It appears that the CARES Act (H.R. 748) is going to allow flexibility in in-service withdrawals from employer sponsored defined contribution plans like our Thrift Savings Plan. The bill was just signed into law and the Federal Retirement Thrift Investment Board is looking at how to best implement it for TSP participants.
In fact, the FRTIB sent out a short email on March 27th to subscribers of the TSP Plan News telling us that they will update us as the TSP implements the changes to retirement plans that have been introduced by the Coronavirus Aid, Relief, and Economic Security Act.
It appears that there are several provisions in the Act that will affect retirement plans.
Suspension of Required Minimum Distributions
One is of benefit to TSP participants who are already retired and who are old enough to have to take required minimum distributions (RMDs). The CARES Act eliminates RMDs for 2020. Therefore, those who would otherwise have had to withdraw money from an account that has lost value (in effect, selling at a loss) no longer have to do so.
This is especially beneficial for TSP participants because the Thrift Savings Plan requires that withdrawals be proportional among the different funds based on the account allocation. Within the TSP, if you had 50% of your account in the C Fund and 50% in the G Fund, half of each withdrawal would come from the beaten down C Fund.
Withdrawals from Retirement Plans
Another provision allows for plan participants who are under the age of 59 ½ to take up to $100,000 out of their company sponsored plans and IRAs without paying the 10% early withdrawal penalty that generally applies to such withdrawals.
In addition, currently employed participants will be able to take a hardship withdrawal that could be repaid over three years. Currently, hardship withdrawals cannot be repaid – period. If the withdrawal were not repaid within the three-year period, it would become taxable.
Is This a Good Idea?
When it comes to the provision dealing with in-service withdrawals, Carl Perkins and Ringo Starr have advice for us – Honey Don’t.
The “King of Rockabilly” wrote and released the song Honey Don’t in 1956 and it was covered by the Beatles (with Ringo singing the lead) in their Beatles 65 album.
We shouldn’t hit savings we have set aside for retirement for anything other than that retirement unless there is absolutely no other alternative. Consider first:
- Your emergency fund;
- Other taxable accounts;
- Reducing current expenses by tightening up your budget; and
- Taking advantage of flexibilities offered by lenders and credit card companies during this crisis.
If you end up taking money from your TSP during this time of hardship, take steps to repay it once things are back to a more stable footing. Re-payments will not count against the annual contribution limit.
Honey, don’t hit your TSP unless it’s the last resort.