3 Unfriendly Features of the Thrift Savings Plan

3 Unfriendly Features of the Thrift Savings Plan

The Thrift Savings Plan (TSP) has numerous positive attributes: the extremely low costs, the simple but effective investment options, and the ease of investing in a tax-efficient manner for your future. However, the TSP does have some unfriendly features of which military members should be aware.

 

The required minimum distribution (RMD) process does not allow the use of all the withdrawal tables established by tax law. RMDs are required withdrawals from your retirement accounts once you turn 70½ years old — Uncle Sam wants his tax money. Only Roth individual retirement accounts (IRAs) do not require withdrawals after a certain age. The RMD tables specify your withdrawal amount each year. Life-expectancy rates determine the annual withdrawal amounts in the RMD tables.

 

Three RMD withdrawal tables are established in the tax code (see  IRS Publication 590-B for details):

 

  • Single Life (the greatest withdrawal amount)
  • Uniform Lifetime (usually the middle amount)
  • Joint Life and Life Survivor (usually the smallest amount)

 

The TSP does not allow the Joint Life and Life Survivor table as an option for TSP participants following RMD requirements. This table is for those who have spouses more than 10 years younger than themselves and allows for smaller RMD withdrawals so retirement account assets last longer for a younger surviving spouse.

 

Note that both Roth TSPs and corporate Roth 401(k)s have RMDs — only Roth IRAs do not have RMDs.

 

Your withdrawal options after military service are limited with a TSP. You cannot make multiple partial withdrawals from your account because TSP allows only a single partial withdrawal per participant. The TSP requires you: a) withdraw your entire account balance in a single payment, b) begin receiving monthly payments, c) purchase a life annuity, or d) use a combination of these withdrawal options. (NEWS UPDATE: A law passed in 2017 allows more than one partial withdrawal. Stay in touch with TSP,  www.tsp.gov, for details as they develop.)

 

Choose option B based on your life expectancy, and know the Single Life table noted above is used for people age 69 and younger and the Uniform Lifetime table is used for people age 70 and older. If you do not make an allowed withdrawal election by the RMD deadline, you forfeit your account balance to the TSP. You cannot request regularly scheduled withdrawals of just your RMD because that is not a TSP-approved withdrawal option.

 

Transferring assets into the TSP. You can transfer most existing retirement accounts outside of the TSP into the TSP. However, the TSP does not accept transfers from Roth IRAs.