Hi Gary.
We posted some previous articles on this subject. Let me repost them for you....
TSP's Future: Flexible Withdrawals and Mutual Fund Options
July 27, 2015
Members of the board that oversees the Thrift Savings Plan gave agency staff the green light on Monday to move ahead with plans to eventually provide participants with more flexibility to withdraw money from their accounts, and offer federal employees the option to invest in mutual funds.
Greg Long, executive director of the Federal Retirement Thrift Investment Board, however, emphasized that both changes are a long way -- years -- from implementation. Changing TSP withdrawal rules requires legislation; Congress gave the board the option in the 2009 TSP Enhancement Act of adding mutual funds, but the agency and federal employee advocates have been weighing the pros and cons of introducing the option to the TSP portfolio ever since.
"I am perfectly fine pushing this out until we have all the king's horses and all the king's men in line to make this work," Long said, of a mutual fund window for TSP participants, during the board's monthly meeting on Monday.
Long said he saw changes to withdrawals as the more urgent need because of data the agency has collected on why participants are leaving. In 2013, enrollees who separated from the government transferred $9 billion out of the TSP to other financial institutions. Twenty-seven percent of those participants said they were motivated to move their money because they wanted more withdrawal flexibility.
"Participant actions and their feedback provide clear indications of meaningful dissatisfaction with our withdrawal options," Long said in a July 7 memo to board members – a sentiment he reiterated during Monday's meeting. He said retaining participants is "not about asset accumulation; it's about better financial outcomes for participants." The TSP board manages more than $450 billion in federal employee retirement funds.
The TSP currently offers two main withdrawal categories for participants, one for those who want to take money out while they are still working for the government (in-service) and another for employees who leave the government (post-separation). There are various rules surrounding the who, what, when and how of withdrawals now, which some enrollees find too restrictive. The number of hardship withdrawals (in-service) were up 13 percent in June from May, though the TSP said it reflects a "similar seasonal increase in prior years" related to paying for vacation and college tuition.
Among the proposed changes the TSP is considering:
- Allow multiple withdrawals (currently only one is allowed) for the age-based (59 and a half) in-service withdrawal, as well as remove the restriction on post-separation partial withdrawals related to this type of transaction.
- Allow multiple partial post-separation withdrawals. Currently, participants can only choose one partial withdrawal under this option; subsequent transactions must be full withdrawals.
- Eliminate the withdrawal election deadline for post-separation withdrawals.
For more information on current TSP withdrawal options, see this Retirement Planning column from Government Executive columnist Tammy Flanagan.
Long said the natural concern over changes to withdrawals would be that it leads people to exhaust their retirement savings. "Just because people want more flexibility, does not by itself mean it is prudent for the TSP's fiduciaries to provide that flexibility," he said in the memo to the board, which was passed out at Monday's meeting. "Although it may appear counter-intuitive, the research on this issue demonstrates that additional withdrawal flexibility leads to more participants keeping money inside the employer-based qualified plan system longer."
The agency is talking to the Employee Thrift Advisory Council early next month about proposed changes to TSP withdrawal rules.
On the mutual fund option, ETAC (which includes representatives from several federal employee advocacy groups) has said it supports moving forward after initially expressing some trepidation about the cost of implementation and potential risks to enrollees that cropped up when the idea became a possibility in 2009.
The FRTIB has estimated that creating the mutual fund window will cost about $6.7 million, and although relatively few participants (between 1 percent and 3 percent) are expected to opt into it, one of the pros is that it encourages enrollees – and their money – to stay in the TSP.
"If a MFW were available in 2013 and it caused just 10 percent of distributed dollars to stay at the TSP, our net cash flow would have improved by $1.2 billion," according to a July 27 memo from Long to the board on the mutual fund window offering. "In addition, the directly-affected participants would be paid substantially lower fees, and all [emphasis in original] TSP participants would have benefited through marginally lowers asset-based administrative fees."
Some concerns over the MFW are that it makes the TSP more complicated, and could lead to confusion and poor investment decisions by participants.
You've Invested for Retirement. Now What?
February 19, 2015
Federal employees have done a fabulous job of accumulating wealth in the Thrift Savings Plan since 1987. Collectively, the nearly 4.7 million TSP participants have more than $400 billion in traditional (tax-deferred savings and growth) TSP accounts and a little over $2 billion in Roth (after tax savings, tax-free growth) accounts.
That's incredible, considering that the TSP is still relatively young -- it will celebrate its 28th anniversary in April. Some of you may remember that in the early years there were many more restrictions on how much you could contribute and how you were able to manage your investments. For example, it wasn't until 1992 that you were able to invest 100 percent of your money in the C and F funds. The S and I funds didn't exist until 2001, and the Lifecycle options weren't available until 2005.
So now the question is, what's going to happen with all the money that federal employees have diligently put away? Remember, there are three stages to investing for retirement:
- Accumulating wealth
- Preserving wealth
- Distributing wealth
Both the people who manage the TSP and many of its participants have reached the point where they're concerned about the distribution of all this wealth.
As of November 2014, there were 4.7 million TSP participants and about 13,000 beneficiary participants (spousal accounts after the primary participant died.) The number of post-separation withdrawals from the TSP has been steadily increasing. About half are one-time partial withdrawals, while others are initial monthly payments. (More than 140,000 TSP participants now get regular monthly payments from their accounts.) A very small number went to purchase TSP annuities.
Single-payment withdrawals of TSP balances are also on the rise. Most of these are cash payments, but they also include transfers to IRAs, 401(k)s and other retirement accounts. In 2013-2014, there were more than 150,000 such transactions. In each of the past two years, more than $8 billion left the TSP annually in the form of post-separation single payments.
Leaving It In
According to the TSP, there are several advantages to keeping your money in the TSP after you separate from federal service. These include:
- For every $1,000 invested, your net expenses are only 28.5 cents per year.
- There are no additional annual fees, commissions, or charges.
- The TSP does not make a profit on your investments.
- The TSP has a responsibility to put your interests ahead of its own.
- The TSP will protect your retirement funds from creditors' claims.
- When you're ready, you can set up a series of scheduled withdrawals so you can receive income without giving up control of your account.
- There are no "back-end" charges when you change your investments or take withdrawals.
If you're planning to move your money from the TSP to another retirement account or investment option after you retire or leave government, you should ask the provider about each of the above points. I would add to this list the fact that the TSP includes the always popular, extremely safe G Fund, available exclusively to TSP participants.
Moving It Out
There are a lot of valid reasons to keep your money in the TSP after you separate. But there are some good reasons to move your money out, too. In the process of preparing for a new webinar series on the TSP with certified financial planner Micah Shilanski, I've learned that these include the following:
- The costs of the TSP are kept low due to relatively simple investment choices, passive investment options and large economies of scale. This is not necessarily good or bad. It's just something to be aware of.
- The TSP's distribution rules don't allow you to choose which investment option from which to withdraw your single payment or monthly payment. Payments are pro-rated between traditional and Roth TSP investments, and also in the percentages in which your money is divided between the TSP's investment options. So you can't for example, just take money out of the G Fund.
- There are penalties and/or taxes on your Roth TSP contributions if you don't pass the test of being at least 59 ½ years old, with at least five years since your first Roth contribution. By moving your TSP into an IRA, you can separate the Roth money from the tax-deferred traditional TSP investments.
- The broad-based index funds used for the TSP are wonderful tools to accumulate wealth. But during the preservation and distribution stages, you may wish to ride a slower roller coaster that doesn't have the big ups and downs of the C, S, F and I funds, but with more diversification and growth potential than the G Fund.
- If you want to take out money on an "as-needed" basis, the TSP doesn't offer the ability to take more than three partial distributions.
- Keeping your money in the TSP may raise certain estate planning issues, especially for a surviving spouse who inherits a TSP account and has a beneficiary participant account established.
- The TSP annuity option is not the same as electing a monthly payment directly from your TSP account. You will be giving up control of your investment in exchange for a monthly annuity payment. For example, there will be restrictions on the disbursement of the account upon your death and caps on the increasing payments if you add inflation protection.
The point is that it pays to take the time to separate fact from fiction and become informed and educated about your options. Doing so will help you enjoy a financially secure and rewarding retirement.
Three (or More) Helpings of the TSP
February 26, 2015
My column last week on Thrift Savings Plan withdrawals attracted several responses like this one:
I do not understand what the following statement from your column is saying: "If you want to take out money on an 'as-needed' basis, the TSP doesn't offer the ability to take more than three partial distributions." Would really appreciate an explanation!
Or this:
I was aware of the ability to take two partial distributions, but how do you take the third?
Many people think that there is only one partial TSP withdrawal available after you separate from federal service and that you then must take a full withdrawal. But to every rule, there are exceptions.
Here are three ways -- and maybe four -- that you can take partial withdrawals after your federal service has ended.
Partial Withdrawal No. 1
There is a post-separation, one-time partial distribution. This allows separated employees to withdraw a portion of their TSP balance and leave the remainder invested until later. Use Form TSP-77 for the withdrawal.
There's also an option for employees who stay in federal service beyond age 59 ½ to exercise this one-time partial distribution as an "age-based in-service withdrawal" by using Form TSP-75. If you make this choice, then you will not be permitted to do a post-separation partial withdrawal.
Partial Withdrawal No. 2
When you're ready to withdraw all of the money from your account, you may exercise a full withdrawal by selecting from a variety of withdrawal options. One of these involves a second single payment. This is your second chance for a partial distribution. The only condition is that if you are going to elect a single payment of, say, 50 percent (it can be any percentage up to 100 percent) of your remaining balance, then you will need to make a choice between monthly payments and/or a life annuity with the remaining 50 percent. (You could choose to do both--some as a series of monthly payments and the remainder as a life annuity.)
You can make a full withdrawal online or by using Form TSP-70. TSP has an online wizard that will help you with your withdrawal request. Based on your answers to a series of questions, it will prefill the appropriate sections of your form and help you avoid mistakes that could cause your request to be delayed or rejected.
Partial Withdrawal No. 3
If you chose a series of monthly payments, you can stop them later and cash out the remaining balance or transfer it to an IRA -- or a little of both. To learn more about TSP post-separation withdrawal options, see the TSP publication Withdrawing your TSP After Leaving Federal Service. Use Form TSP-79 to request a final single payment from your TSP account. This will close your account.
Possible Partial Withdrawal No. 4
There is technically a fourth partial withdrawal that can be used prior to retirement and will not count against your one-time post-separation partial withdrawal. If you have an outstanding TSP loan at separation and don't repay it in full within 90 days, a taxable distribution of the outstanding balance will be declared. To avoid this distribution and possible tax penalties, you may be able to roll the amount of the distribution into an IRA or eligible employer plan within 60 days of it being declared. You will not be able to withdraw your TSP account until your loan is closed by either payment in full or taxable distribution.
For more information about loan repayments after leaving federal service, see this TSP tax notice. The option to not repay an outstanding TSP loan balance should be approached with caution, due to the possibility of a tax penalty for early distribution and the overall tax consequences of a lump sum payout of your TSP account. To learn more about TSP loans, see this publication.
Required Minimum Distributions
Keep in mind that under IRS rules, you must begin receiving required minimum distribution payments in the calendar year when you become age 70 ½ and are separated from service. The TSP will calculate these distributions for you based on your account balance and your age if you have money left in your TSP account when these distributions are required.
Be sure to keep your address current with the TSP using Form TSP-9, so you will be notified when you must make a selection for full withdrawal as the required minimum distribution deadline draws near. If you do not make a withdrawal choice by the required deadline, your account balance will be forfeited to the TSP. You can reclaim your account, but your balance will not accumulate earnings after it is forfeited.
Although your withdrawal options are somewhat limited within the TSP, there may be more choices than you're aware of. No matter which option you exercise, remember that withdrawing from your TSP account after your separation may have significant tax consequences. It's important to understand these before you make a choice you may not be able to rescind later.
Although the TSP webinar series that I'm presenting with certified financial planner Micah Shilanski has sold out, it's included in an annual webinar pass providing access to a full year of sessions on retirement planning. To learn more, click here.
http://www.shutterstock.com/pic-162656312/stock-photo-retirement-plan.html?src=&ws=1(Image via Jerry Sliwowski//Shutterstock.com)
February 26, 2015
http://www.govexec.com/pay-benefits/retirement-planning/2015/02/three-or-more-helpings-tsp/106212/
Posted by: sarah_oz@yahoo.com
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