Key Points:
RMD definition
When RMDs take effect
Life Expectancy Factor
There’s no doubt about it, there are a lot of acronyms in the federal employee world! In this article, you’ll learn about an acronym associated with your TSP account – RMD. RMD stands for required minimum distribution and is part of the Internal Revenue Code.
The IRS required minimum distribution (RMD) is a mandatory rule that requires you to receive a certain portion of your TSP account each year based on your life expectancy. When does this take effect? April 1st of the year after you turn 70 ½ if you’ve separated from federal service. If you’re still working in your federal job at age 70 ½, you can continue to contribute to your TSP and required withdrawals must begin by April 1st of the year following the year you separate from federal service.
Let’s look at a few examples to clear up any confusion:
You’re retired and your 70th birthday was June 30, 2018. You reach age 70 ½ on December 30, 2018 and you must take your first TSP RMD (for 2018) by April 1, 2019.
You’re retired and your 70th birthday was July 1, 2018. You reach age 70 ½ on January 1, 2019. You do not have a TSP RMD for 2018. You have until April 1, 2020 to take your first TSP RMD for 2018.
You retire at age 73 on December 31, 2018. Your first TSP RMD is April 1, 2019.
You retire at age 73 on January 3, 2019. Your first TSP RMD is April 1, 2020.
It’s important to know that RMDs are taxable income in the year you receive them. And remember we said that RMDs are required each year? Based on your birthdate, if you wait to take your first RMD and are required to take another RMD in that calendar year, you could end up having two taxable withdrawals in the same year depending on the source of your RMD, taxable or tax-exempt contributions. After your first RMD, subsequent RMDs must occur by December 31st of each year. Timing is everything! Look at example #2 above – if you wait until 2020 to take your first RMD (from 2018) AND also take the RMD required for 2020, you’ll have two potentially taxable distributions in 2020. If this increases your Modified Adjusted Gross Income on your federal tax return, it could affect your Medicare Part B premium amount. Yes, it’s important to pay attention to the timing of your RMDs!
Also important to know is that the penalty for not complying with RMDs is significant – 50% of the amount you were supposed to withdraw! This applies if you do not take any RMD or if your distribution is not large enough. If you have more than one retirement account subject to RMD requirements, the required distribution must be calculated separately for each account.
Fortunately for TSP participants, the penalty is generally not an issue. If you’ve chosen monthly payments from your TSP based on life expectancy, for example, the total dollar amount of your annual payments will approximate your RMD so there’s no need to worry. For those who selected installment payments based on a specific dollar amount, the TSP will issue a supplemental payment for the remaining amount if your withdrawals don’t satisfy your RMD. Of course, you can also elect to receive a partial withdrawal to cover your RMD and the TSP will calculate this for you if you call them at the TSP ThriftLine.
If you take no action, the TSP is required to automatically send you your required RMD payment.
Can you transfer or rollover your RMD to avoid paying taxes? Wouldn’t that be nice…but the answer is no. Required minimum distributions from the TSP are not transfer or rollover eligible. And while Roth IRAs do not generally have RMDs during the lifetime of the owner, your Roth TSP balance does. People get confused about that distinction.
However, if you plan to work in federal service past age 70 ½, you can directly transfer any 401(k) and/or traditional IRA funds to your traditional TSP account and postpone your RMDs from these accounts until you retire from federal service. How? Remember, RMDs are not required from your TSP while you’re still working.
Life Expectancy Factor
Okay, so how is your life expectancy determined for RMDs? Hint…it’s not a crystal ball at the TSP. Actually, the TSP uses the Uniform Lifetime Table published by the IRS. To calculate your RMD, the TSP uses your prior year-end account balance and your age, along with the IRS Uniform Lifetime Table. This table has a “distribution period” assigned for each age which is the maximum number of years over which you are allowed to take distributions for a given age.
The formula to calculate your RMD looks like this:
TSP Account Balance ÷ Distribution Period = % of Account Balance that must be withdrawn.
Here’s an example. In the current IRS Uniform Lifetime Table, the distribution period for a person age 75 is 22.9. If the participant’s year-end TSP balance was $100,000, the RMD totals $4,367. ($100,000 ÷ 22.9)
If you’d like to explore life expectancy factors, there’s a table on the last page of the TSP publication, Important Tax Information About Your TSP Withdrawal and Required Minimum Distributions. You also have the option to call the TSP and they’ll help you.
There’s one important RMD distinction for the TSP that’s important to understand – the only table that’s used by the TSP to calculate the owner’s RMD is the Uniform Lifetime Table. In other words, the TSP does not take into account the relation or age of the beneficiary when calculating RMDs. What does this mean? The Joint Life Expectancy Table that you may have seen for RMDs from IRA accounts, for example, does not apply to the TSP.
RMD rules are different after the TSP account owner dies. That’s covered in a separate Tangerine article about TSP beneficiaries but you can also read about the topic in a TSP publication here.
Action Steps:
TSP and IRA rules are not interchangeable – familiarize yourself with the differences. For example, with a traditional IRA, contributions stop and mandatory withdrawals must begin when you’re 70 ½ whether or not you’re still working – not so with the TSP!
The tax rules regarding RMDs are quite a challenge to understand. If you’re feeling bold, check out the TSP publication Important Tax Information About Your TSP Withdrawal and Required Minimum Distributions. Of course, consulting a trusted financial or tax advisor is also advisable!
Publish Date: August 30, 2019 © Tangerine, 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.