Options for Withdrawing Funds from the Thrift Savings Plan: Option 1 – Installment Payments

This is the first of four FEDZONE columns discussing the withdrawal options that are available to separated Thrift Saving Plan (TSP) participants. In these columns, a “separated” TSP participant means a civilian federal employee or a member of the uniformed services who has separated from that employment. A “beneficiary” TSP participant is a spouse beneficiary of a deceased civilian or deceased uninformed service TSP participant who had a TSP account established in his or her name. These columns will present information about the TSP withdrawal process, the rules that govern withdrawals, and the tax implications of each withdrawal option.

Given that a TSP participant may need their TSP retirement savings to last into their 90’s, there are some questions a TSP participant should ask himself/or herself before deciding to withdraw from their TSP account, including:

• When should the participant start withdrawing the account?
• How much does the participant think things will really cost during the participant’s retirement?
• Will the participant have enough income to cover all their expenses during retirement?
• Will the participant’s savings last for his or her whole life?
• Does the participant need to provide income for is or her dependents or heirs?

Leaving One’s Money in the TSP 

Unless a TSP participant is subject to required minimum distribution (RMDs) or has a total TSP account balance of less than $200 (this includes the combined balance of the traditional TSP and the Roth TSP), there are no requirements for a TSP participant to make withdrawals from his or her TSP account. The entire account can be left in the TSP, continuing to grow over-time tax-deferred in the traditional TSP, and tax-free over-time in the  Roth TSP. However, a retired TSP participant is not allowed to make direct contributions to either their traditional TSP or to their Roth TSP accounts. This is because all direct contributions to TSP accounts must be made payroll deduction.  Separated participants can make indirect contributions to TSP accounts by transferring funds into their traditional TSP accounts via direct rollovers from traditional qualified retirement plans (401(k), 403(b) plans, SEP-IRAs, SIMPLE IRAs) and traditional contributory IRAs. They can also transfer funds into their Roth TSP accounts via direct rollovers from Roth qualified retirement plans (Roth 401(k), Roth 403(b) and Roth 457 plans). Note that Roth IRAs are not allowed to be directly rolled over to a Roth TSP account. Also, a TSP beneficiary participant is not permitted to directly rollover retirement accounts to either their traditional beneficiary TSP account or to their Roth beneficiary TSP account.

There are three basic methods of withdrawing money from a TSP account as a separated or beneficiary participant: (1) Installment payments; (2) Partial/total/distributions; and (3) Annuity purchases. This column discusses TSP installment payments.

A TSP participant can choose to receive installment payments from their account monthly, quarterly (every three months) or annually. A TSP participant may schedule a date up to six months in the future for these installments to begin. These payments will continue until the TSP participant stops them, or until the TSP total account balance equals zero. This is true even if the TSP participant chooses to have the installment payments come from the traditional TSP balance first or from the Roth TSP account balance first. When the TSP participant runs out of money in the participant’s chosen TSP account, then payments will continue from the TSP account that the TSP participant did not choose.

There are two ways of setting the payment dollar amount, a fixed dollar amount or payments based on life expectancy. Both payment methods are discussed.

• (1) Installment payments of a fixed dollar amount. The TSP participant chooses the amount he or she wants to receive. Minimum payment is $25.

Making changes to fixed dollar installment payments

A TSP participant can stop or make changes to his or her fixed dollar installment payments at any time. Using My Account, the TSP participant can stop existing installments and request new installments. To make certain changes without stopping the TSP installment payments, the TSP participant must call the ThriftLine (1-877-968-3778).

To make the following changes to installments, the TSP participant must first stop existing installment payments and then request new installment payments, which the TSP participant can perform going online to  My Account or by calling the ThriftLine (1-877-968-3778):

• start, stop, or change direct deposit of the TSP participant’s installments if payments go to more than one destination.
• change the dollar amount of the TSP participant’s payments.
• change the frequency (monthly, quarterly or annually) of the TSP participant’s payments.
• change the source TSP account (traditional TSP or Roth TSP) of the TSP installments (traditional, Roth, or both).
• change the installment type (fixed dollar amount or based on life expectancy).
• switch from the Single Life Table to the Uniform Lifetime Table when taking required minimum distributions (RMDs).

A TSP participant can make the following changes without stopping installments if the TSP participant calls the ThriftLine (1-877-968-3778):

• start, stop, or change direct deposit of the TSP participant’s installments if payments go to a single destination.
• change the amount of the TSP participant’s federal income tax withholding.
• start rolling over traditional TSP money (not Roth TSP money) from the TSP participant’s installment payments to a traditional IRA or to an eligible employer-sponsored traditional qualified retirement plan (only if installments are of a fixed dollar amount and expected to last less than 10 years).
• change or stop rollovers (if the TSP participant is currently doing rollovers).

Expected duration of installment payments and federal income tax withholding.

The rules for federal tax withholding and eligibility to roll over money to an IRA or to an eligible employer plan are different depending on how long your installments are expected to last.  The TSP determines the expected duration of a TSP participant’s installment payments using the TSP participant’s account balance, the payment amount the TSP participant has chosen, and an assumed earnings rate.

If the expected duration of a TSP participant’s installments is less than 10 years, the following IRS rules apply:

• The TSP must withhold 20 percent in federal income taxes of any amount that a TSP participant did not roll over for federal income tax.
• The TSP participant can instruct the TSP to withhold a percentage that’s greater than 20 percent, but you cannot have less federal income withheld or waive federal income tax withholding.
• The TSP participant may roll over all or part of a traditional TSP account installment payments to a traditional IRA or to an eligible employer-sponsored traditional qualified retirement plan.

If the expected duration of the TSP participant’s installment payments is 10 years or more or they are based on life expectancy, the following IRS rules apply: 

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

• The TSP participant cannot roll over any part of his or her annual TSP required minimum distribution (RMD) to an IRA or eligible employer plan.

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

• The TSP participant changes the dollar amount or frequency of installment payments.
• The TSP participant makes a rollover contribution to his or her TSP account.
• The TSP participant takes a distribution or purchases a TSP annuity in addition to the TSP participant’s installment payments.
• (2) Installment payments based on life expectancy. A TSP participant will have the TSP compute the annual distribution (and paid in 12 equal monthly payments) based on one of two IRS life expectancy tables. The initial payment will be based on the TSP participant’s age and the participant’s traditional TSP account balance at the time of the first payment. Note that life expectancy payments are calculated using the participant’s entire traditional TSP account balance. Each January, the TSP will recalculate the amount of the installment payment for that year. The recalculation will be based on the TSP participant’s current year age and the traditional TSP account balance at the end of the preceding year.