Ideally the modernization of any process would add flexibility and increase simplicity – and that was the expectation with the 2019 TSP Modernization Act. But is that what actually happened?
The Big Idea: You’re In Charge
The motivation behind saving money in a retirement savings account (like the TSP) is providing income for yourself in retirement.
The TSP is one of the three income benefits in a FERS retirement, but it’s the only one whose income is determined by the account balance – which is influenced by how much you saved and how your investments performed.
It’s helpful to think of retirement savings in two distinct phases: accumulation and distribution. The challenge is that there is a lot of emphasis on the first phase and not enough on the latter. Let’s explore them both.
Phase 1: Money In (Accumulation)
The TSP has made it “dirt simple” to get the money into TSP. You, the employee, sign up to put in a percentage or dollar figure from your paycheck, and like clockwork, the money moves into the TSP throughout your career. You also get to select the investments in two areas: where the new contributions will go and how the total account balance is invested.
The goal here is for savings to build up in anticipation of retirement.
Phase 2: Money Out (Distribution)
In this phase, employees need to do the retirement pivot—going from the savings period (Phase 1) to investing for the 20+ year withdrawal period (Phase 2). Setting your TSP up for a successful Phase 2 can mean the difference between a secure retirement and one where you’re scrambling to make ends meet for your lifetime.
The TSP Modernization Act: Did it make it easier?
More or less, yes. The TSP Modernization Act was created to increase the withdrawal options from the TSP to help retirees have greater flexibility with their payments.
The TSP increased the options to stop/start/change payments, plus you can now select traditional TSP, Roth TSP or both. This was a welcome relief from the “take it or leave it” rigid options that were previously available.
Unfortunately, this stayed the same.
The TSP Modernization Act did not change an important factor in a withdrawal strategy:
You still cannot select the fund(s) you wish to take a withdrawal from.
For any withdrawal, you are forced to take the amount proportionately from each fund you have—even if you have losses in the stock fund(s).
In retirement, it can be especially important to be strategic. For instance, during economic difficulties and stock market losses, it may be helpful to avoid selecting one investment over the other for a withdrawal, but the TSP does not allow you to do this—you must take some from each of your funds so that the investment allocation (percentage in each fund) remains unchanged. This restriction may force retirees into a less-than-favorable situation: skipping their withdrawal to avoid selling too many shares of a stock market fund that has suffered losses.
As part of your retirement pivot, evaluate your TSP funds to make sure they’re aligned with your withdrawal schedule.
Moving Day: Know exactly what you want – and what to ask for
Part of the TSP Modernization Act includes going digital: the withdrawal process has been moved to their online portal. This has its pluses and minuses. The good news: if you can get through the 7 steps online, the form that’s been generated for you based on these steps is probably correct.
The bad news: you get to make these decisions without a lot of support. You’ll be required to select both the withdrawal and the income tax options that work best for you.
That means you really need to know what you want before you get started.
Measure twice, cut once!
It’s an old construction term that means check your math! In the case of TSP withdrawals, educate yourself on what each option offers you. There are four options that you can utilize for retirement income from the TSP:
- Installment Payments: these are scheduled payments that let you pick the amount you receive and whether it’s on a monthly, quarterly or annual basis. Your payments will continue, unless you stop them, until your account balance equals zero. There are differing Federal tax withholdings depending upon how long your payments are expected to last.
- Single Withdrawal: this is an unscheduled payment in which you can withdraw $1,000 or more from your account as a one-time payment. There is no limit on the number of single withdrawals you can make, but the TSP will not process more than one in any 30-day period.
- Purchase an Annuity: you can use all or part of your TSP account to purchase an annuity with their outside vendor. You give up your money and control of it in exchange for a guaranteed lifetime monthly payment. See the TSP fact sheet Annuities for more information.
- Transfer Your Withdrawal: you can transfer part or all of your TSP balance to an IRA or an eligible employer plan. Check with the IRA provider or plan administrator to confirm acceptance of your transfer.
Many people find this process a bit unnerving because you are making important decisions and the terminology can be daunting to keep straight.
Take your time. Clearly understand your options and the benefits that the TSP provides. Track down answers to your important questions.
Make sure you get answers directly from the TSP’s publications, a TSP representative, or a well-qualified advisor that can show you how they know the answers. Hint: avoid the ‘TSP Transfer Specialist’ who doesn’t explain the benefits inside of TSP but knows everything about their own product.