What You Need to Know About the Thrift Savings Plan

What You Need to Know About the Thrift Savings Plan
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By MOAA Staff


Note From MOAA: This article is regularly updated to include changes to Thrift Savings Plan (TSP) regulations. Last update: December 2023.


The Thrift Savings Plan (TSP) has numerous positive attributes: the extremely low costs for the core funds, the simple but effective investment options, and the ease of investing in a tax-efficient manner for your future, to name a few. However, it does have some quirks investors should know about.


You now have more choice over distributions. One of the big disadvantages of the TSP used to be the limited withdrawal options. Well, thanks to the TSP Modernization Act (implemented in 2019), there are now more ways to withdraw your money.


[FROM TSP.GOV: Distributions Information (PDF)]


There are four basic methods to take distributions:

  • Installment payments (Either a fixed dollar amount or an amount based on life expectancy. You can receive the payments monthly, quarterly, or annually.)
  • Partial distribution
  • Total distribution
  • Annuity purchases


You can use one or any combination of these methods. There’s no limit on the number of distributions you can take after you retire, but processing times limit you to no more than one per month.


If you have both traditional and Roth money in your account, you can specify that your withdrawal comes from traditional money, Roth money, or pro rata (a distribution that has the same percentages of Roth and traditional that your account does).


[RELATED: MOAA's Digital Retirement Guide]


You can transfer money from your TSP to an individual retirement account (IRA) or an eligible employer plan like a 401(k) – and from an IRA or 401(k) back into the TSP. While you can no longer contribute to the TSP once you leave the military, there is a way to add money to your account: You can transfer money from traditional and Roth employer plans and from a traditional IRA into your TSP account (transfers into the TSP from Roth IRAs are not allowed). Or, you might want to consolidate your retirement savings in your post-military employer’s retirement account, or in your IRA, by transferring your TSP balance out.


[MOAA WEBINAR RECORDING: What to Do With Your TSP/401(k) When You Switch Jobs (Exclusive to Premium/Life Members]


When transferring balances, you’ll have to pay attention to the tax treatment of your savings. If you transfer a traditional account to a Roth account, you will have to pay taxes on the conversion.


You can keep your TSP account after you separate from federal or military service as long as you keep a balance of $200 or more in the account.


[FROM TSP.GOV: Tax Rules About TSP Payments (PDF)]


You’ll pay penalties on withdrawals before age 59½, with certain exceptions. If you take a distribution from your TSP account before you reach age 59½, you’ll pay a 10% penalty in addition to regular income tax. However, if you separate from service during or after the year you reach age 55, you won’t pay the additional penalty.


You have to pay attention to the 5-Year Rule. If you have money in the Roth TSP, it’s separated into two pools: contributions and earnings. You’ve already paid taxes on your contributions, so you won’t pay taxes on distributions from that. And you won’t pay taxes on earnings, either, as long as the distribution is “qualified.”


For a distribution to be qualified, you must be 59½ or older AND five years must have passed since your first Roth contribution.


[RELATED: Roth or Traditional? Know the Difference Before You Decide]


Required Minimum Distribution (RMD) changes. SECURE 2.0 increases the age at which you must begin taking RMDs from your TSP account. On Jan. 1, 2023, the age increased to 73. It will increase to 75 on Jan. 1, 2033.


SECURE 2.0 also reduced the penalty tax if you don’t take your full RMD amount in any given year. Previously, the excise tax was 50% of the amount. Now it is 25%, and it can be reduced to 10% if you take the correct RMD within two years.


If you are required to take an RMD and your distributions fall short of the required amount, the TSP will automatically send you the amount that’s required. You’ll want to make sure that your address is updated, however, because they will not send a check if they know you have an incorrect address on file.


Beginning in 2024, Roth balances will no longer be subject to RMDs prior to a participant’s death. RMD calculations will only include your traditional balance. Calculations for spouse beneficiary participant accounts will still include the entire account balance.


The RMD process does not allow the use of all the withdrawal tables established by tax law. The RMD tables specify your withdrawal amount each year. Life expectancy rates determine the annual withdrawal amounts in the RMD tables.


Three RMD withdrawal tables are established in the tax code (see IRS Publication 590-B for details):

  • Single Life (the greatest withdrawal amount)
  • Uniform Lifetime (usually the middle amount)
  • Joint Life and Life Survivor (usually the smallest amount)


The TSP does not allow the Joint Life and Life Survivor table as an option for TSP participants following RMD requirements.


The IRS Single Life Table is used to calculate installments based on life expectancy for participants who have not yet reached RMD age when installments begin. When these participants reach RMD age, they may choose to switch to the Uniform Lifetime Table. This decision cannot be reversed.


The Uniform Lifetime Table is used for participants who have already reached the RMD age when payments begin.


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