Ed’s first part of a four-part in-depth overview of your TSP withdraw options. This article focuses on installment payments and how to request withdrawals
This is the first of four FEDZONE columns discussing the choices that are available to all separated Thrift Saving Plan (TSP) participants. In these columns, a “separated TSP participant” refers to a civilian federal employee or a member of the uniformed services who has separated from that employment. A “beneficiary participant” refers to 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 the participant should ask himself/or herself before deciding to withdraw 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 his or her dependents or heirs?
Leaving One’s Money in the TSP
Unless a participant is subject to required minimum distribution (RMDs) or has a balance of less than $2,000, there are no requirements for the participant to make withdrawals from his or her TSP account. The entire account can be left in the TSP, continuing to grow, tax-deferred, or tax-free with the Roth TSP. No direct TSP contributions can be made but the TSP account will continue to accrue earning, and inter-fund transfers may be made.
Separated participants can transfer money into their TSP account from traditional qualified retirement plans – (401(k), 403(b) plans, SEP-IRAs, SIMPLE IRAs) and traditional contributory IRAs.
There are three basic methods of withdrawing money from a TSP account as a separated or beneficiary participant, namely: (1) installment payments; (2) single withdrawals; and (3) annuity purchases. The remainder of this column discusses TSP installment payments.
TSP Installment Payments
A TSP participant can choose to receive payments from their account monthly, quarterly (every three months) or annually. The payments will continue until the TSP stops them or until the total account balance equals zero. This is true even if the participant chooses to have the payments come from the traditional TSP balance first or from the Roth TSP account balance first.
There are two ways of setting the payment dollar amount, a fixed dollar amount or payments based on life expectancy. Bot payment amount methods are discussed below.
• Fixed dollar amount. The TSP participant chooses the amount he or she wants to receive. Minimum payment is $25.
• Life expectancy. A TSP participant can have the TSP compute the installment payment based on IRS life expectancy tables. The initial payment will be based on the participant’s age and the participant’s account balance at the time of the first payment. Note that life expectancy payments are calculated using the participant’s entire TSP account balance (traditional and Roth) even if the participant chooses to withdraw from the traditional and not the Roth TSP account first. 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 age and the entire TSP account balance at the end of the preceding year.
The TSP has available on its website the TSP Installment Payment Calculator to estimate the amounts of a TSP participant’s life expectancy payments or to see how long payment of a fixed dollar amount would last.
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 website in order to access the TSP installment payment calculator for estimating the amounts based on life expectancies, there may be 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
|Year||(a) Account Balance Previous Dec. 31||John’s Age||(b) Life Expectancy Factor*||(c) (a)/(b) Annual Payment||(d) (c)/12 Monthly Payment|
*Single Life Expectancy Table (Table I of Appendix B in IRS Pub. 590-B) (see below).
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.
Making Changes to Installment Payments
After a TSP participant’s installment payments are set up, the TSP participant can make changes to them at any time.
The following changes can be made whether a TSP participant is receiving payments of a fixed dollar amount or based on life expectancy:
- Stop payments
- Change the source of payments – traditional, Roth or both
- Start, stop, or change direct deposit of payments
- Change the amount of federal tax withholding
The following changes can only be made if a TSP participant’s payments are of a fixed dollar amount:
- Change the dollar amount of payments
- Change the frequency of payments
- Start transferring payments to an IRA or eligible employer-sponsored retirement plan
- Change or stop transfer
To request any type of withdrawal, including installment payments, a TSP participant must log in to “My Account” at www.tsp.gov and check on the “Withdrawals and Changes to Installment Payments” link on the menu. From there the TSP participant will have access to an online tool with which to start withdrawals
IRS Single Life Expectancy Tables (from IRS Publication 590-B
Single Life Expectancy Table (Table I of Appendix B in IRS Publication 590-B) *
Use this table for:
- · Determining RMDs for account beneficiaries, starting in the year after the year the account owner dies.
- · For ages not covered in table above, see IRS Pub. 590-B.
|Age||Life Expectancy||Age||Life Expectancy||Age||Life Expectancy|
Uniform Lifetime Table*
*Appendix B of IRS Publication 590-B
Edward A. Zurndorfer is a Certified Financial Planner, 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 the employees of Serving Those Who Serve 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.