The Federal Thrift Savings Plan (TSP) is a tax-deferred retirement savings and investment plan set up to help federal civilian employees and military personnel save for retirement. The TSP is a defined contribution plan. Employees and servicemembers are eligible to make pre-tax contributions of at least part of their salaries annually to the plan, while the government may match some or all of those contributions. Since 2012, participants are allowed to designate all or part of their deferrals as Roth contributions, which are funded on an after-tax basis. Several withdrawal options are available through which participants can access their TSP funds, either while still working for the government or upon retirement.
As a TSP participant, you may be eligible to take a one-time, age-based withdrawal from your TSP upon reaching age 59½. All or a portion of your vested account balance may be withdrawn at that time. If you elect to take a partial withdrawal, you can’t take another partial withdrawal upon separating from service.
The rules are a little different if you make an in-service withdrawal in cases of financial hardship. Specific requirements and limits apply, and each time you take a hardship distribution, you are barred from making another hardship distribution for a period of six months. And you can’t make contributions to your TSP for a six-month period.* While in-service withdrawals may be available, it’s more likely that you’ll take withdrawals from your TSP when you retire or leave federal government employment.
Leave Funds in the TSP
You may find that you don’t need to access money from your TSP account immediately upon retirement. In that case, you can defer taking withdrawals from your TSP and allow it to remain in place. However, you’ll have to start taking withdrawals by April 1 of the year following either the year you turn age 70½ if you’re no longer a federal employee, or the year you separate from federal service, whichever is later.
Partial Withdrawal After Leaving Employment
You can make a one-time partial withdrawal and leave the rest of your money in your TSP. To be eligible for a partial withdrawal, you must not have made a prior partial withdrawal or an age-based in-service withdrawal, and your withdrawal request must be for at least $1,000.
When you are ready to withdraw your money from your TSP account, you can do it all at once (commonly referred to as a lump-sum payment) or over a period of time. Or you can purchase an annuity that will make payments to you for life. You also can choose any combination of these full withdrawal options. Keep in mind that withdrawals from a TSP, other than from a Roth TSP, are generally fully taxable as ordinary income.
Series of Monthly Payments
You can request a specific dollar amount that you’ll receive each month until your entire TSP has been paid to you. Or you can receive monthly payments according to IRS Life Expectancy Tables based on your age and your account balance. The TSP will recalculate your monthly payment every year you take withdrawals of this type.
Three types of annuities are available:
- An annuity that is paid to you during your lifetime (single life annuity);
- An annuity that is paid to you while you and your spouse are alive, then paid to the surviving spouse for the rest of his or her life after one of you dies (joint life with spouse annuity), or
- An annuity that is paid to you while you and a person chosen by you (with an insurable interest in you) are alive, then paid to the survivor (beneficiary) for his or her life after you die.
However, if you are a married Federal Employee Retirement System (FERS) participant, you must elect a joint life with spouse annuity with a 50% survivor benefit, level payments, and no cash refund feature, unless your spouse consents to another annuity option. There are no fees or commissions associated with these options.
Factors that determine how much your monthly annuity payments will be include how large your account balance is, the interest rate at the time the TSP purchases your annuity, the performance of your investment fund, your age (and your joint annuitant’s age, if applicable), and the annuity option you elect. The TSP website(tsp.gov) has a calculator you can use to project your future account balance.
Your TSP offers several options for withdrawing money from your account. Your specific goals will determine when to take money out and how you wish to receive it. When making this decision, you should consider your income needs and the lifestyle you would like to have in retirement.
If you have questions, contact the Experts at Henssler Financial: