President Trump signed the TSP Modernization Act of 2017 on November 17, 2017. The new law allows the TSP to loosen some current restrictions on withdrawals from the TSP. Congress gave the TSP up to two years to make the changes.
Mike Causey interviewed me on this and other TSP topics December 13. You can listen to a rebroadcast by clicking here.
Or read the details below.
Currently, the TSP only allows one lump-sum withdrawal during a participant’s life. The TSP is now authorized to eliminate this restriction. That means retirees can make multiple lump sum withdrawals. The same change is being made to “in-service” withdrawals, those made by employees over the age of 59.5.
The TSP is unlikely to allow an unlimited numbers of withdrawals, according to a TSP spokesperson. Instead, the TSP will limit the number of withdrawals to keep costs low.
Currently, participants receiving funds by identical monthly payments can only change the amount of payments once a year. If monthly payments are stopped, the TSP account must be closed. The new law allows the TSP to eliminate both restrictions.
Restrictions that remain
Several important restrictions remain that do not exist in IRAs.
Withdrawals must come from all the funds being used by a participant. The percentage, allocation of the withdrawal is the same as the current investment percentage. For instance, if half of the balance is in G (short-term bond) Fund and half in C (large US stocks), then a withdrawal must come 50% from G and 50% from C.
That prevents basing withdrawal decisions upon the current and expected future value of the stock and bond markets. Because stocks are currently at historic highs and overdue for a major (+20%) correction, someone withdrawing funds today might prefer to take all money from the stock funds. That locks in gains.
In March 2009, the C Fund was down 54% from its previous high, on July 19, 2007. The bond (F and G) Funds increased in value over that same time period. Someone withdrawing funds then might prefer to take it from F and G. That is selling at a profit instead of a loss.
Participants with a Roth TSP balance must withdraw the same percentage from the Roth balance as the regular balance. In many situations, a retiree would prefer to take funds from just one of those. The TSP does not allow that.
When it comes to withdrawal options, IRAs are still more flexible than the TSP.