The TSP Modernization Act of 2017
Jeff: Hi, I’m Jeff Smith with United Benefits. Today we’re gonna talk about a very hot topic. A lot of people have a lot of questions about this. The new law, the TSP Modernization Act of 2017.
So what is this? It’s a new law that was signed in 2017 that will allow more flexible withdrawal options with your TSP, which is much needed. This will take effect by at least September 2019. The good thing about it – or one good thing about it, too – is all TSP participants, whether you’re retired or actively working or what not, you can take advantage of the new changes once they get implemented.
Let’s go over how it’s currently working to kind of explain what the changes will become. Right now, you’re only allowed one partial in-service or post-service withdrawal. If you take another lump sum withdrawal, you’re forced to take all of your account. So you really only have one flexible withdrawal right now. Your withdrawals from your Roth and Traditional balances must come out proportionately, so you can’t really pick and choose right now. They have to come proportionately.
Your required minimum distributions (we’ll call those your RMDs) require you to make a full withdrawal election after you have turned 70 1/2 and have separated from service, or TSP will initiate an account abandonment process. In other words, you have to take action on this or you can get penalized, not only on the abandonment process but from the IRS as well.
In your monthly payment options, currently you can only choose monthly payments: it can only come once a month. You can only make changes once a year during open season. So there’s not a whole lot of flexibility on that if you needed to change around. If you stop your monthly payments, right now you must receive the rest of your account balance or you also have the option to transfer it into an IRA. So there’s not a whole lot of flexibility on that at all.
These are some things that will be changing. So now let’s look at what will change. Now, once this gets implemented, you’ll be able to make up to four partial in-service withdrawals. So, while you’re working, you’ll have access to it four times. You obviously have to be 59 1/2 or older, or there could be penalties incurred on that. You’re allowed to make unlimited post-separation withdrawals.
Once you’re separated from service for at least 30 days, you can tap into it as often as you like. Now you can choose to withdraw from either Roth or Traditional, so now you have your option on, do you want to take your tax free money, or your taxable money? The RMDs are automatically calculated and distributed to you if you have not satisfied the requirements– whereas in the past, you had to make an action. Now, if you don’t do anything, they will do it for you which is a very good thing. On the monthly payment options, now you can change it to quarterly or annually if you like. You can make changes at any time, you can stop it, you can start it. Also, you can make withdrawals while you’re receiving your monthly payments.
So all these options are good. Like I said, September of 2019, everything should be implemented. The one thing about it like I said, having unlimited access is something you do need to be careful about because this is your retirement account.
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