Since 1986, the Thrift Savings Plan (TSP) has been a staple for civilian and armed forces members employed by the United States Federal Government to save for retirement. This plan was designed from the start to be the envy of retirement savers everywhere.
Here are some key features of the TSP plan:
- There are five extremely low cost index funds that provide broad market exposure, in addition to the “L Funds” that tailor the investment directive towards a particular retirement date.
- There are no additional administrative expenses for participants, regardless of whether a current or former employee.
- The plan allows for both pre-tax and Roth contributions.
Despite these great plan features, many service members were choosing to move their retirement funds elsewhere once presented with the option—either when their service ended or upon starting a new, non-federal position. The reason? TSP was lagging behind with options surrounding how withdrawals can occur and a lot of retirees could have more control at other institutions. Luckily for plan participants, the TSP Modernization Act will soon make this an extremely attractive retirement plan for active workers, past employees, and retirees alike.
There are new TSP options on the horizon!
On September 15th, 2019, new withdrawal options are slated to be released to plan participants in an attempt to curb rollovers and address many of the initial shortfalls of the plan. Below are some of the items worth highlighting:
- If you’re 59½ and still an active employee under the plan, you can now take up to four in-service withdrawals annually. Prior to these upcoming changes, active plan participants could only make one partial withdrawal annually. This gives plan participants more flexibility to plan their withdrawals rather than making a single “guestimate” annually.
Picking Withdrawal Sources:
- Savers can now choose the source type of withdrawals being made—Roth, pre-tax, or a combination of both. As it stands now, withdrawals are made proportionally from all sources. While this may seem like a small item, it isn’t—this change allows participants to have more control over their taxable income.
- Individuals who take hardship withdrawals won’t be temporarily penalized from making future salary deferrals. This is significant because it removes the six month period where active employees would be ineligible to contribute to their plan, preventing them from getting their employer match. This isn’t intended to make the option more appealing as much as it is to make it less punitive. Having taxes and penalties assessed are bad enough.
Forced Plan Exit:
- Individuals no longer employed with the U.S. Federal Government are no longer forced to make a full-withdrawal election after turning 70½. IRS mandated required minimum distributions (RMD’s) still apply, but participants can now elect monthly, quarterly, or annual payments and have the ability to change them through the online portal at any point, rather than strictly in the open season.
The TSP Modernization Act on whole is larger than what is outlined above, but we’re happy to say that the changes seem positive and should benefit current and future TSP participants. We’ve included a link to the latest TSP update notice from May 2019. This notice is available on the TSP website and within your plan portal. Additional information will be coming out in coming weeks. Please take the time to familiarize yourself with these changes and reach out to the TSP helpline (1-877-968-3778) if you have questions or concerns.
As always, we’re here as a resource for you for any questions.
The information is provided for discussion purposes only and should not be considered as advice for your investments. Investing involves risk. Your investments are subject to loss of principal and are not guaranteed. Blooom does not provide tax advice. Consult a tax expert for tax-specific questions.
- November 2018 FRTIB Additional Withdrawals Project presentation; https://www.frtib.gov/pdf/minutes/MM-2018Nov-Att6.pdf
- TSP Website; www.tsp.gov
- May 2019 TSP Modernization Act Fact Sheet; https://www.tsp.gov/PDF/formspubs/tspfs10.pdf