Congratulations. We are living in the future. For years, FERS annuitants and those who continue to stay employed beyond age 59 ½ complained that they were constrained in withdrawing their Thrift Savings Plan investments. In the “old” days, if they owned Traditional and Roth accounts, they had to have equal percentages from the two accounts when they wished to elect a withdrawal.
The latest online PDF of Distributions: Installments Total and Partial Distributions Life Annuities provides the new flexibility for annuitants on page 6:
Traditional, Roth, or Both
If you have both traditional and Roth money in your account and are leaving some money in your account, you can specify that your distribution should come only from your traditional money, only from your Roth money, or pro rata. Pro rata means the distribution will have the same percentages of Roth and traditional as are in your account.
Example of a pro rata distribution: Your total account balance is $150,000, of which $120,000 (80%) is traditional and $30,000 (20%) is Roth. You request a pro rata distribution of $10,000. Your distribution will consist of $8,000 (80%) of traditional money and $2,000 (20%) of Roth money.
If you are still working as a federal employee and have attained age 59 ½ then you will be interested in the latest online edition of New Rules and Processes for Age-Based In-Service Withdrawals.
On page 7 of the pdf under:
Age-59½ Withdrawals
If you are 59½ or older, you can make withdrawals from your TSP account while you are still employed. You must pay income tax on the taxable portion of your withdrawal unless you roll it over to an IRA or other eligible employer plan.
Read the content and continue to page 8:
You have a number of withdrawal options, depending on whether you have both traditional and Roth money in your account or just one source.
If you only have one source (traditional or Roth), you can
- withdraw a specific dollar amount from your vested account balance as long as it’s at least $1,000, or
- withdraw your entire vested account balance.
If you have both traditional and Roth, you have those same two options, but you can also
- withdraw a specific dollar amount ($1,000 minimum) and request that it come only from traditional or only from Roth,
- withdraw all of your traditional money, or
- withdraw all of your Roth money.
If you choose instead to withdraw money from both traditional and Roth, your withdrawal will be taken pro rata from both. That means that your withdrawal will have the same proportion of traditional and Roth money as you have in your total vested account balance. Example: You have $100,000 in your vested account balance, including $80,000 traditional and $20,000 Roth. If you take a $10,000 withdrawal, $8,000 will come from traditional and $2,000 will come from Roth.
The distribution rule changes allow annuitants and those working over age 59½ to withdraw money from the TSP. However, these changes also mean an opportunity to explore how your investments are diversified within a Traditional and Roth Blend in anticipation of a withdrawal strategy or to provide additional flexibility for uncertainties.
Let’s suppose a person intends to retire in the year 2036 when turning age 62.
In 2030, she or he will have a Traditional and a Roth account, which was opened in 2020.
The Traditional account will have $600,000 in investments in 2024, and the Roth account will have $75,000. Both accounts are invested in the C, S, and I Funds.
A few years before the person’s planned retirement in 2036, he or she decides to have all of his or her Traditional account invested with the Lifecycle 2040 Fund choice and change his or her Roth account to be invested solely in the G Fund.
The flexibility resulting from this arrangement would allow most of the TSP funds to be still dedicated to the long term. The Roth account would hold just the G Fund allocation and provide a safe “bucket” that should never go negative regardless of the financial markets until and through 2036.
The person feels better about the uncertainty of the 2036 financial markets and has also created a safe source of funds should she or he need funds after age 59½.
This would be because when the investor reaches age 59½, he or she can withdraw money from the G Fund account since over five years have passed since the Roth was opened in 2020.
Another advantage is that since the withdrawal is from a Roth account, it will not be taxable. Thus, the Roth can augment one’s emergency fund savings.
More importantly, the investor will not be as worried about a potential financial meltdown at retirement in 2036.
