How the TSP Modernization Act Might Affect You

Federal Employee Articles

How the TSP Modernization Act Might Affect You

Posted by Benchmark Financial Group, LLC
8 months ago | October 14, 2019

With more than $550 billion collectively stashed in Thrift Savings Plans, federal employees clearly enjoy this important retirement benefit. The fund is structured similarly to 401(k) accounts offered by many private sector employees, and features investment options with a low fee structure. But still, there is always room for improvement.

The TSP Modernization Act sought to improve Thrift Savings Plans even more. Originally passed in 2017, the new law went into effect just last month on September 15. Change can trigger anxiety, but these modifications were designed to benefit you.

Multiple post-separation partial withdrawals. When you separate from service, you can roll over your TSP into another fund or leave the money right where it is. But some people want to take withdrawals, usually due to financial need. In the past, only one post-separation withdrawal was allowed, so you might have been forced to determine the amount of that withdrawal very carefully. Plus, it was subject to a 10 percent tax penalty.

That tax penalty remains, but now you can take multiple post-separation withdrawals. This is good news for someone who wants to take a smaller amount, but might need to take another withdrawal at a later time.

Age-based in-service withdrawals. Let’s assume you’re still employed by the federal government, but you need access to your TSP funds for some reason. If you’ve reached age 59 ½, you can take up to four in-service withdrawals each year (previously you could only take one per year).

Strategic withdrawals. Now, when you take withdrawals from your TSP, you can choose between taking the funds from your Traditional balance, your Roth balance, or a mixture of both. Since withdrawals from these two types of account are taxed differently, this new rule allows you to more strategically plan for income taxes.

You can make changes to your RMDs after age 70 ½. Previously, federal retirees were required to commit to an RMD each year, either a fixed monthly amount or an annual RMD based upon life expectancy. Now, you will be free to change your withdrawal election.

Make changes to your installment payments. Now, instead of committing to a fixed installment payment each October during “open season”, you can change the amounts as you go along. This way you can leave your money in your TSP until you really need it, or adjust your budget throughout retirement.

As you can see, these changes to TSP funds generally allow for more flexibility. But if you have any concerns or questions, please contact our office and we can help you determine how these changes affect you.

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