Liberalizing Federal Thrift Savings Plans

Take-Away: On September 15, 2019, the law changed with regard to the federal Thrift Savings Plan, which has over 5 million plan participants. The TSP Modernization Act of 2017 is supposed to provide much greater flexibility for participants to access their retirement savings account with more rights of withdrawal.

Background: The Thrift Saving Plan (TSP) is one of the world’s largest retirement plans for civilian and military personnel. The recent law changes are intended to address very restrictive rules, which should come as no surprise since Congress has several other Bills under consideration which are intended to ‘liberalize’ and encourage retirement savings in the private sector, although I personally think the proposed SECURE Act is much more of a ‘shell game’ of diversion engaged in by Congress, but my ‘rant’ on that Act has already been covered.

Old TSP Rules: Under the prior law, a participant in the Thrift Savings Plan was limited to one withdrawal, and only that was after age 59 ½. Another example of inflexibility with regard to these accounts was that a TSP participant who left governmental employment was required to take a full withdrawal of their account upon attaining age 70 ½. Adding insult to this last rule was that if the individual had not submitted the required withdrawal form by the following February after that age was attained, they were deemed to have abandoned their account. While hardship withdrawals were permitted, if taken a 6-month suspension from making further TSP contributions was imposed.

New TSP Rules: The old TSP rules are no longer applicable, particularly with regard to the restrictions on in-plan withdrawals.

Among the new provisions are more in-service (for current federal employees) withdrawal opportunities over the age 59 ½.
Up to four such age-based in-service withdrawals are permitted each year. The only restriction is that such partial withdrawals must be at least 30 calendar days a part.
In-service withdrawals can be taken from the traditional TSP account, from the Roth TSP account, or from both, not in proportion to the traditional and Roth TSP account balances; in the past, withdrawals from these TSP accounts had to be pro rata.
TSP participants who have separated from federal service are no longer required to make a full withdrawal after they attain age 70 ½., which eliminates any deemed abandonment of the account.
TPS participants over the age 70 ½ are subject to the same required minimum distribution rules (RMDs) as private sector retirement plan accounts. In the event a participant does not take their full RMD in a calendar year, the TPS will distribute checks to them in December to comply with that obligation. [One wonders if this ‘forced’ RMD distribution at the end of a calendar year might someday be applied to all retirees who face RMDs for the year from their IRA and 401(k) accounts- it would seem to be a better solution than the current 50% ‘gotcha’ penalty for not taking an RMD.]
TSP participants who have left government employment and become eligible to receive distributions in retirement can choose between monthly, quarterly, or annual distributions from their account. This distribution options can be changed at any time.
Retirees can change from a life-expectancy distribution of payments to a fixed dollar amount at any time during the calendar year. This is in addition to an annuity option.
A hardship distribution can be taken from a TPS account. A hardship distribution must be at least $1,000. There must be evidence of a true need, e.g. costs going through a divorce. There is no suspension of future contributions to a TSP account even if a hardship distribution is taken.

Conclusion: These are welcome changes to one of the world’s large retirement plans. Some of the changes are intended to ’catch up’ with permissible distribution options that are available for private retirement plans, e.g. the ability to annuitize a portion of the retirement account. It will be interesting if some of the other rules, intended to permit greater access to retirement savings, are carried over to private sector retirement, e.g. mandatory distribution of RMDs in December of each year.