Those born in the first year of the “baby boom” will be turning 70 ½ either this year or next year.
My old high-school friend Jack was born in June of 1946; therefore, he turns 70 ½ in December. I’m a little bit younger, having been born in November of 1946, so I turn 70 ½ in May of 2017. This means that Jack and I will have to begin taking required minimum distributions (RMDs) from our tax deferred accounts (IRAs and the TSP in both of our cases).
The required beginning date for RMDs is April 1 of the year after the year in which an individual turns the age of 70 ½. Jack’s first RMD must be taken by April 1, 2017; mine will have to be taken by April 1, 2018.
After the first RMD, all subsequent RMDs must be taken by December 31; so if I delay taking my first RMD until April 1, 2018, I will have to take my second RMD on December 31, 2018. This might make more income be subject to a higher marginal tax rate. However, nothing stops me from taking my first RMD in 2017, the year in which I turn 70 ½.
So, what exactly is a required minimum distribution? It is an amount of money that must be taken from most tax deferred retirement plans each year after participants reach the age 70 ½. Why 70 ½? That’s the age that Congress decided was the time by which participants should begin taking money out. After all, Uncle Sam has been deferring taxes for years – he’s not going to wait forever to take his cut. The size of a required minimum distribution is based on the previous year’s account balance as of December and the participant’s life expectancy.
Life expectancy is determined (for the purpose of calculating your RMD) by IRS tables that can be found in IRS Publication 590B. Most people will use the uniform life expectancy table, which gives a life expectancy (distribution period) of 27.4 years for one who is age 70. Let’s say that you have $325,000 in your TSP and you are age 70; that would give you a required minimum distribution of $11,861.32, or $988.44 per month.
This article looks at RMDs from the Thrift Savings Plan and has previously appeared in the TSPSafetyNet newsletter. A previous Fedsmith article looked at the issue of taking RMDs from Individual Retirement Arrangements.
Like almost all tax deferred retirement plans, the Thrift Savings Plan requires that participants who are 70 ½ or older take a required minimum distribution each year. If you are retired and withdrawing money from your TSP, it is very likely that you are withdrawing more than the amount that is required. If you are not retired from your federal job when you reach 70 ½, you will not have to begin taking RMDs from your TSP until April 1st of the year after the year in which you retire.
If you have a Roth balance in your TSP, you must take RMDs from it due to the TSP’s proportionality requirement (i.e., withdrawals must be taken proportionally from your Traditional and Roth balances). This is not the case with Roth IRAs, where minimum distributions are not required.
In addition, you are not allowed to rollover your required minimum distribution.
The most popular TSP withdrawal options are monthly payments, either a fixed amount, or an amount based on the IRS life expectancy table. If you elected to take monthly payments based on the IRS life expectancy table, your monthly payments from age 70 ½ on will add up to the exact amount of your RMD. If you elected monthly payments of a fixed dollar amount and are not taking out enough money to meet your required minimum distribution (a rare occurrence), The TSP will send you an additional payment in the month of December to bring your withdrawals up to the required amount.
If you fail to take a RMD there is a 50% penalty applied; 50% of the difference between what you should have taken out and what you actually took out.
As mentioned in the above paragraph, if you’re taking out monthly payments, the TSP has you covered and you’ll never face a penalty for failing to take a RMD. If you are not working and haven’t begun withdrawals by 70 ½, the TSP will notify you at the beginning of the year after the year in which you turned 70 1/2 that you must begin taking out your money by April 1. If you do not begin withdrawing the money by April 1, the TSP will transfer all your money into the G fund. If you do not begin withdrawing your money within nine months, you forfeit your account. Don’t panic! Once you begin taking your withdrawals and have paid your penalties, the TSP “un-forfeits” your account.
John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. Order your copy at shoplrp.com. Ask your human resources office to contact Federal Career Experts about pre-retirement training.