1, 2023, some of the changes will take effect January 1, 2024, and other changes will take effect in 2025., and later.

Perhaps the most significant change (effective January 1, 2023) is the increase of the required beginning date (RBD). The RBD the deadline for taking a qualified retirement plan (and the TSP) participant’s or a traditional IRA owner’s first required minimum distribution (RMD). SECURE Act 2.0 increased the RBD to April 1st following the year a qualified retirement plan participant and a traditional IRA owner becomes age 73. For TSP participants, depending on when a TSP participant was born the RBD will vary, and is explained below.

The most significant change taking effect on January 1,v2024 resulting from SECURE Act 2.0 passage is that there will be no lifetime RMDs for Roth retirement plans, including the Roth TSP. This column discusses the ramifications of this change to Roth TSP participants who are currently in federal service (and therefore eligible to contribute to the Roth TSP) and federal annuitants who own Roth TSP accounts but are ineligible to contribute to their Roth TSP account.

Current and Future TSP RMD Rules

Under current TSP rules, a TSP participant is required to take his or her first TSP RMD at his or her “required beginning date” (RBD). For TSP participants who were born before July 1, 1949, the RBD is April 1st following the later of the year a TSP participant becomes 70.5 or the year the TSP participant retires from federal service.

For TSP participants who were born after June 30,1949 and before January 1, 1951, the RBD is April 1st following the later of the year of TSP a participant becomes 72 or the year the TSP participant retires from federal service. With the passage of the SECURE Act 2.0, the RBD for TSP participants born after December 31, 1950 and before January 1,1960 will be April 1st following the later of year a TSP participant becomes age 73 or the year the TSP participant retires from federal service. Finally, for TSP participants born after December 31, 1959, the RBD will be April 1st following the later of the year the TSP participant becomes age 75 or the year the TSP participant retires from federal service.

Finally, for TSP participants born after December 31, 1957, the RBD will be April 1st following the later of the year the TSP participant becomes age 75 or the year the TSP participant retires from federal service.

It needs to be emphasized that federal annuitants who have already reached their RBD and who are taking their TSP RMDs will continue to do so. That means that a federal annuitant born before January 1, 1951 must take his or her TSP RMD for the year 2023 in the same manner as he or she took the RMD during 2021 and 2022.

At this time (during January 2023) the TSP is calculating those annuitants’ 2023 RMDs using the combined balance of the TSP participant’s traditional TSP account and Roth TSP account as of December 31, 2022. In accordance with the SECURE Act 2.0, effective January 1, 2024, the TSP will no longer use the balance in a TSP participant’s Roth TSP when calculating a TSP participant’s annual TSP RMD.

How the Inclusion of the Roth TSP is Resulting in a Larger TSP RMD That is Required

As will be illustrated in the following example, the inclusion of a TSP participant’s Roth TSP balance is resulting in a larger TSP RMD that is required. It is important to mention that the TSP allows Roth TSP participants to rollover their entire Roth TSP account to a Roth IRA. The Roth IRA is the only type of retirement account in which lifetime RMDs do not have to be made. A Roth IRA account owner has no RBD. Consider the following example:

Example 1. Margaret, age 73 during the year 2022, is a retired federal employee. She retired in 2020 with both a traditional TSP account and a Roth TSP account. For the year 2022, Margaret had to take her TSP RMD. Her 2022 TSP RMD was computed by the TSP. Margaret was notified by the TSP in January 2022 what her 2022 TSP was, calculated as follows:

Note that had Margaret rolled over her entire Roth TSP account to a Roth IRA before December 31, 2021, then her TSP balance on December 31,2021 would have consisted entirely of Margaret’s traditional TSP. In that case, Margaret’s 2022 TSP RMD would have been computed as:

$650,000 (traditional TSP balance as of 12/31/2021)/26.5 = $24,528

Margaret’s 2022 TSP RMD of $24,528 was computed based only on Margaret’s traditional TSP account balance of $650,000 as of December 31,2021.

The difference between Margaret’s 2022 TSP RMD computed using Margaret’s combined traditional TSP and Roth TSP balances as of December 31,2021 and her 2022 TSP RMD computed using only on her traditional TSP account balance as of December 31,2021 is $33,962 less $24,528, or $9,434.

The $9,434 is fully taxable and is a significant amount of income. That amount of income could possibly push Margaret into a higher federal marginal income tax bracket. That amount of income could push Margaret into a higher income tier for purposes of Medicare Part B monthly premium (thus subject to an Income-Related Monthly Adjust Amount or IRMAA). That amount of income could result in Margaret being subject to the Net Investment Income Tax (NIIT).

As previously noted, this additional amount of TSP RMD would not have occurred had Margaret rolled over her entire Roth TSP account to a Roth IRA before December 31,2021. But Margaret did not perform that rollover. There is a good possibility that Margaret was not aware of this rollover option. She was likely not advised by a financial advisor to do so.

Ramifications of SECURE Act 2.0 on Federal Annuitants Born Before January 1, 1951

For those federal annuitants born before January 1,1951 and who own both traditional TSP and Roth TSP accounts, the SECURE Act 1.0 rules apply with respect to their TSP RMD. Their 2023 TSP RMD will be calculated using the combined traditional TSP account and Roth TSP account balances as of December 31, 2022, and their life expectancy factor (as obtained from the IRS Uniform Lifetime Table) for their age during 2023.

The larger their Roth TSP account balance as of December 31, 2022, the larger their 2023 TSP RMD. Performing a Roth TSP to Roth IRA rollover post-December 31,2022 will not help them because the 2023 TSP RMD is based on their TSP account balances as of December 31,2022.

The SECURE Act 2.0 provision in qualified Roth retirement plan and Roth TSP accounts will not be included in the TSP RMD calculation means that federal annuitant who have reached their RBD will not have their Roth TSP accounts included in the TSP RMD calculations performed after December 31,2023. That is, in the calculation of TSP RMDs starting with the calculation of the 2023 TSP RMD.

Ramifications of SECURE Act 2.0 on Federal Employees Who Have Reached Their RBD and Who Plan to Retire During 2023

Those federal employees who are past their RBD (employees born before January 1 ,1951) and who have a traditional TSP account and a Roth TSP account can contribute to both TSP accounts while they continue in federal service. They are not required to take their TSP RMDs until they retire from federal service. Their first TSP RMD is due April 1st following the year they retire from federal service. That first TSP RMD is for the year in which they are retiring. The following example illustrates:

Example 2. Perry is a federal employee with both a traditional TSP account and a Roth TSP account. Perry was born April 8,1948 and will be 75 years old during 2023. Perry’s RBD was April 1, 2019. But because Perry has continued in federal service, he has not been subject to the TSP RMD rules.

Perry plans to retire on July 29, 2023. His first TSP RMD must be taken no later than April 1, 2024. The TSP will calculate Perry’s first year TSP RMD (for the year 2023), based on Perry’s TSP account balance as of December 31,2023.

The question is: Will the TSP calculate Perry’s first year (2023) TSP RMD using Perry’s combined traditional TSP account balance and Roth TSP account balance as of December 31, 2023? The answer is no. Under SECURE Act 2.0, the Roth TSP balance has to be included in the TSP RMDs due to be taken before January 1, 2024. That is, pre-2024 TSP RMDs.

However, there is an exception for pre-2024 RMDs (such as the 2023 TSP RMD) not required to be taken until April 1,2024. This exception applies to Perry. His 2023 TSP RMD has to be taken before April 1, 2024. Therefore, in the calculation of Perry’s 2023 TSP RMD, the TSP will not include Perry’s Roth TSP balance as of December 31, 2023.