On September 15, the TSP Modernization Act should be in place giving federal employees more access to their Thrift Savings plan. What does that mean and how will it affect federal employees?
I am a firm believer that you should have as much access to your money as possible, but there may be some drawbacks to more access. Before discussing those drawbacks, let’s look at what the Modernization Act does compared to how TSP used to operate.
In the past, TSP has only allowed one in-service withdrawal while an employee is still working. To do an in-service withdrawal from TSP, an employee must be age 591/2 or older.
NEW RULE – Employees will be able to do four in-service withdrawals per year. Each withdrawal must be at least 30 days apart.
Old – Federal employees could make one partial withdrawal from TSP, whether it was an in-service withdrawal, or a partial withdrawal once separated. The next lump sum withdrawal or transfer must be a full account liquidation.
NEW RULE – Retirees can make unlimited withdrawals or transfers from their TSP.
Old – Withdrawals were taken monthly and couldn’t be changed throughout the year. The only time changes could be made was October through mid-December, and the changes took place the following year.
NEW RULE – Changes to your withdrawals can be made at anytime and can be taken quarterly, monthly, and annually.
Old – Withdrawals were taken proportionately from Roth and Traditional TSP, according to your balance. For example, if you had a balance of 80% Traditional and 20% Roth, any withdrawals would reflect the same percentage.
NEW RULE – You can specify where withdrawals are taken from.
Old – All withdrawals required a written form.
NEW RULE – They haven’t given specifics yet, but claim that withdrawals will be initiated electronically.
Double Edged Sword
I LOVE the fact that people will be getting more access to their money that is in TSP, however, I wonder about drawbacks. The new rules are going to be great for people that are retired and want to change their retirement distribution, and even for those that do a transfer and then decide they want to do another. But….
The one thing that scares me is people will now have more access to their money. Yes, this is a good thing, but can also be detrimental for some people’s retirement. What I’m really trying to say here is to be responsible. Having more access to your money doesn’t mean that you SHOULD access your money. Please keep in mind that your TSP is for retirement income and not for purposes of a nice vacation, remodel your house, buy a new car, etc. Please don’t start violating numbers one and two in this article. Not that you can’t take money out to do these things, but you shouldn’t if it will negatively impact your retirement.
These changes may lead employees to do more transfers out of their TSP to other investments. The most common investment sold to federal employees is annuities. I have written about annuities and whether or not they are a good fit for federal employees multiple times. To be brief, I don’t believe that they are a good fit for most feds. Please, please be careful and do your due diligence prior to doing a transfer out of your TSP. If you choose to work with an advisor, you may want to read this article before choosing one.
As a federal employee, you now have a lot more access to your Thrift Savings Plan, which can be a great thing. However, caution still needs to be taken before doing a transfer or frivolously withdrawing funds meant for retirement. If you would like a partner to help you with retirement planning and TSP management, you are welcome to schedule a call with Brad.
Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.