TSP Modernization Act (PL 115-84)Submitted by Hearn Wealth Management LLC on April 5th, 2019
This information should answer some frequently asked questions about changes to the TSP withdrawal options associated with the passage of the TSP Modernization Act (PL 115-84).
Questions and Answers about Changes to TSP Withdrawal Options
What’s going to change?
When the new withdrawal policies go into effect, you will have more options for how and when you can access money from your TSP account. These options fall into the following categories:
• Multiple age-based (for those 59½ or older) in-service and post-separation partial withdrawals will be allowed.
• You’ll be able to choose whether your withdrawal should come from your Roth balance, your traditional balance, or a proportional mix of both.
• You will no longer be required to make a full withdrawal election after you turn 70½ and
are separated. (You will still need to receive IRS-required minimum distributions (RMDs).
• If you're a separated participant, in addition to the option of monthly payments, you’ll be able to choose quarterly or annual payments, and you’ll be able stop, start, or make changes to your installment payments at any time.
Right now, you’re limited to one partial withdrawal in your lifetime—either an age-based in-service withdrawal (when you’re 59½ or older) or a partial post-separation withdrawal. Under the new policy, you’ll be able to take up to four age-based in-service withdrawals per calendar year;
• there will be no limit of the number of partial withdrawals you can take after separating from federal service (except that you won’t be able to take more than one every 30 days);
• you’ll be able to take partial withdrawals while you’re receiving post-separation installment payments; and
• having taken age-based in-service withdrawals will not prevent you from taking post-separation partial withdrawals.
Roth, Traditional, or Both
Currently, when you take a withdrawal, the money comes from your traditional and Roth balances on a pro rata basis. For example, if 80% of your account is in your traditional balance and 20% is in Roth, any withdrawal you take will be 80% traditional and 20% Roth. Under the new rules, you can still use this method, but you’ll also have the option to take your withdrawal only from your Roth balance or only from your traditional balance. These options will be available for all types of withdrawals.
By law, the TSP currently requires that you make a full withdrawal election after you turn 70½ and have separated from federal service. If you fail to do that, we initiate an account “abandonment” process.
The new law does away with this requirement. You will never be required to make a full withdrawal election. You will still need to receive IRS-required minimum distributions (RMDs). You can satisfy the requirement by taking a partial withdrawal or installment payments. If you take no action or just don’t withdraw enough to meet your RMD, we will automatically send you the remaining RMD amount.
If your account has already been abandoned, you’ll be able to restore the account without making a full withdrawal election. Your restored balance can remain in the plan (subject to RMDs) with all the new withdrawal options available.
• Monthly payments are currently the only option you have for receiving regular post-separation installment distributions from your account. The new rules will also allow you to receive payments quarterly or annually.
• Right now, if you’re receiving monthly payments, you can only change the amount of those payments during an open season between October 1 and December 15. In the future, you’ll be able to change the amount and frequency (monthly, quarterly, annual) of your installment payments—and change from life-expectancy payments to a dollar amount at any time throughout the year.
• Now, if you want to stop your monthly payments, you must receive the remainder of your account in a final withdrawal paid to you or transferred to an IRA or other eligible plan. The new rule eliminates that requirement.