How TSP Payments Are Provided Using The IRS Life Expectancy Guideline

May 5, 2018

Most people, when they want to withdraw money from their TSP, use the equal monthly payments. When the TSP Modernization Act is enacted, it gives people the option to pick how they want their payments – annually, quarterly or monthly. For now, there are two choices in how to get monthly payments – as a fixed dollar amount that chances once a year or through the IRS life expectancy table.

The selection can be made on the form TSP-70 (or Request for Full Withdrawal) or form TSP-77 (or Request for Partial Withdrawal When Separated). Here’s a look at the payments a person could receive if they choose the IRS life expectancy table option.

There are one of two reason people opt for the IRS life expectancy table payout, and both of them involve no IRS penalties. People who retire from the federal service before turning 55 avoid the 10 percent early withdrawal penalty using the age-based withdrawal methodology until they hit 59 and half years. The TSP’s life expectancy option is a way to meet the tax law requirements.

People 70 1/2 or order and withdrawing from the TSP must withdraw a set amount or be subjected to a 50 percent penalty for not taking the required minimum distribution. The life expectancy option will meet this requirement as well.

For people who choose the equal monthly payments using the IRS life expectancy table, the payment amounts are calculated every year on the account’s balance at the end of the year and the outstanding life expectancy. Once a person reaches the age of 70 1/2, the calculation follows the required minimum distribution rules.

The TSP will use the Uniform Lifetime table to determine what the payments should be.

Here’s an example of a person who stops working for the federal government at 56 years old with a TSP balance of $356,000 with a yearly rate increase of five percent. Here’s what she’ll get based on the Retirement Income Calculator.

At 56 years old, she’ll get a monthly payment of $1,088.85.
At 65 years old, she’ll see an increase to $1,613.23 a month.
When she turns 70, they increased to $1,961.94 a month.

When the required minimum distribution starts at 70 ½, the monthly amount declines to $1,245.51. If she lives an active lifestyle, she may decide to focus on a set dollar amount that is more in-line with how she spends.

A change can be made during the yearly open season, which begins Oct. 15 and runs to Dec. 15. Changes become effective January. Once the life expectancy monthly payments are switched to a set dollar amount, there is no going back. With the TSP Modernization Act, more changes will be allowed.

If the same individual continues with the life expectancy payments and lives to her 90^thbirthday, she’ll be getting $2,601.72 each month and still have more than $325,000 in her TSP fund.

Paying Taxes

Federal income tax is imposed for any withdrawals made from a traditional TSP, but based on the ordinary income. These equal monthly payments have a subjected withholding of the following: you’re married filing jointly and have three dependents you’re claiming. This is the lowest withholding rate and will not be enough for federal income taxes, which means you’ll end up paying in taxes if you’re not careful.

IRS life expectancy table payments are not permitted for rollover distribution and may not be rolled into an IRA.