TSP Withdrawals Fixed Payment Option

Separated TSP participants include a civilian federal employee or a member of the uniformed services who has retired or left federal service or the uniformed services. Also included in the category of separated participants is a “beneficiary” participant who is a spousal beneficiary of a deceased federal employee/retiree or a deceased uniformed service participant who established a TSP account in his or her name.

With currently many federal employees and uniformed service members retiring in their late 50’s and early 60’s, the importance of having a good TSP withdrawal strategy cannot be overemphasized.

It is not unreasonable to assume that many of these individuals could live into their 80’s and 90’s, needing the income from their TSP account withdrawals to help pay their retirement expenses. With inflation expected to return to its normal average annual rate of 4 to 6 percent, separated and beneficiary TSP participants are advised to make sure that they do everything possible to maintain their TSP account throughout their retirement, a period that may last for as long as 30 to 40 years.

Questions to Ask Before Making TSP Withdrawals

To accomplish this goal of maintaining their TSP accounts, TSP participants should ask themselves the following questions before they decide to take distributions from their TSP accounts:

1. When to start withdrawing from the TSP account?

2. How much does the participant expect things will really cost them during retirement?

3. Will the participant have enough retirement income to pay for all of his or her expenses during retirement?

4. Will the participant need to provide income for any dependents/heirs from their federal retirement income?

5. Will the participant be moving to an area in which expenses will be significantly higher or lower compared to where he or she lived before retiring?

Leaving Money in the TSP

Unless a TSP separated participant or a beneficiary participant is subject to required minimum distributions (RMDs) or has an account balance of less than $2,000, there are no requirements for a separated or beneficiary TSP participant to do anything with their TSP account. No distributions, rollovers, transfers or inter-fund transfers have to be paid. The TSP account will continue to accrue earnings.

A separated TSP participant is allowed to make rollovers into their TSP accounts. These rollover contributions include rollovers of traditional IRAs and traditional qualified retirement plans such as the 401(k), 403(b) and Roth 457, into the traditional TSP. Rollovers of Roth qualified retirement plans (Roth 401(k), Roth 403(b) and Roth 457 plans can be made into the Roth TSP. Rollover of Roth IRAs to the Roth TSP are not allowed.

There are four distribution methods of withdrawing money from a TSP account, including:

(1-2) Installment payments of which there are two methods: Fixed dollar amount and payments based on life expectancy;

(3) Partial total distribution; and

(4) Annuity purchase.

The remainder of this column discusses fixed dollar amount installment payments.

Fixed Dollar Installment Payments from the TSP

A separated or beneficiary TSP participant can choose to receive fixed dollar installment payments from their TSP account monthly, quarterly (every three months) or annually. A participant may schedule a date up to six months in the future for these installment payments to begin. The payments will continue until the participant stops them or until the participant’s TSP account balance equals zero.

The minimum duration of fixed payments is one year. This is true even if a participant chooses to have the installments come from the participant’s traditional balance first or from their Roth balance first. When a participant runs out of money in their chosen source (traditional or Roth account), payments will continue from the source the TSP participant did not choose.

In requesting fixed payments, a participant goes online on the TSP web site (www.tsp.gov) to his or her account and chooses the amount to receive in each installment (monthly, quarterly or annually). The payment amount of any frequency must be at least $25.

After a fixed installment payment is set up, the TSP or beneficiary participant can update the installment payment at any time. A separated or beneficiary TSP participant can do any of the following:

• Stop the payments.

• Change the source of payments – from the traditional TSP, from the Roth TSP, or from both accounts.

• Start, stop or change direct deposit of payments.

• Change the amount of federal income tax withholding.

• Change the dollar amounts, higher or lower.

• Change the frequency of payments. For example, from annually to quarterly; or quarterly to monthly.

• Start transferring payments to an IRA or to an eligible employer-sponsored retirement plan, or

• Change or stop rollovers, if currently doing rollovers.

Federal Income Tax Withholding and Eligibility to Rollover to an IRA

The rules for federal income tax withholding and eligibility to rollover to an IRA or eligible employer-sponsored retirement plan are different depending on how long installment payments are expected to last. The TSP determines the expected duration of a TSP participant’s installment payments based on the participant’s account balance, the payment amount the TSP account owner has chosen, and an assumed earnings rate.

If the expected duration of the participant’s fixed installment payments is less than 10 years, then the following IRS rules apply:

• The TSP must withhold 20 percent in federal income tax of any requested traditional TSP withdrawal amount that the participant does not request a direct rollover, either to a traditional IRA or to a traditional qualified retirement plan such as a 401(k) or 403(b) employer-sponsored retirement plan.

• A participant can instruct the TSP to withhold in federal income tax a percentage that is greater than 20 percent, but the participant cannot have less than 20 percent withheld or waive federal income tax withholding altogether.

• Traditional TSP funds can be rolled over in installments to a traditional IRA or to an eligible traditional qualified retirement plan.

• A Roth TSP participant may rollover with no tax consequences all or part of a Roth TSP account to a Roth IRA or to a qualified Roth employer-sponsored retirement account such as a Roth 401(k) employer-sponsored retirement plan.

If the expected duration of a participant’s traditional TSP installment payments is 10 years or more, the following IRS rules apply:

• The TSP is required to withhold federal income taxes from any taxable amount as if the TSP or beneficiary participant is single with zero exemptions, unless the participant elects a different option. Installment payments initiated before 2023 will continue to have withholding as if the participant is married with three dependents unless the participant chooses a different option or does so in the future. The participant can request that a different percentage or nothing be withheld.

• No part of an installment payment can be rolled over to an IRA or employer-sponsored qualified retirement plan.

The following events will trigger a recalculation of a participant’s expected installment duration:

• The participant changes the dollar amount or frequency of installment payments.

• The participant makes a rollover contribution from a traditional IRA or from a qualified retirement account into his or her traditional TSP account, or

• The participant takes a distribution or purchases a TSP annuity in addition to his or her instalment payments.

Finally, the TSP never withholds state income taxes from installment payments. The TSP participant who is a resident of a state with an income tax is responsible to make arrangements to pay any state income tax due on traditional TSP distributions.

State income tax payments can come from another retirement plan. For example, OPM withholds from CSRS and FERS annuities income taxes for all states with state and local income taxes. The participant can also pay any state income taxes due by paying state estimated tax payments. TSP and beneficiary participants who live in states with state income taxes should check with a qualified tax professional in order to find out the best way to pay the state income taxes due on their traditional TSP fixed installment payments.