The Thrift Savings Plan Makeover

If you’re wondering what to do with your Thrift Savings Plan (TSP) account after you’ve separated or retired from the military, you’re not alone. Members regularly ask me if they should transfer their TSP account to an IRA. While my go-to answer to the question has always been, and will continue to be, “it depends,” there are more factors to consider now that President Trump signed the TSP Modernization Act of 2017 into law.

The good news: The new TSP law is geared to increase flexibility to TSP participants. An important caveat: TSP plan administrators have two years to put this law into effect from the time it was signed. Because exact details could change, stay tuned to USAA and tsp.gov for more information. 

Let’s look at four specific features presented in the new TSP law.

1. The limit on partial withdrawals is eliminated. You will have freedom to use your funds as you need them without having to set up a stream of income or unchangeable periodic payments. Before this new law, you could only take one partial withdrawal in your lifetime.
2. The 70.5 age limitation is eliminated. You still must take your required minimum distribution as the IRS requires, but you can leave your account invested in the TSP fund of your choice. Before this new law, your account would be “forfeited” if you did not make a withdrawal selection by age 70.5. Participants could still access their money after eventually making a withdrawal selection, but they missed out on any earnings made during the forfeited timeframe.
3. The law makes it easier to control withdrawals. Currently, withdrawals from TSP are made proportionately from Roth and Traditional parts of the account. This means you can’t simply withdraw money from only the Roth or Traditional portion of your account to control taxable income in retirement. Once the new law is in place, you will be able to do just that.   
4. Finally, you have increased flexibility to change the periodic payment option of TSP. You can even stop the payments altogether if you decide you don’t need the money anymore. Before this new law, those beginning to withdraw from TSP on a regular basis had only the following three options or a combination of them:

• life annuity
• lump sum single payment
• periodic payments

Also, once you made your choice, you were locked in. The ability to change your decision can be very helpful if you find a part-time job or inherit money and desire to allow your TSP funds to grow.

A successful retirement depends on long-term savings and the flexibility to use your money wisely in retirement. One way to use your money wisely is to only withdraw money when you need it. Historically, TSP participants who were transitioning from the accumulation phase (growing their money) to the distribution phase (using their money) faced a dilemma: Stick with a low-cost plan that has limited flexibility, or roll over to an IRA or another plan that does. These new TSP changes are designed to improve your flexibility and are a big win for those who diligently serve our nation. 

So, what is the answer to the question we started with? Yep, it’s still: “it depends.” There may be other factors that could affect your decision as well, such as the added creditor protection provided by TSP, relative low cost of TSP, or the level of service and advice offered through an IRA provider.  Be sure to speak with a qualified financial advisor about this decision.   However, if you have time to delay your rollover decision, it may give time for the full details of these TSP changes to roll out and you’ll know better how they may affect your retirement lifestyle.

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