When you decide to withdraw your account balance after separation, you can have the TSP provide it to you in lump-sum payments, as an annuity, as a series of installment payments based either on life expectancy or on a set dollar amount, or a combination.
Effective since September 2019, an unlimited number of lump-sum withdrawals is allowed, ending a prior policy of allowing only one partial withdrawal lifetime. Also since that time, there is more flexibility in the installment payment option–including allowing annual or quarterly payments in addition to monthly payments–and account holders with both traditional and Roth balances have the option to designate lump-sum or installment payment withdrawals from only one type of balance or to choose what used to be required, taking withdrawals from both on a prorated basis.
Under the lump-sum and fixed dollar amount installment payment options, you can have the TSP transfer all or part of your investments into an individual retirement account or other eligible retirement plan, subject to minimum withdrawal requirements as described below. IRA transfers are not allowed with annuity payments or with installment payments expected to last longer than 10 years or that are based on life expectancy.
Lump-Sum TSP Withdrawals
- withdraw the entirety of the account; or
- take partial withdrawals without limit (so long as they are at least 30 days apart) and continue to manage the remainder in the account by moving money among the investment funds.
If you decide on a series of installment payments you want to receive monthly, quarterly or annually, you can choose:
- a specific dollar amount; or
- a series of payments computed by the TSP based on an IRS life expectancy table.
If the amount elected does not satisfy the IRS minimum withdrawal requirements the TSP will increase the amount so that the requirements are satisfied after April 1 of the year after you reach age 701⁄2. All or part of the payments may be transferred into an IRA or other qualified retirement account, subject to the minimum withdrawal requirements. See IRS Publication 590 for details, including how to figure your minimum required distribution.
While payments are ongoing, you can continue to manage the remainder in the account by moving money among the investment funds.
If you elect the fixed dollar amount payment, you can change the frequency or amount at any time. Those electing life expectancy based payments have a one-time opportunity lifetime to change to fixed dollar amount payments; a change in the other direction is not allowed.
Here are the annuity choices that the TSP makes available to you:
- a single life annuity;
- a joint life annuity with your spouse; or
- a joint life annuity with someone other than your spouse.
For someone other than your current spouse to be eligible for a joint life annuity, that person must have an “insurable interest” in you. The TSP assumes that the following kinds of people would meet that requirement:
- your former spouse;
- blood relatives or adopted relatives who are closer than first cousins; and
- a person who is living with you in a relationship that would constitute a common-law marriage in those jurisdictions that recognize common-law marriages.
If you want to provide for someone other than a person listed above, you must submit an affidavit with your annuity request from at least one other person (other than the joint annuitant) who has personal knowledge that the joint annuitant you have chosen has an insurable interest in you. The certifier must know the relationship between you and must state why he or she believes that the named annuitant might reasonably expect to benefit financially from your continued life.
If you elect a joint life annuity, the monthly payments will continue to you or to your joint annuitant after either one of you dies. The monthly payments can be in the same amount or reduced by half, depending on whether you choose to provide 100 percent or 50 percent survivor protection. Note that unlike the survivor benefits under the basic federal retirement program, if a 50 percent survivor benefit is elected in a TSP annuity, the payments are reduced to 50 percent when either spouse dies, not just when the primary beneficiary dies.
Payment levels — Once you have chosen to receive an annuity, you also have to decide whether you want to receive level payments or ones that increase. Choosing increasing payments results in a reduction to your basic TSP annuity.
Level payments remain the same from year to year. In effect, you receive the same monthly payment for as long as you live. Increasing payments move upward based on the consumer price index (CPI). The adjustment is made each year on the anniversary date of your first annuity payment.
While increasing payments can be combined with either a single or joint life annuity with your spouse, they cannot be combined when the “joint annuitant” is someone other than your spouse.
Note: Increases cannot exceed 3 percent per year. On the other hand, they cannot decrease, regardless of what the CPI does.
Special annuity features — There are two other annuity features, each of which also results in a reduction to the basic TSP annuity:
- the cash refund feature
- the 10-year certain feature
Under the cash refund feature, if you (and your joint annuitant) die before the full amount in your account balance used to buy your annuity has been expended, whatever remains will be paid to your beneficiary in a lump-sum.
Under the 10-year certain feature, if you die before receiving annuity payments for a 10-year period, those payments will continue to your beneficiary for however many months are left. This feature can be combined with a single (but not a joint) life annuity and with either level or increasing payments.
Required Minimum Distributions
By April 1 of the year after you reach age 70 1⁄2 you must begin receiving minimum distributions of a percentage of your account based on your and age. These distributions cannot be transferred to an IRA or similar tax deferred plan. This requirement applies both to money invested through the TSP’s traditional design and through the Roth design; the distributions must be made proportionately from traditional and Roth balances, for investors who have both. (Note: The requirement for minimum distributions of Roth balances might be avoided by having that balance transferred to a Roth IRA; consult a tax adviser.)
Since September 2019 there is no longer a requirement for an account holder to make a full withdrawal decision at that point. That did not change the minimum withdrawal requirement, however.