TSP Changes Withdrawal Options…but MUCH remains to be done
If you follow my Youtube channel you know how frustrated I get with the TSP withdrawal options. They are bad. So bad, in fact, that I simply can’t see a reason for one to leave his account in the TSP when he separates from service.
I did a video on this exact topic yesterday where I show you the insanity of the withdrawal options for TSP account holders and their heirs.
However, a bunch of my subscribers made me aware of the TSP Modernization Act which President Trump signed in 2017. I have such GREAT subscribers, I must say. It’s wonderful being educated by your own audience.
So, I took it upon myself to read what this act entails. Could it be, after all these years, the TSP is finally stepping into the 20th century in their allowance for regular distributions??? Mind you, I’m not even asking for TSP to step into the 21st century, just the 20th.
And lo and behold, after reading up on the Act it turns out that the TSP has stepped into the 20th century, but only during the Teddy Roosevelt presidency. There is a LONG way yet to go.
So, let’s look at the new options. Here is the FAQ from TSP.gov.
1. Multiple PARTIAL withdrawals will be allowed(up to 12 a year). About time.
2. You can SPECIFICALLY identify WHICH account to take a withdraw from, Roth or Traditional TSP. That is fantastic!
3. You don’t need to make a FULL WITHDRAWAL ELECTION when you hit 70.5! HUGE!
4. Once you’ve separated, you can choose monthly, quarterly or annual distributions. Not great but we’ll take it.
5… Oh, there is no 5. Those 4 above are it.
Huh? Yup. That’s it. Not much Modernization there, eh?
What we have here is a small, incremental increase in flexibility. But no where near enough for one to advocate keeping the TSP upon separating from service. Why?
Well first and foremost, if you are married the options for your spouse are horrible. At your death the TSP automatically sets up a Beneficiary Participant Account (BPA). I won’t get into that here but the BPA is NOT the same as the TSP in terms of flexibility. Notice the “Modernization Act” didn’t address the BPA.
Secondly, non-spouse beneficiaries can not keep the TSP. It MUST be redeemed, either via a rollover to an inherited IRA or a lump sum distribution.
Thirdly, beneficiaries of the BPA can NOT, I repeat can NOT, rollover that account to an IRA. They MUST take a lump sum distribution!!! That will lead to gigantic taxable income to the beneficiary and there is not a thing they can do about it.
Fourth, the reason to remain in the TSP is because it has dirt low expenses. We are talking on average around 4 basis points, or .04%, a year. That’s it! Incredible value there. But nowadays you can get pretty doggone close to similar expenses at Vanguard, Schwab and other firms…without the insane distribution restrictions.
Thus, while I very much appreciate Congress and President Trump trying to allow more flexibility for TSP participants, what they’ve done here is just one tiny, tiny step, not nearly enough. It’s actual not the politicians fault. It’s the Trustees of the TSP. I keep reading that they’ll have to increase costs if they allow more flexibility. Meaning, if one reads between the lines, this “Modernization Act” is an attempt to get the people screaming for more options to pipe down. A small bone to placate the rabble if you will. So don’t expect more “Modernization” any time soon.