*You should consider carefully the consequences of an in-service distribution. Distributions from your pre-tax TSP account are subject to federal income tax, and an additional 10% penalty tax will generally apply to distributions made prior to age 59½. The taxation of in-service withdrawals from a Roth TSP account depends on whether the distribution is a qualified or nonqualified withdrawal. Consideration should also be given to the overall depletion of your retirement savings. In addition, if you’re married, your spouse must be notified of any request for an in-service distribution, and in most cases must consent.
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 service members 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All or a portion of your vested account balance may be withdrawn at that time.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.
About 360 Financial Group
360 Financial Group, founded in 1990, provides a holistic approach to comprehensive wealth management as well as tax and accounting and investment management services. At 360 Financial Group, our MISSION is to be our clients’ primary advisor. We believe our knowledge, experience, and intuitive approach to tax and financial planning gives our clients the confidence they need to help them realize their dreams.
Registered Representative, Securities Offered Through Cambridge Investment Research. Inc., a Registered Broker-Dealer, Member FINRA, SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. 360 Financial Group and Cambridge are not affiliated.
Cambridge Investment Group, Inc. is a privately-controlled firm with a national reach across the financial services industry consisting of multiple broker-dealers and RIAs, including Cambridge Investment Research Advisors, Inc. – a large corporate RIA; and Continuity Partners Group, LLC – a special purpose broker-dealer and registered investment advisor; and Cambridge Investment Research, Inc. – an independent broker-dealer, member FINRA/SIPC, that is among the largest privately-controlled independent broker-dealers in the country supporting approximately 3,000 independent financial professionals nationwide who serve their clients as registered representatives and investment advisor representatives, choosing to use either Cambridge’s firm Registered Investment Adviser or their own. For more information visit www.joincambridge.com.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017.