Legislation introduced in the Senate today would allow more flexible withdrawal options for federal employees from their Thrift Savings Plan accounts.
The TSP Modernization Act (S. 873) was introduced by Senators Rob Portman (R-OH) and Tom Carper (D-RI) to coincide with the TSP’s 30th anniversary.
One of the primary goals of the bill appears to be to encourage federal employees to leave their savings inside of the TSP after leaving federal service, something the Senators say is beneficial because of the TSP’s low fees. A press release from Senator Portman calls the current withdrawal rules “overly restrictive” and says that they are “inducing federal workers to transfer their retirement accounts out of the TSP to higher-fee accounts.”
The bill would make four changes that the Senators say would “modernize” the TSP.
Age based withdrawals while in-service
Current TSP rules allow only one age-based withdrawal while actively employed in federal service. The bill would allow multiple age-based withdrawals and subsequent post-separation partial withdrawals.
Partial post-separation withdrawal
Current TSP rules allow only one partial post-separation withdrawal (and none for those who had made an in-service age-based withdrawal) – after which only full-withdrawal options are available.
The legislation would add individual flexibility by allowing multiple partial post-separation withdrawals (although TSP could impose some limits if a deluge of withdrawals steeply raises administrative costs).
Full withdrawal via periodic payments
Currently, periodic payments can be selected only in monthly intervals. Additionally, the payment amount can be adjusted only once per year and this must occur just prior to the beginning of the next calendar year. These payments can be reduced to as low as $25/month, however, the recurring payments cannot be stopped unless a participant withdraws their entire remaining balance. Participants enrolled in periodic-payments status cannot elect a partial withdrawal or annuity purchase.
The bill would make these changes:
- Allow a schedule of quarterly or annual withdrawal payments
- Allow participants to change payment amounts anytime
- Permit stoppage of periodic payments while allowing the remaining balance to stay in the Plan (subject to RMD requirements)
- Permit flexibility to select a partial withdrawal or annuity purchase while in periodic payment status
Eliminate the withdrawal election deadline
The bill would eliminate the withdrawal election deadline which currently requires TSP participants to make a post-separation withdrawal election by April 1 of the year following the year in which they turn 70 1/2 and are separated from federal service. This is separate of the IRS requirement to begin distributing required minimum distributions (RMD’s) on the same day.
The Federal Retirement Thrift Investment Board (FRTIB), the group who administers the TSP, supports the bill. FRTIB Executive Director said, “We are very appreciative of Senators Portman and Carper’s leadership on this important issue. Enactment of this legislation will meaningfully improve TSP participants’ ability to responsibly access their retirement savings.”
