Thrift Savings Plan Changes Coming This Fall

Money jar with retirement label.

The Thrift Savings Plan (TSP) is undergoing some major changes this fall which will make it much easier to withdraw funds.

Beginning Sept. 15, 2019 you'll be able to make partial withdrawals from your account at any time, change any installment payments and make additional partial withdrawals whenever you need to.

Let's look at your options for getting money from your TSP now, and what your options will be when these changes are made in September.

Getting Your Money While Still Employed

Currently, there are basically two ways to get money out of your TSP while you are still employed: a loan and withdrawal.

There are two main types of TSP loans: a general purpose loan and a residential loan. A residential loan must be used to buy or build your primary residence, documentation is required.

With a loan, you repay the amount you have taken out of the TSP and pay an interest rate equal to the rate-of-return on the G fund. You can also continue to contribute to your TSP account while you are paying off the loan. Loans are not taxable.

The general purpose loan must be repaid within five years, while the residential loan must be repaid within 15 years.

The second way to get money from your TSP while employed is an in-service withdrawal. There are two types of in-service withdrawals. A financial hardship withdrawal and an age-based withdrawal.

With a financial hardship withdrawal proof is required, the age-based withdrawal requires no proof, but you must be at least 59.5 years old to take an age-based in-service withdrawal.

You must pay taxes on the withdrawals and may have to pay a tax penalty for a financial hardship withdrawal.

You don't have to pay the money back, but your TSP balance will obviously drop by the amount of the withdrawal.

Most financial experts warn against borrowing from your retirement fund or taking the money out early except in the most dire of circumstances.

Getting Your Money After Leaving Employment

When you leave the service you can get to your money at any time. However this is seldom a good idea because you will normally have to pay taxes plus a tax penalty if you cash out your TSP before you reach 59.5 years old. The best thing to do is keep your money in the TSP or put it into another qualified retirement plan.

When you reach age 59.5 you can setup a distribution plan for your money. You currently can request what is known as a partial withdrawal or a lump-sum withdrawal.

If you take an age-based withdrawal while employed you can't take a partial withdrawal after you leave the service. A lump-sum withdrawal can be either the whole amount in cash, a set monthly amount or an annuity which is similar to a set monthly amount. Currently, once you make a decision you are locked in.

All of that changes in September.

New Withdrawal Options

Beginning Sep. 15, 2019 any in-service withdrawals you take will have no effect on the number of post-separation partial withdrawals you can take. You can also elect an installment payment plan after you retire and if you need a big lump-sum payment for an emergency, you can get it.

You will also be able to change your installment payment plans whenever you want. You can change the amount you get each month, or switch between a monthly, quarterly or annual installment payment plan. Currently you can only make minor adjustments to a payment installment plan, and only once a year during open-season.

If you're 59.5 or older and still working in federal civilian or uniformed service, you will be able to take up to four in-service withdrawals each year. Currently you only get one age-based in-service withdrawal.

After you retire you will be able to access your money through a partial withdrawal at any time, up to as often as once per month. You'll also be able to start and stop your payments whenever you want.

Under the new rules, you'll be able to choose whether your withdrawal should come from your Roth balance, your traditional balance or a proportional mix of both. Currently any distributions are automatically proportional to your balance, often resulting in tax time headaches.

And, once you reach age 70.5 years old you won't have to figure out the required minimum distribution amount and tell TSP how much to send you each month to avoid a big tax bill. TSP will automatically figure out the required minimum distribution amount and send it to you each year if you don't make any plans.

Last but not least, TSP will finally let you request withdrawals and do much of your financial planning online. Currently, TSP requires you to fax or mail hardcopy documents for most withdrawals, distributions or changes. Once September rolls around you should be able to accomplish most actions online.

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