For several years, the Thrift Savings Plan (TSP) asked Congress to pass legislation to make withdrawals from the TSP less rigorous in order to allow TSP participants to withdraw their TSP accounts with more flexibility. In 2017, Congress passed the TSP Modernization Act (Public Law 115-84) allowing more flexible withdrawal options.
It has taken the TSP two years to make the necessary programming changes and form revisions in order to implement the new withdrawal options. These new withdrawal options took effect on Sept. 15, 2019.
In a series of columns, the new flexible withdrawal options are discussed and what they mean to TSP participants. This column discusses the changes to installment withdrawals/payments from one’s TSP account.
- Understanding the New Changes to TSP Withdrawal Options – Part 2
- 4 Important Rules That Did NOT Change With the New TSP Withdrawal Options
The following table summarizes the “old” rules (pre-Sept 7, 2019) and “new” rules (post-Sept 14, 2019). Note that there was a blackout period during the period Sept. 7 to 13, 2019, in which TSP participants could not request withdrawals from their TSP accounts. The following table summarizes the old rules and new rules with regard to installment withdrawals/payments from a TSP account.
Advantages to New Rules Regarding Post-Sept. 14 2019 TSP Installment Withdrawals/Payments
There is obviously more flexibility for TSP participants receiving post-separation payments. This is particularly important for TSP participants when they are deciding on how much to withdraw in the early years of their retirement versus the post-age 70.5 years at which time TSP participants each year must withdraw at least their required minimum distribution (RMD).
It is also important to remember that a CSRS or a FERS annuitant will be receiving a guaranteed pension in the form of a CSRS annuity or a FERS annuity. It is quite possible that an annuitant may not have a need for TSP withdrawals during the first 10 to 12 years of his or her retirement because the CSRS or FERS annuity and the FERS annuity supplement (received by a FERS employee who retires before age 62), may be sufficient enough to pay the annuitant’s expenses. In addition, when the annuitant reaches his or her full retirement age (FRA), the annuitant becomes eligible for full Social Security retirement benefits and can reduce or cease TSP withdrawals.
But as an annuitant ages and advances into his or her retirement years, some expenses tend to increase over time. For example, medical expenses tend to increase as an individual ages. The annuitant may in fact have to increase the amount coming out of the TSP, whether they are on a monthly, quarterly, or an annual basis. For example, a TSP participant may have to enter a nursing home, an assisted living facility, or require long-term care (LTC) assistance at home. The annuitant did not purchase LTC insurance for himself or herself and, if applicable, for a spouse. The only way to pay for these LTC expenses is to use TSP withdrawals. LTC expenses can vary widely, from the type of LTC being administered and from location to location.
Another change to the TSP withdrawal options (discussed in my next column) is that a TSP participant is allowed to request a partial withdrawal (at least $1,000) even if the TSP participant is receiving installment payments (quarterly, monthly or annually). A TSP participant receiving installment payments may have a sudden and unexpected expense. For example, a major casualty loss or major medical expense. Under the old TSP rules, the TSP participant could not request a partial withdrawal. Under the new TSP rules, the TSP participant can request such a partial withdrawal
Disadvantages to New Rules Regarding Post-Sept. 14 2019 TSP Installment Withdrawals/Payments
There is no doubt that the new post-separation installment payment TSP rules are more flexible compared to the old rules – allowing the withdrawal of TSP funds on an annual, quarterly or monthly basis, increasing or decreasing the amount of payment on a quarterly basis, stopping the payments at any time, and permitting partial withdrawals in addition to the installment payments.
Because TSP participants now have more readily access to their TSP accounts, this may cause a tendency among participants to neglect properly investing their TSP accounts with the goal of long term growth. TSP participants should beware that for most annuitants (especially FERS annuitants) the TSP represents an essential part of their retirement that has to last throughout the annuitant’s retirement years, as much as 30 to 40 years.
While the CSRS and FERS annuities and Social Security retirement benefits will always be available while the annuitant is living, there is no such guarantee that a TSP account will last throughout the annuitant’s life. As such, a TSP participant is advised not to withdraw annually from his or her TSP account not much more than the TSP RMD (approximately 4 to 6 percent of their account balances) in most years.
At the same time, a TSP participant should be aware of the fact that whatever monies remain in the TSP account should continue to grow at an investment rate of return each year that exceeds the participant’s annual withdrawal rate. For example, if the annual withdrawal rate from a TSP account is 5 percent, then the TSP account’s investment rate of return for the funds remaining in the TSP account should average a minimum 6 to 7 percent. In so doing, the TSP participant is taking steps to avoid longevity risk, the risk of “outliving” one’s TSP account.