[vc_row][vc_column width=”2/3″ el_class=”section section1″][vc_column_text]Through their Thrift Savings Plans (TSP), current American citizens or former federal government employees or military personnel have more than $550 billion in the TSP program for their retirement. Most federal workers were generally content with their benefits that TSPs provided, which operates like a 401(k). TSP is recognized to have low-cost investment choices, ensuring that participants don’t have a lot of their money spent on fees and charges. Last year, the average spending rate for TSP funds was only 0.04 percent. This rate is quite low compared to what’s paid for other private investment options, which can be around 0.11 percent.
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For those who do not understand what these changes are or what they mean, this post is for you. The fortunate thing is that the new rules have put in place based on feedback from TSP account holders so that the program can be more beneficial to the participants. The recent changes are mainly in regards to withdrawal options, which really only immediately affects those that are 59 and a half or up. However, for those younger generations out there, it is still beneficial to know what your benefits are.
The changes:
Once you leave your job working for the federal government or the military, you will now be able to make unlimited partial withdrawals.
You have a few choices for what to do with the funds in your TSP account after you separate from your service. Participants can leave their contributions alone in their account to let it increase in profit, and then make withdrawal options at age 70 and a half. Also, you can roll savings to a different retirement account that is eligible. Your last choice is to take some or all of the funds, a decision that brings along a penalty if you are younger than 55. Keep in mind that you have to be 59 and a half or older to withdraw money from your TSP without a tax penalty if you are still in service.
You could only do one partial withdrawal in your life before the new laws were put into place. Since September 15th of this year, if you are post-separation, withdrawals are unlimited, but you can only do this once every 30 calendar days.
Why are these changes significant: if they leave work or are fired, many choose to cash out their retirement savings. This can be an extremely costly move if you completely withdraw your account before the minimum retirement age. You’ll face a 10 percent tax penalty, and you won’t receive the growth of retirement investments.
For many, touching the funds from their retirement account when they fall on hard times seem to be their only choice, especially if they don’t have any emergency cash stashed away. If you end up in that situation in the future, thankfully, with the new changes in place, you won’t have to cash out your account, but just withdraw what you may need to cover your emergency expenses. And unlike before, taking a withdrawal will not hinder you from taking another one down the road.
For those that are 59 and a half years old and up, and are still working for the Federal government, you are allowed to take up to 4 in-service withdrawals every year, but must at least be 30 days apart from the last request.
If you’re a senior citizen that is in federal service, you’re can also take four regular age-based withdrawals. Before, only one could be made.
If you still receiving your regular wage, it may be wise to hang on to not using your savings for retirement. It will come more in handy when you are no longer working. With that said, this change can be beneficial for many seniors that are still employed by the federal government. Since they are now able to take four withdrawals a year, this can help their transition into retirement be much easier.
You can also now select if you want your withdrawal to be pulled from your traditional account or your Roth account, or a mix of both balances.
Typically, if you make investments outside a tax-advantaged plan, the income is taxed once you earn it, and when you sell your investments, you face capital gains tax. On the other hand, the money you invest in retirement accounts such as a TSP or a 401(k) have advantages. Such advantages differ depending on what kind of contribution you make, whether it is a contribution to your traditional account or a contribution to your Roth account. When you make traditional investments to a TSP, you do not have to pay income taxes until the time you withdraw those contributions. When you make Roth contributions to a TSP, the amount is after-taxes, but when you withdraw the money, you will not have to pay capital gains tax or income tax.
Previously, if you decided to withdraw from a TSP, you would have to take a “pro-rata” payment. This meant that id if 65% of your TSP balance was conventional and 35% was Roth, the withdrawal could look like this: 65% traditional and 35% Roth. Now you can choose to take a complete Roth or traditional withdrawal or “pro rata” like before.
Why this is significant:
This can assist many account holders in paying lower taxes by seeing what can be more beneficial for them to receive a payment from a traditional balance or a Roth balance.
Generally speaking, it is wise to take funds from your Roth account if your tax rates are higher now than it will be later on, and if your tax rates are lower now than it will be down the road, it is better to take cash from your traditional account. Let’s imagine you’re a federal worker living in N.Y.C., where taxes on state income can be as high as 8.95 percent, who is looking to retire to New Hampshire, which is a state that does not have a state income tax. In that case, taking your Roth TSP payments in Washington, D.C., which has high state taxes, and taking your traditional TSP payout after you’ve moved to Florida, may be advantageous.
If you’re a younger federal employee who is contributing to your TSP, and you’re unsure about whether to invest with traditional contributions or Roth, this policy change makes it a bit more attractive to have a combination of both forms of contributions in your fund, because now you’re going to be in charge of how disbursements can be aid out and can be more tactical with your investment, Keep in mind that if your employer contributes to your TSP, it will apply the amount directly to your traditional TSP.
Another change is that you will no longer have to make a full withdrawal choice at the age of 70 and a half when you are no longer in federal service. However, you will have to receive the required minimum distributions that will be calculated each year by the IRS.
Previously, account holders how to decide how they wanted to withdraw their TSP when they reached 70 and a half. Normally they would specify the fixed payment they would receive each month from then on or would choose a variable lump sum based on the expectancy of their life. Finally, participants can change their withdrawal options as past 70 and a half as long as they receive at least the minimum payments that are mandated by law.
This is a significant change because now retirees do not need to move their savings into an IRA to gain more flexibility to have access to their money.
If you are an account holder that no longer works in federal service, you can select whether you wish for monthly, quarterly, or once a year payments. Before the new rules, installment payments were only paid out every month. These installment distributions can also be stopped, restarted, or change any time desired. In the past, the only time you could change the amount you were receiving was during the month of October, which was open season. Now, these adjustments can be made at any point of the year.
This is a significant change because this can encourage people to make small withdrawals of what they need at that time, rather than larger ones to prevent problems of running out of cash for the year. This allows participants to leave more of their funds in their account to grow their value.
The new rules that have been implemented now allow more access to their investments.[/vc_column_text][/vc_column][vc_column width=”1/3″][vc_single_image image=”36156″ img_size=”292×285″ style=”vc_box_shadow”][/vc_column][/vc_row]
