Effective September 2019, there will be significant changes made to the Thrift Savings Plan (TSP). These changes will be focused on withdrawal options that have previously lacked flexibility causing many to look for alternative options that offer more accessibility and control to their retirement savings.
Here’s a breakdown of the upcoming changes being made to the TSP:
Multiple Age-Based Withdrawals:
- Currently: Participants only have the opportunity for one partial withdrawal in-service or post-separation.
- Upcoming Change: Multiple age-based (for those 59½ or older) in-service and post-separation partial withdrawals will be allowed. You won’t be able to take more than one every 30 days, and you’re limited to four age-based in-service withdrawals per calendar year.
Choice of Traditional or Roth or Both for Withdrawals:
- Currently: If you have both Traditional and a Roth balance, the only way to take a withdrawal is on a pro rata basis.
- Upcoming Change: You’ll be able to choose whether your withdrawal comes from your Roth balance, Traditional balance, or a proportional mix of both. You can still do pro rata basis; however, the additional option of selecting the mix is also available. This change applies to all types of withdrawals.
Required Minimum Distributions (RMDs):
- Currently: Full withdrawal election is required after you turn 70½ and are separated from federal service.
- Upcoming Change: 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).
Installment Payments – Monthly, Quarterly or Annually:
- Currently: Only monthly installment payments are available and you can only change the amount of your payment once during open season (October 1 and December 15).
- Upcoming Change: 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 to stop, start, or make changes to your installment payments at any time.
What’s Still Lacking?
In my opinion, the TSP still has room to improve the installment payments. A few small changes to the ways federal employees can withdraw their income could potentially help TSPs last longer in retirement.
Here are a three ways the TSP can still improve installment payments.
Monthly Payment Flexibility
Allowing participants to decide which of the TSP Funds are used/sold to generate monthly installment payments would have a significant benefit. As an example, let’s say a retired participant has their TSP allocation set to 50% C Fund and 50% F Fund and they are taking monthly payments of $1,000 each month. The TSP will sell the needed amount of shares to generate $500 from the C fund and $500 from the F Fund. The C Fund tracks the performance of the S&P 500 Index, which can experience shape price fluctuations and cause the participant to sell a variable amount of shares from month to month based on the C Fund performance. If the C Fund is down 15%-20% or more, the participant would have to sell considerably more shares to generate their monthly income. This is referred to as reverse dollar cost averaging and poor returns early in one’s retirement can have serious long term effects.
Ability to Take Income from Dividends and Interest
In order to take monthly payments, you must sell shares. Many investors taking income from their retirement accounts prefer to spend only the dividends and interest generated by their investments. This is a concept that has been around for a long time, and for good reason. It works and does not put additional pressure on investments portfolios due to selling shares when the investments are down. This option may never be available in the TSP since most employer-sponsored retirement does not offer this level of flexibility.
There are no new funds added to the TSP. The five core funds remain plus the L Funds, which are a blend of the five core funds based on your proximity to retirement. For many years feds have called for additional investment options, but it doesn’t appear any new funds will be added in the near future.
In summary, the TSP Modernization Act is an improvement over the current rules; however, there are areas that further improvement can be made. The challenge is how to make continual improvements without increasing costs. When it comes to the question of whether or not to roll over your TSP to an IRA in retirement, here is an apples to apples comparison. Ultimately, you need to do your own due diligence and make the best decision that best suits your needs in retirement.
If you’d like to discuss your TSP options with us, book a call using this link and we’ll be in touch with you shortly.