The Federal Retirement Thrift Investment Board (FRTIB), the agency that manages the Thrift Savings Plan, recently issued a final rule in the Federal Register in which it responded to comments it received from individuals regarding withdrawal options for the TSP.
The rule was published in conjunction with upcoming changes to the TSP as a result of the TSP Modernization Act. This new law will allow additional withdrawal options and also eliminates the requirement that participants who at least age 70 1/2 and are separated from federal service to make a full withdrawal election with respect to his or her TSP account.
In the rule, the FRTIB said that one suggestion that was made by six individuals was to allow Roth conversions within the TSP. Many 401k plans will allow participants to convert traditional 401k balances to Roth. It creates a taxable event, but depending on one’s situation, it can save a lot of money over time by paying the taxes up front. Presumably, the individuals who inquired about getting this option within the TSP were thinking it could be beneficial for tax planning purposes.
The FRTIB said in the final rule that it has weighed this option previously but has decided not to implement it:
The FRTIB has, in the past, considered allowing in-plan Roth conversions and ultimately concluded that the tax complexities involved and, in particular, the potential irreversible financial pitfalls for participants, weighed against doing so. Revisiting this decision was outside the scope of implementing the changes permitted by the [TSP Modernization] Act.
Other Questions Asked
Other people asked about being able to withdraw from one’s tax-exempt balance only, but the FRTIB noted that this is prohibited by the Internal Revenue Code.
One question asked suggested that TSP participants be allowed to make fund specific withdrawals. The FRTIB said it had weighed this option but declined to add it because “complexity involved in updating withdrawal election forms and the associated programming to permit fund-specific withdrawals renders this option impracticable at this time.”
One individual wanted post-separation withdrawals to be exempt from the 10% additional early distribution tax regardless of the participant’s age. The FRTIB noted, however, that this is governed by the Internal Revenue Code.
And another commenter expressed frustration about the fact that the upcoming changes do not permit a participant to make a single withdrawal election from his or her traditional balance and Roth balance in a percentage other than pro rata. The FRTIB said it had considered allowing this but that “doing so was unfeasible from an administrative perspective.”
A copy of the final rule is included below.