The TSP and Required Minimum Distributions

What happens during the second and subsequent distribution calendar years? 

Since the deadline for a TSP participant’s first distribution calendar year is April 1 of the second distribution calendar year, the TSP will continue to follow the rules explained above for the first two months of the second distribution calendar year until the first distribution calendar year’s RMD has been satisfied. A participant’s distribution taken in the second calendar year will not start counting toward the second year’s RMD until the first distribution calendar year’s RMD is satisfied. If the first distribution calendar year RMD is not satisfied by early March of the second distribution calendar year, then the TSP will send the participant the remainder of the first distribution calendar year RMD. After that, distributions will count toward the second distribution calendar year’s RMD using the same rules described above in the first distribution calendar year with two important exceptions:

• December 31 deadline. After the first distribution calendar year, the deadline for a given year’s RMD is December 31 of that same year. Therefore, if a participant who has not satisfied their RMD for that year, the TSP will send the participant a check for the necessary amount in early- to mid-December of that year.
• Treatment of annuity purchases. If a TSP participant purchases an annuity in any year after the first distribution calendar year, then the annuity purchase will satisfy a portion of the participant’s RMD for that year in the following way: The percentage of the participant’s traditional TSP account that is used to purchase the annuity is the same percentage of the RMD that the purchase will satisfy. For example, if a participant chooses to purchase a TSP annuity with 50 percent of the traditional TSP account balance, the 50 percent of the participant’s RMD amount will be satisfied.

The same rules apply for the years that follow, except the distributions taken in all months of a year count towards that year’s RMD.

TSP RMDs may not be distributed to a Retirement Plan.

TSP RMDs cannot be distributed to an IRA or to an eligible employer retirement plan. If a TSP participant chooses to distribute all or part of a traditional TSP distribution in a year in which the participant has an RMD, then the TSP is required to make sure that the participant satisfies the RMD before the distribution takes place.

Federal income tax withholding from RMDs.

With one exception (see next paragraph), RMDs are in the category of non-periodic TSP installment payments. According to IRS rules, the TSP must withhold 10 percent of federal income tax from the RMD unless the TSP receives other instructions from the TSP participant. The participant can instruct the TSP to withhold a different percentage between zero and 100 percent by contacting the TSP using one of the ThriftLine options.

The exception is that there is one situation in which the TSP would not treat an RMD as a non-periodic payment, namely: if a portion of an installment payment is used to satisfy the RMD and that installment payment is categorized as a periodic payment and these periodic payments are expected to last 10 or more years (or the payment is based on life expectancy), then the entire payment (including the RMD) is considered a periodic payment. The TSP will then follow the same federal income tax withholding rules for “Installment Payments Expected to Last 10 years or More or Based on Life Expectancy” as explained in the TSP publication “Tax Rules about TSP Payments” (may be downloaded at https://www.tsp.gov/publications/tspbk26.pdf).  

Separate RMDs must be taken from a traditional IRA and any qualified retirement plans a TSP participant owns.

TSP participants who own traditional IRAs and/or qualified retirement plan accounts (including 401(k), 403(b), 457 and profit-sharing retirement plans) that they previously participated in must, upon reaching their required beginning date (April 1 following the year they reached age 70.5, 72, 73 or 75 depending when they were born – see table above), take an annual RMD from their traditional IRA and any of the qualified retirement accounts they use to participate. A separate RMD must be taken from the traditional IRA and each qualified retirement plan. It makes no difference whether the TSP participant is still in federal service.

The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency or service, if you're eligible to receive agency or service contributions) put into your account during your working years and the earnings accumulated over that time. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP. RMD's are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.