Challenges Participants Face When Withdrawing Funds From Your Investments
Regardless of the vehicle, a big challenge all investors face is coming up with a withdrawal strategy that protects their money throughout their lifetime. This is also true with the TSP, when it comes to the TSP, investors face two major obstacles that can impact their retirement funds:
1. Once a TSP participant decides to begin receiving money from the TSP they can’t stop those withdrawals. Like turning on a facet, the money flows and it can’t be turned off. Giving up control of your cash flow limits your ability to manage taxable income in retirement. Paying excessive and unnecessary taxes is a waste of your precious retirement income.
2. Once the TSP begins to liquidate, the money is withdrawn from each investment fund a participant owns proportionately. This means that regardless of market conditions or current value of your investments, part of each fund owned will be sold. Giving up control over which funds should be sold is dangerous and puts you on a path to pre-mature liquidation of your retirement accounts. During down markets, it is important you preserve investments that have been negatively impacted.
The overall problem facing participants is that these two obstacles can expedite the complete liquidation of your retirement funds inside the TSP. Additionally, these are two logical reasons for a TSP participant to roll their money out of the TSP. The TSP is aware of these challenges and has made some strides to address some of these obstacles in an effort to make withdrawing money from the TSP more flexible. These changes are set to go into effect at the end of September and will encompass all TSP participants regardless of whether or not they are retired or withdrawing funds.
What is Going to Change?
The TSP has announced revisions and changes to the rules around withdrawing retirement income from the TSP. Over the years, it has been the desire of many federal employees to keep their retirement money in the TSP after separating from service. These changes were made in part because the TSP has acknowledged that their withdrawal options were simply not flexible enough to meet the lifestyle and demands of today’s retiree. We have outlined the key changes that will be effective the end of September 2019.
When the new withdrawal policies go into effect, you will have more options for how and when you can access money from your TSP account. These options fall into the following categories:
· Partial Withdrawals: Beginning at age 59 ½, plan participants can take up to 4 partial in-service withdrawals as active employees. Additionally, there is no limit of the number of partial withdrawals you can take after separating from federal service (except you can’t take more than one every 30 days). This means that plan participants don’t have to select an automatic withdrawal option, thus allowing them maximum flexibility in the ways they receive income. Expanding the frequency by allowing multiple partial withdrawals gives employees greater flexibility in managing the withdrawal options, both before and after they retire.
· Monthly Withdrawals: Make a list of all your income sources—your paycheck, child support, alimony, social security payments, other government aid etc. Do the same for expenses. To help, track your spending for several months to get a feel for what to include in your budget. Once you’re comfortable, make a plan for paying off debts, paying bills on time and contributing to savings goals. Don’t forget to budget money for savings and entertainment. Allowing participants the ability to adjust the monthly withdrawals creates greater flexibility to avoid liquidation in a down market.
· Flexibility with Roth Withdrawals: You will now be able to choose whether your withdrawal should come from your Roth balance, your traditional balance, or a proportional mix from both. This means going forward you will have more flexibility in managing your taxable income in retirement and extending the life of your Roth balances. Giving retirees the choice of taxation on their TSP creates flexibility in controlling taxes. It also gives employees a way to preserve assets inside their Roth by not creating artificial mandatory withdrawal rules.
Required Minimum Distribution (RMD) Laws
These new changes do not effect current RMD laws which require all retirees who reach 70 ½ to withdrawal a minimum amount of money. Whether or not your retirement funds are inside or out of the TSP, this law will apply. If you don’t elect a withdrawal strategy from the TSP or if you are not withdrawing enough upon reaching your RMD then the TSP will liquidate and send you the correct amount.
While the TSP did not address all of the limitations associated with withdrawing funds from the TSP, they did take a big step forward in helping employee manage their retirement income. The reason we invest in the TSP is to provide income in retirement; therefore; it stands to reason you should develop a withdrawal strategy throughout your lifetime. Planning ahead will go a long way towards making better choices.
James De La Torre has conducted federal benefit and financial planning seminars in all of the country. He is a key note speaker at federal conferences and works with federal professional organizations on ways to improve the communication of federal benefits to their membership. Jim has appeared as a guest on “Fed Talk” on the Federal News Radio network, discussing the gaps in federal benefits and the financial impacts employees face. Jim holds a Charter Retirement Planning Counselor’s (CRPC) designation from the College or Financial Planning and is a member of the Financial Planning Association. Please direct questions or comments directly to James at firstname.lastname@example.org.