The Federal Retirement Thrift Investment Board (FRTIB) recently announced that it is permanently changing the rule that prevents a separated (from Federal service) or retired TSP participant from restarting installment payments based on life expectancy if the participant previously received installment payments based on life expectancy but stopped these payments in order to elect receiving fixed dollar amount payments.
Effective January 1, 2021, all TSP participants who are eligible for installment payments may elect to receive payments based on life expectancy – even if they previously started and subsequently stopped payments based on life expectancy.
The new TSP rule means that if a participant is currently receiving payments based on life expectancy, the participant may now elect to stop these payments – knowing that the participant will be able to reelect receiving these type of installment payments at any time starting after Dec. 31, 2020. If the life expectancy payments are stopped in 2020, then these type of installment payments cannot be restarted sometime during the rest of 2020. However, the TSP participant can request to receive instead installment payments of a fixed dollar amount for the remainder of 2020.
The rule change may affect some TSP participants, especially those federal annuitants over age 70.5 receiving life expectancy payments during 2020 for the purpose of satisfying their TSP required minimum distributions (RMDs). These participants may want to seriously stop these payments for the rest of 2020 because 2020 TSP RMDs are waived as a result of the CARES Act passage earlier in 2020.
This column further explains what the change in the rule for starting, stopping, and restarting TSP installment payments based on life expectancy means. Most importantly, the column will explain how installment payments based on life expectancy work. It is unfortunate that the TSP has not done a thorough job in explaining the withdrawal option for a TSP participant to receive installment payments based on life expectancy. With the information presented in this column, it is hoped that TSP participants will have a better and complete understanding of how the option of TSP installment payments based on life expectancy works.
TSP Withdrawal Options
The TSP has a publication: “Withdrawing from Your TSP Account for Separated and Beneficiary Participants” downloadable from its website here. explaining TSP withdrawal options. There are three options for withdrawing money from a TSP account as a separated or beneficiary participant, namely:
- installment payments (either a fixed dollar amount or an amount based on life expectancy);
- single withdrawals; and
- annuity purchases.
This column discusses installment payments based on life expectancy. The other installment payment option is fixed dollar amounts which is not discussed in this column. A subsequent column will discuss TSP annuity purchases.
TSP Installment Payments Based on Life Expectancy
On page 2 of the publication Withdrawing from Your TSP Account for Separated and Beneficiary Participants it states: “You can have us compute your installment payments based on IRS life expectancy tables. Your initial payment amount will be based on your age and your account balance at the time of your first payment. Life expectancy payments are calculated using your entire account balance even if you choose to withdraw from our Roth balance first or your traditional balance first. If you choose life-expectancy-based installment payments in combination with a single withdrawal, an annuity purchase or both, your payment calculation will be made after the other funds are moved from your account. Each January we will recalculate the amount of your installment payment. The recalculation will be based on your age and your account balance at the end of the preceding year.”
“Use the ‘TSP Installment Payment Calculator’ at www.tsp.gov to estimate the amounts of your life expectancy payments.”
Two points are made here with regard to the above instructions and information as directly coming out of the TSP publication on withdrawals, and specifically TSP installment payments based on life expectancy:
· There are two IRS single life expectancy and one IRS joint and last survivor life expectancy tables (presented in Appendix B of IRS Publication 590-B). 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 and the other is the uniform lifetime table (the two IRS single life expectancy tables are produced below).
· If one goes to the TSP Web site in order to access the TSP installment payment calculator for estimating the amounts based on life expectancies, there is a message that: “This calculator is being revised and is currently unavailable. We apologize for the inconvenience and hope to have it up and running soon.”
Moreover, one of the helpful learning tools lacking in TSP publications are actual examples. There is no example here presenting TSP installment payments based on life expectancy. 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.
(1) Name of TSP participant: John
(2) Age of participant: 60
(3) Retired from Federal service on December 31, 2014
(4) About one month after retiring from federal service, John requests online (using Form TSP -99: Withdrawal Request for Separated and Beneficiary Participants – Civilians) that $200,000 of his TSP account (only traditional, no Roth) be withdrawn via monthly payments based on life expectancy.
(5) John has 50 percent of his TSP account invested in the C fund and 50 percent invested in the G fund.
(6) TSP will compute John’s monthly payments for the year 2015 based on the $200,000 account balance as of Dec. 31, 2014 and John’s single life expectancy (age 60) from the IRS’ “single life expectancy table” (Table I, Appendix B in IRS Publication 590-B, see below). Monthly payments in future years will be recomputed based on the account balance on the previous December 31 and John’s new life expectancy factor.
For 2015: John’s annual payment is computed:
$200,000 (account balance as of Dec. 31)/25.2 (life expectancy factor)
= $7,937 (annual payment for the year 2015)
$661 (monthly payment for the year 2015)
John’s annual and monthly TSP payments for the years 2015-2020 based on life expectancy are summarized in the following table:
John’s TSP Installment Payments Based on Life Expectancy for the Period 2015 -2020
Some observations from the table illustrating payments for the years 2015 through 2020:
1. As John gets older, the life expectancy factor decreases.
2. John’s original $200,000 account balance fluctuates through the years, decreasing to a low of $190,443 on Dec. 31, 2017 to a high of $223,701 on Dec. 31, 2019. The reason for the fluctuation in the account balance on December 31 is that while monthly withdrawals are made from the account throughout the year, the TSP funds remaining in the account are growing at a faster or slower rate compared to the percentage withdrawal rate.
3. If John is concerned or uneasy with the variation in the annual payment for the purpose of meeting his annual budget needs, he is allowed to switch to fixed installment payments (monthly, quarterly or annually) of a dollar amount (minimum monthly amount $25) that he can increase, decrease, or even stop under the new TSP withdrawal rules that took effect in September 2019.
4. If John does switch to fixed payments, then effective Jan. 1, 2021 under the new TSP rule (effective August 2020) John can switch back to receiving payments based on life expectancy.
5. Once John becomes age 72 (he was born after June 30, 1949), John must start to receive his required minimum distribution (RMD) from his TSP account. To satisfy his TSP RMD requirement, John can direct the TSP to send him installment payments based on life expectancy. To do so, John must use his entire TSP account in the calculation of the payment. This is because the TSP RMD is calculated based on a TSP participant’s entire balance, including traditional and Roth TSP balances.
6. TSP payments based on life expectancy that are used to satisfy a participant’s TSP RMD requirement will necessitate the use of a different IRS life expectancy table, namely the Uniform Lifetime Table, Table III of Appendix B in IRS Publication 590-B. This table is used for unmarried TSP participants and married TSP participants (unless the spouse is the sole beneficiary and more than 10 years younger than the TSP participant. In that case, the Joint Life and Last Survivor Expectancy Table in Appendix B of IRS Publication 590-B. Portions of the two single life expectancy tables are reproduced below.
In comparing the two single life expectancy tables below, the life expectancy factors are larger at each age for the Uniform Lifetime Table. This means monthly payment will be lower because the denominator in the ratio account balance as of Dec. 31/life expectancy is larger. This results in a smaller RMD payment. In the joint life and last survivor expectancy table, the life expectancy factors are larger yet at a given age, leading to even smaller RMDs.
It is therefore important for TSP participants who are required to take RMDs and who choose to satisfy their annual TSP RMDs using installment payment based on life expectancy, that they are certain that the appropriate IRS life expectancy table is used in order to compute the correct amount of the RMD.