With the TSP Modernization Act going into effect on September 15, 2019, there are new withdrawal rules. These expanded options greatly enhance your ability to access your money both before and after you are eligible for tax and penalty-free withdrawals.
The major changes are:
- Choose if your withdrawals come from traditional, Roth, or both balances
- Up to four in-service withdrawals per year
- Multiple post-separation partial withdrawals
- No longer must make a full withdrawal at 70 ½.
- Can take monthly, quarterly, or annual payments and make changes to it anytime
These are a summary of the big changes, but there is plenty more to know about each one of these and how to fully take advantage of them. We will do a deeper dive into each topic and add some more info on new withdrawal options from the TSP Modernization Act.
Here is a pamphlet on a summary of the changes from the TSP.gov website.
Withdrawing from Traditional, Roth, or Both
Before these changes, whenever you made a withdrawal from your TSP, it came out of both your Roth and your traditional balances proportionally.
What that means is, if 25% of your total balance was in your traditional TSP, when you took a $1000 withdrawal, 25% of that, or $250, would be from your traditional TSP balance, and the other $750 from Roth TSP.
These both are treated different for tax reasons. If you withdrew this after separating from federal service and after 59 ½ years old, the $250 from traditional would be taxable income. The $750 from your Roth TSP would not be taxable income.
With the TSP Modernization Act going into effect on September 15, 2019, you can now designate which balance you want to withdraw from, or withdraw proportionally like you had to in the past.
This can be good for tax planning purposes. If you know your income is low in a year or you have enough write-offs or credits, you can choose to pull out of your traditional IRA, because you’ve calculated you won’t be taxed heavily on it.
If you know your close to being pushed into a higher tax bracket, or just realize your tax consequence will be high, you could choose to withdraw just from your Roth TSP balance. Withdrawing from your Roth at the right time does not add to your taxable income!
KEEP IN MIND: Although you can control which balance to withdraw from, you cannot control whether you withdraw contributions or investment earnings. It comes out proportionally to how it exists in your account.
This can be an important factor for a Roth TSP. While withdrawing contributions from a Roth IRA or TSP are always tax and penalty-free, you will end up paying taxes and being penalized on the growth when withdrawn early.
There are two types of in-service withdrawals, financial hardship and age-based.
The changes from the TSP Modernization Act only affect how aged-based withdrawals work.
Before the changes took effect, you could only make an age-based service withdrawal once. Additionally, once you did that, you were unable to make any partial withdrawals after leaving federal service.
You can now make up to four age-based withdrawals each year. Also, doing so will not keep you from being able to make partial withdrawals after leaving federal service. You will pay income tax on the taxable portion of your withdrawal unless you transfer it or roll it over to an IRA or other eligible employer plan.
You have to be at least 59 ½ years old to make an aged-based withdrawal. You can only withdraw money you are fully vested in. This means you’ve been working long enough to keep the TSP matching.
This can be an advantage over the past as there are more options to withdraw money throughout the year when perhaps you’ve switched to part time work, took a pay cut, or just need extra money to tide you over. The TSP Modernization Act was designed to give more options to military member and federal employee.
How to Apply
You start the withdrawal process on tsp.gov. In some cases, you can do the withdrawal entirely online. If the signatures or yourself or your spouse are required, then you will not be able to complete the entire process online. Sometimes it requires having signatures notarized.
Here is a pamphlet on in-service withdrawals from the TSP.gov website.
Here is a graphic comparing the two different types of in-service withdrawals:
Post-Separation Partial Withdrawals
A partial withdrawal, also referred to as a single withdrawal, is what it sounds like. You are not asking for periodic payments, which are monthly or quarterly. You are also not withdrawing your entire TSP all at once. You are simply taking out an amount of money $1,000 or more.
Under the old rule, you could only do this once in your lifetime. If you did this before separating from federal service, you weren’t even eligible to do it at all post-separation.
There is no limit to how often you can do this now, except for the need to wait 30 days between withdrawals.
This can be done even if you are currently receiving installment payments.
It used to be that you could only do this once. That was bad news, and people were faced with taking more money out than they needed to under the old system.
Under this system, you can now take out exactly what you need for the current month, and let the rest grow as it should in the TSP account, which has great investment options and expense ratios.
As you can see, withdraw options have been greatly enhanced by the TSP Modernization Act.
How to Withdraw
The process all happens through the online transactions portal on TSP.gov. In some cases, it’s possible to do the entire transaction online, and sometimes it requires signatures, spouses signatures, and possibly notary.
Click here for the manual on Withdrawing from your TSP Account.
It’s been updated with the TSP Modernization Act changes.
The old rules required that you make a full withdrawal of your TSP once you turned 70 ½ years old and were separated from federal service.
If you did not withdraw it, the TSP initiated a account abandonment process where they moved your money to the G fund for you, then asked you to withdraw it all.
Making a full withdrawal at 70 ½ years old is no longer a requirement. You are never required to make a full withdrawal of your TSP. The abandonment of accounts process described above will also no longer occur.
This is great news, as retirees are no longer forced to take their money out of the TSP, where it could continue to grow and enjoy favorable expense ratios.
You do need to start making required minimum distributions (RMD) at 70 1/2 years old on traditional TSP balances. This is a minimum amount you must withdrawal each month according to tables put on by the IRS.
They want their money! (taxes)
Period payments in the past were very limited.
You only had the option to set up monthly payments.
A change to those monthly payments could only be done once a year during a specific time. If you missed it, you were locked into your current withdraw for another year.
You can receive installment payments monthly, quarterly or yearly. You have the option of receiving these payments in a fixed dollar amount, or based on your life expectancy, which uses some complicated math to figure out what it should be.
You can make changes to your installment payments any time. There is a variety of ways to change them, including changing your federal tax withholding.
Before the TSP Modernization Act went into effect, being able to change this once a year was archaic. Being able to change it anytime is much more in line with expectations we have of benefit plans these days.
How to Make Changes
It’s all done online. Go to TSP.gov to the online transactions portal. In some cases, you can do everything online, and in some cases, it will requires signatures, spouse signatures, and/or notaries.
There you have it.
A bunch of good info on the TSP Modernization Act and the new TSP withdrawal options.
Hope it helps.
This info is also incorporated into my super-detailed TSP page, which covers everything you could possibly want to know about the TSP.
Read my most popular TSP post – The Best TSP Investment Strategy Out There
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