By MOAA Staff

Note From MOAA: This article updates a 2018 MOAA.org post on the Thrift Savings Plan (TSP) to include plan regulations current as of September 2022.

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.

There are three 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 or total distributions
• 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.

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’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]

You must take a required minimum distribution (RMD) from your account. Whether you have contributions in the Roth TSP or the Traditional TSP or both, you still must take an RMD at age 72. Only Roth IRAs do not require withdrawals after a certain age.

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.

If you receive installments based on life expectancy before you reach age 72, payment amounts are calculated using the Single Life Expectancy Table. When you reach RMD age, you’ll have the option each January to request to begin using the Uniform Lifetime Table instead. If you do make this choice, you won’t be able to switch back. If you begin receiving life expectancy installments after you’ve reached the RMD age, the TSP must use the Uniform Lifetime Table.

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