TSP Modernization Act
Effective September 15, 2019
New withdrawal options go into effect 9/15/19
Expanded options for how and when you can access your TSP
Change to hardship withdrawals
Enhanced online tools for TSP withdrawals
For those who felt that there were limitations to accessing your TSP account, the changes resulting from the TSP Modernization Act (PL 115-84) are sure to please. All participants are eligible for the expanded choices including those who have already taken withdrawals. And the changes apply to beneficiary participants too! Let’s take a look at your new choices.
Under the former rules, you were limited to one partial withdrawal in your lifetime. That’s been replaced with:
The ability to take up to four (4) age-based in-service withdrawals per calendar year. As before, you must be at least age 59 ½ to make an age-based withdrawal.
No limit on the number of partial withdrawals you can take after separating from federal service – with one caveat, you won’t be able to take more than one every 30 days.
The option to take partial withdrawals while you’re receiving post-separation installment payments.
Eligibility for post-separation partial withdrawals even if you take an age-based in-service withdrawal. Formerly, if you took an age-based in-service withdrawal, you were not eligible to make a partial withdrawal after you separated from federal service.
Prior to the Modernization Act, the only option available for receiving post-separation installment distributions (payments) from your TSP was monthly. While monthly payments are still available, your options have been expanded to also include quarterly or annually, i.e. one time per year. And you can start, stop, or change installment payments at any time! Formerly, that was only permitted one time per year during an open season. To recap, the new choices include the ability to receive monthly, quarterly, or annual payments AND the option to change the amount and frequency of your payments at any time throughout the year. One thing that did not change is the one-time only switch from life expectancy payments to “dollar amount” payments. You cannot go back to life expectancy payments once you change to payments based on dollar amount.
More good news! Before these changes, if you wanted to stop monthly payments you had to receive the remainder of your account in a final withdrawal that was paid to you or transferred to an IRA or other eligible plan. That requirement has been eliminated, allowing you to stop and start your payments at any time.
Source of Withdrawals – Traditional, Roth, or Both
The TSP changes put you in full control of which part of your TSP funds your withdrawals. In other words, the previous “pro-rata basis” for processing withdrawals has been eliminated – no longer does the withdrawal have to be split proportionally from your traditional and Roth balances.
It may be easier to look at an example to understand this change. Under the former rules, if a participant had both a traditional and Roth TSP balance and requested a withdrawal, the funds would be withdrawn proportionally from pre-tax (traditional) and post-tax (Roth) balances. So if your TSP account was 70% traditional and 30% Roth, 70% of your withdrawal would come from your traditional balance (subject to tax) and 30% would come from your Roth balance (not taxable if the withdrawal was qualified ). The TSP now allows participants to specify from which balance they want their withdrawal to come. Pro-rata withdrawals remain available, if that’s your choice, but you are not limited to proportional withdrawals anymore. This change applies to all types of withdrawals.
Withdrawal Election Eliminated
Prior to the Modernization Act, if you were separated from federal service, you were required to make a withdrawal choice for your TSP account balance by April 1st of the year following the one in which you turned age 70 ½. If you did not do so, the TSP initiated an account “abandonment” process. This provision has been eliminated. However, please note that IRS required minimum distributions did not change.
Six Month Suspension Removed for Hardship Withdrawals
Previously, if you made a financial hardship withdrawal from your TSP you were not permitted to make contributions to your account for six months after the disbursement was made. That rule has been eliminated. Effective September 15, 2019, all six month suspensions in progress will automatically expire on that date and participants may resume contributions. Financial hardship withdrawals processed on or after 9/15/19 will not be subject to the six month contribution suspension. For FERS participants, this change means your Agency Matching Contributions can continue!
Enhanced Online Tools
As you might imagine, all these new withdrawal options require new forms and the TSP has that covered…along with enhanced, secure online features. “Wizards” attached to online forms are designed to help you complete the forms thoroughly and accurately by walking you through the process. Rather than simply completing a paper form to send in, the enhanced online process allows you to complete at least part of the transaction online, if not the entire process. In those cases where a paper form is still necessary, for example when a notarized signature is required, you’ll be given only the necessary pages to complete and submit. When the paper forms are returned to the TSP, they’ll link them to your completed online information to complete your transaction.
There you have it, the “nuts and bolts” of the TSP Modernization Act. Many new (long awaited?) options for participants!
Visit the TSP YouTube videos to learn more about the Modernization Act, your new withdrawal options, and much more!
Stay up-to-date on all things TSP by regularly checking out Plan News and Announcements.
Publish Date: August 30, 2019 © Tangerine Foundation, Inc. All rights reserved.
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular individual or circumstance. This article is not intended to be a client-specific analysis or recommendation. Do not use this article as the sole basis for any financial decisions. Consider all relevant information. Information should not be considered as tax or legal advice. You should consult with your tax advisor and/or attorney regarding your individual circumstances.