The answer to this question boils down to two more questions:
- How much access do you want to your money in retirement?
- How many investment options would you like to have access to?
In part one we are going to discuss the first question. The Thrift Savings Plan is a very good accumulation vehicle for federal employees because of the ease of use, simplicity and low costs. Once an employee separates from service and wants to take distributions out of their TSP it becomes an entirely new animal.
The "oh so convenient" TSP becomes "not at all convenient" TSP in a hurry. The only way to take distributions out of TSP is to receive an automatic monthly distribution. Here are some common questions employees ask that will be addressed in this article.
- What if I want to take money out one month and not the next?
- Can I take money out to take my family on vacation?
- Can I stop my distributions?
- Can I take money out of my TSP and not my Roth TSP?
- How do I increase my monthly withdrawal?
- Can I take money out of my Traditional TSP and not my Roth TSP?
Once you start receiving a distribution from TSP you cannot stop receiving distributions. Thrift Savings Plan will not allow you to discontinue your distributions. They will permit you to change your distribution for the next year as long as you fill out form TSP 78 during the correct time period of 10/1-12/15. Yes, you read that correctly - you are not allowed to change your distribution during the year that you are receiving it. Changes can only be made for the following year's distributions.
Participants are also not allowed to receive lump sum distributions with the exception of a one-time distribution. In other words, taking money out of your TSP periodically is not an option. TSP does not allow lump sum distributions.
All distributions from TSP are disbursed according to how your TSP is allocated. They are disbursed in relation to your fund allocation and your TSP/Roth TSP allocation. A look at the following example can help to understand how participants receive distributions.
- Joe Smith has 70% C fund and 30% G fund
- Joe also has 25% of his money in the Roth TSP
- If Joe chooses to take $1,000 a month from TSP he will receive $750 from the Traditional component and $250 from the Roth.
- His distribution will also include a withdrawal of 70% from the C fund and 30% from the G fund.
Is this the best withdrawal method? Most people I talk to would prefer not to access money in their Roth TSP for one big reason – money in Roth TSP passes to beneficiaries income tax free! So, the longer that money sits in the Roth TSP the more time it has to compound income tax free. The TSP requires withdrawals from Roth TSP once individuals attain age 70 ½ as well, however, a Roth IRA never forces you to take withdrawals.
Many people would prefer not to withdraw funds from their stock investments in years when they are down, in fact, there have been studies which show this may help investments last longer. However, this is not an option with TSP. Withdrawals from TSP will happen in accordance with how your balance is allocated.
One final note is what happens to TSP when it passes on to a non spouse beneficiary. A spouse can leave money in TSP at the death of a federal employee, however, a non spouse beneficiary must take all money out of TSP. This creates a potentially dangerous tax situation for the beneficiary and could end up costing thousands of unnecessary dollars in taxes.
If we review the withdrawal options and restrictions from TSP we get the following:
- Impossible to change monthly withdrawal amount throughout the year
- No ability to take lump sums out periodically
- Suspending withdrawals is not an option once you start taking them
- You can’t choose to take money out of Traditional TSP and not Roth TSP
- You can’t choose which fund you would like your distribution to come from
- Withdrawals must begin from Roth TSP at age 70 ½
- Non spouse beneficiaries must remove all money from TSP
I realize in writing this that there are a lot of negatives in the article, but if you want access to your money in retirement this is the reality of TSP. Next week we will cover question number two regarding investment options as well as how to do a rollover. If you would like help with managing your TSP or doing a rollover you can contact me at email@example.com.
Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.