Congress recently passed a long sought after bill, H.R. 2146, benefiting federal law enforcement officers (LEO) and other special category employees. Part of the Bipartisan Trade Priorities and Accountability Act of 2015, this new law will change the rules for special category federal employees and their ability to access their TSP accounts.
I will go over some of the specific questions here, as well as how the changes may affect your own personal retirement planning.
What groups does the rule apply to?
The changes for TSP access will apply to all of the following:
- Federal law enforcement officers
- Federal firefighters
- Customs and Border Patrol Officers
- Air Traffic Controllers
Why was it needed?
State and local law enforcement officers and firefighters have always been able to withdraw from their employer retirement funds if they retired in the calendar year they turned 50. However, federal officers, performing the same jobs and still subject to forced retirements, were not allowed to do the same.
The current rule for federal officers allows for penalty-free distributions if the officer retired in the calendar year they turned 55 or later. The only option available to a federal LEO who retired prior to age 55 was 72(t) life expectancy payments which are very inflexible. Since many federal LEO’s are eligible and retire before 55, there was a significant demand for better options.
What does it actually do?
The rule change will give the same benefits to federal officers that state and local officers have. If you retire in the calendar year you turn age 50 or later, you will be eligible for TSP withdrawals without paying the 10% early withdrawal penalty. All other regulations still apply. If you have an existing 72(t) life expectancy withdrawal program in place, future withdrawals under the new rule will not cause a penalty to be applied to the prior distributions. If you met the age 50 requirement when you retired, you will essentially be allowed to break your 72(t) agreement.
When will it be implemented?
The age requirement changes will go into effect for withdrawals as of January 1st, 2016. Any withdrawals made prior to that time will still be subject to the earlier penalty rules. Beginning in 2016, however, the retirement age requirement will be retroactive. For example, if you retired at age 52 two years ago, you would be eligible for penalty-free withdrawals in 2016. A withdrawal in December, 2015 would still be penalized, however.
What does it NOT do?
While the change is welcome for the affected groups going forward, the benefits are not retroactive. If you owe an early withdrawal penalty for a past withdrawal, that penalty will still be applied.
The rule change also only applies to potential penalties on a withdrawal. The same TSP withdrawal restrictions are still in place with regard to the one-time partial and fixed monthly amounts.
Who will be affected by the change?
All current and former special category employees will be subject to the new TSP withdrawal rules. Retirees who retired in the calendar year they turned 50 or later will be eligible beginning in January. Without the change, the same people would have to wait until age 59 ½. Those employees that are still working may have an extra incentive to work at least until January of the year they turn 50. That may be much more manageable for the extra benefit rather than continuing all the way to age 55, as was necessary under the old rule.
Another option retirees had for penalty free access prior the new rule was to implement a 72(t) withdrawal schedule, or a series of life expectancy payments. Previously, the 72(t) withdrawal schedule had to be maintained for five years or until age 59 ½, and any withdrawals in excess of the 72(t) amount would have caused a penalty to be applied to the entire withdrawal balance. Beginning in 2016, additional withdrawals will be allowed for eligible participants without triggering the retroactive penalty.
Who will NOT be affected by the change?
Retirees who retired in the calendar year they turned 55 are already exempt from the early-withdrawal penalty, and their situation will not change. Others who already have retired or will retire prior the calendar year they turn 50 will still not be eligible for the penalty-free withdrawals, and will be limited to the 72(t) option.
How will the change affect my retirement plan?
It is important to keep in mind that new law will affect your access to the TSP only, but not any benefit amounts. If your long term retirement income plan was comfortable before, it still will be, and vice versa. If your retirement income sources are not sufficient to maintain your lifestyle, adding more flexible access will not change that fact.
The biggest change is that many people who are close to age 50 will likely want to stay at least until that calendar year, in order to have the additional options. For those who will now be eligible for penalty free withdrawals, the new option will also affect any potential TSP to IRA transfer. That transfer would result in the loss of the penalty-free withdrawal eligibility, since the rule applies only to the TSP, not IRAs.
There will be many individual factors to consider in everyone’s situation, but the new change only improves your options by providing more flexibility.