Congress recently enacted changes to the Thrift Savings Plan (TSP) that will give federal retirees flexibility to withdraw money from their accounts.
These changes are helpful.
But getting your TSP money will still not be as flexible as in the private sector. In the private section, IRA distributions can be made in different amounts, at any time, and from any of your funds. This legislation fixes the first two issues but not the third.
The TSP changes address the fact that many retirees rollover their entire TSP balance to an IRA after leaving federal service. As a result, the TSP asset base is not as large as it could be. And the TSP administrative fees have the potential to increase because they would be spread out over a smaller base. Congress wanted to forestall this rise in TSP expenses.
Background
Currently federal retirees can withdraw part of their account balance only once. They need to do this partial withdraw before they set up periodic (e.g., once a month) payments from their TSP account.
Once they started periodic payments, however, they are not allowed to make a partial withdraw. The only recourse is to switch the amount of the monthly withdrawal to take effect the next year.
And the withdrawal comes proportionally from the funds in your account based on their value. You cannot direct the TSP to take the amount from the G Fund only. It will come out of all of your funds.
Not a very flexible system.
Because of these restrictions, I often counsel federal retirees to make the one allowed partial withdraw (e.g., 25% of the balance) before beginning their monthly payments. They invest the partial withdrawal in an IRA. They can then tap the IRA in an emergency or to respond to life events.
I also urge federal retirees to consider leaving the majority of their money in the TSP because the TSP fund’s fees are the lowest. They are even lower than index funds offered by Schwab, Vanguard, or Fidelity.
The TSP fund expenses, which are deducted from a fund’s return, are on average 0.038%. For example, the Vanguard 500 Fund Admiral Shares has a fee of 0.04%. Vanguard small cap and international funds (comparable to the TSP’s S and I Funds) have higher fees than the TSP.
The TSP funds have low fees because they are offset by account forfeitures (if folks leave the government without vesting) and loan fees. These keep the funds’ fees lower than anywhere else.
New Withdraw Options
Under the new law retirees will have flexibility to adjust the periodic payments – both amount and frequency and more one-time payments. But they will not be able to direct from which fund the money would be withdrawn. The withdrawal will still be proportional from each fund in the account.
The law will allow federal employees and retirees to make multiple age-based withdrawals from their TSP accounts and remain eligible for partial withdrawals after they leave federal service. Additionally, those who have left would be able to make multiple partial post-separation withdrawals.
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In sum, these changes are a step in the right direction. But they do not give the same flexibility as in the private sector. I am hoping that the TSP Board begins to roll out these changes by the end of 2018.
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