A recent column explained the differences and similarities between the Thrift Savings Plan (TSP) and IRAs.
One of the discussion points was in respect to the required minimum distribution (RMDs) that retired TSP participants over age 70.5 (age 72 if born after June 30, 1949) and traditional IRA owners over age 70.5 (over age 72 if born after June 30, 1949) are both subject to.
A reader commented that he intends to transfer his TSP account to a traditional IRA shortly before he becomes age 72 because his wife is 17 years younger than he is in order to take advantage of “Table 2”.
This column explains what “Table 2” is referring to and why this traditional transfer to a traditional IRA should not be necessary. The column further explains what TSP participants should do to minimize their future RMDs.
General Review of the RMD Rules
It is important and instructive to review the general RMD rules. When an individual reaches age 70.5 (or 72 if born after June 30, 1949) he or she becomes subject to the RMD rules. This means that the individual must take an RMD from his or her traditional IRA and any qualified retirement plan account (including the TSP) that the individual owns.
The RMD rules were enacted by Congress in order to limit the time retirement plan assets can grow tax-deferred by forcing qualified plan participants (and TSP participants) and traditional IRA owners to begin taking annual distributions from these retirement accounts no later than their “required beginning date” (RBD).
Prior to the passage of the SECURE Act in December 2019, the RBD was April 1 following the year a traditional IRA owner or a retired qualified retirement plan participant became age 70.5. This RBD still applies to individuals born before July 1, 1949. But under the SECURE Act, for individuals born after June 30, 1049, the RBD is April 1 following the year the individual becomes age 72.
Note that the RMD rules do not apply to Roth IRAs until the Roth IRA owner dies. This is a significant advantage of the Roth IRA for individuals who plan to accumulate wealth in their retirement plans to pass onto their heirs. As noted, the TSP (combined traditional TSP and Roth TSP accounts) is subject to the RMD rules.
RMD Comparison Chart:
Traditional IRA vs. Thrift Savings Plan (TSP)
Additional Information on the Calculation of IRA and TSP RMDs
As presented in the RMD comparison chart above, the RMD is calculated each year by taking the account’s fair market value balance (combined IRAs, combined traditional TSP and Roth TSP) on December 31 of the year preceding the RMD divided by a “life expectancy” factor. These life expectancy factors are found in the appropriate IRS life expectancy tables.
For an individual who is a traditional IRA owner, or a TSP participant who has retired from federal service, the Uniform Lifetime Table is used to calculate an RMD. The life expectancy factor is based on the IRA owner’s/TSP participant’s age at the end of the distribution year. The following is a partial listing of the Uniform Lifetime table shows listing of the RMD life expectancy factors for ages 70 to 85:
Uniform Lifetime Table for Calculating RMDs
Example. Charles, a retired federal employee with a TSP account, reaches age 73 during 2021. As of Dec. 31, 2020, the last day of the calendar year immediately preceding the year for which Charles’ 2021 TSP RMD will be calculated, the value of Charles’ TSP account is $1,000,000 ($800,000 in the traditional TSP and $200,000 in the Roth TSP). Based on the Uniform Lifetime Table for calculating RMD above, Charles’ 2021 RMD will be calculated as follows:
$1,000,000 divided by 24.7 = $40,486
Note that Charles can specify that $40,486 can be withdrawn from his traditional TSP account, Roth TSP account or from a combination of both.
Is the Uniform Lifetable Table always used for calculating RMDs? The answer is no. In IRS Publication 590-B (Distributions from Individual Retirement Arrangements) the Joint Life and Last Survivor Expectancy Table (“Table 2”) is used to determine RMDs for a qualified retirement plan participant or a traditional IRA owner whose sole beneficiary is a spouse, and the spouse is more than 10 years younger than the qualified plan participant or the IRA owner. A portion of the Joint Life and Last Survivor Expectancy Table (“Table 2”) is shown here:
Note that the Joint life Expectancy Factors are greater than the Uniform Lifetable Table factors for a married individual with a designated spousal beneficiary who is more than 10 years younger than the individual, as the example with Charles above now illustrates:
Example (from above). Charles is married, and his wife is 14 years younger than him. He is age 73 and his wife is age 59. Charles’ spouse is his sole beneficiary of his TSP account. According to the IRS Joint Life and Last Survivor Expectancy Table, Charles’ joint life expectancy factor is 27.5. As such, Charles 2021 RMD is calculated as follows:
$1,000,000/27.5 = $36,364
Charles’ 2021 TSP RMD, as calculated based on the Joint Life and Last Survivor Expectancy Table of $36,364 is $4,122 less compared to the $40,486 TSP RMD, as calculated based on the Uniform Lifetime Table. In other words, by using the other table, Charles will reduce his 2021 TSP RMD by $4,122 and therefore potentially reduce his 2021 taxable income by $4,122.
Why Are Some TSP Participants Who Are Subject to RMDs Receiving More RMDs Than They are Required to and What they Should Do?
The TSP has available on its website a tax notice entitled “Important Tax Information About Your TSP Withdrawal and Required Minimum Distributions” (PDF download). In the tax notice, the TSP explains what TSP RMDs are and how they are calculated. While the TSP mentions that in calculating a participant’s RMD, the TSP uses the participant’s prior-year-end balance and the IRS’ Uniform Lifetime Table, there is no mention of the Joint Life and Last Survivor Expectancy Table.
This means that married TSP participants who are subject to RMD and whose spouses are more than 10 years younger than their TSP participant spouses are receiving more TSP RMD each year than they have to.
A column entitled “6 Differences Between TSP and IRAs Federal Employees and Retirees Should Know” was published. Very shortly thereafter, a reader sent the following email: “I moved my TSP to an IRA because my spouse is 17 years younger than e and that enabled me to use the Joint Life and Last Survivor Expectancy Table for my RMDs. Maybe a future column could mention that.”
That article now appears. The reader did in fact do the right thing – given the fact that the TSP does not give the option to a married TSP participant whose sole TSP beneficiary is a spouse more than 10 years younger to use the Joint Life and Last Survivor Expectancy table.
The reader therefore directly transferred his entire traditional TSP account to an IRA in which he was able to use the Joint Life and Last Survivor Expectancy table. In reality, the TSP should remedy this situation and give married TSP participants whose sole beneficiary is a spouse more than 10 years younger to the option of using the “joint table” rather than the “uniform table” for computing RMDs.
For the benefit of married TSP participants with spouses more than 10 years younger, and are the sole beneficiary, the TSP needs to calculate the RMD using the Joint table. By using the Uniform Lifetime Table, these married TSP participants are receiving more TSP RMD than they have to each year and therefore paying more tax than they have to in any given year.
Calculating the TSP RMD Using the Combined Balance of the Traditional and Roth TSP
Another reason that some TSP participants subject to RMD are receiving more TSP RMD each year, and paying more tax than they have to, is because they have not separated their traditional and Roth TSP accounts. As explained, the combined traditional TSP and Roth TSP account balance is used the calculation of TSP participant’s RMD in any year. If the Roth TSP could be “separated”, then the TSP account balance would be less and a smaller RMD would result.
How can the Roth TSP be separated? The Roth TSP can be directly transferred (tax-free) to a “rollover” Roth IRA. In so doing, a Roth TSP participant will accomplish two things, namely:
(1) remove the Roth TSP for purposes of calculating the TSP RMD – a smaller TSP RMD resulting in less income for the year and associated federal and state liability; and
(2) transfer the Roth TSP account to a Roth IRA which is not subject to the RMD rules which means that the Roth IRA continues to grow tax-free over the years until the Roth IRA owner dies.