Developed in conjunction with Ext-Joom.com

Amat Victoria Curam

Financial Information for Senior Military Officers

What You Don't Know About TSP RMDs Could Hurt You

What You Don't Know About TSP RMDs Could Hurt You
One of the main reasons to contribute to TSP is so that you can take the money out and spend it in retirement.  Often though, retirees may not need or want to take their money out of the Thrift Savings Plan (TSP).  But, the IRS wants you to take the money out, more than you want to leave it in TSP and they have the power to make you do it.  You have to take out Required Minimum Distributions (RMDs)

The IRS (Congress more accurately) says that you must start taking distributions from your TSP by April 1st (not the 15th) of the year after you turn 70 1/2.  If you're still employed by the US Government when you turn 70 1/2 then your RMDs are deferred....generally until Apr 1st of the year after retirement.  Realize that if you avail yourself of the 1 Apr option you will have to make two RMDs that year.  One for the age 70 1/2 year and one for the current year. 

Since the IRS "knows all" it knows how long you will live.  There is a table of Uniform Life Expectancy" that you use to determine how much you must take out each year.  It is important that you get this right, as the penalty for withdrawing too little is 50% of the amount you didn't take out.  That is one of the highest penalties I know of.

Whether you are taking RMDs or any other type of distribution, your distribution will be "proportional".  For example, if you have 50% in the Roth TSP, 50% in the "normal" TSP and 5% of your "normal" TSP balance is tax exempt (from contributions made in a combat zone) your distribution will be 50% Roth, 45% normal and 5% Tax Exempt.  The same holds true for funds.  If you have 50% in the G Fund and 50% in the C Fund your distribution will be 50/50 G and C Fund.  Nothing too out of the ordinary here.  Where things do get weird is if you fail to direct TSP to take out distributions.

If by the April 1 deadline you do not make a withdrawal election you will FORFEIT your TSP balance. You can reclaim your account, but you will earn zero income during the time of forfeiture.  And since it is TSP, you'll have to complete a form and make a full withdrawal to get your money back (you can roll the withdrawal to an IRA so you won't get nailed with a big tax bill).  The one bit of good news is you won't have to pay a penalty, because TSP will make a distribution, this one time, on 1 Mar.

Unlike an IRA or most 401(k) plans, you can't instruct TSP to make an "automatic" RMD distribution at some point during the year.  If you are taking withdrawals of some sort though and the amount withdrawn does not satisfy the RMD requirements, TSP will send you an additional payment to make sure you cover your RMD.

So, what is the take away?  Well the big one is make sure you start taking withdrawals or set up a withdrawal plan prior to 1 Apr of the year after you turn 70 1/2.  If you don't, you'll lose money (no income in the forfeited account) and flexibility (when you are forced to take a total withdrawal).

RMD management is a key part of comprehensive financial planning.  We're ready to help you build your plan...

 

Your Life Expectancy After You're Dead? Yes, the I...
The Strickland Decision: Part III

Related Posts

 

Comments

No comments made yet. Be the first to submit a comment

Disclaimer

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.

Read Our Blog

 

Understanding TSP RMDs
      You can't leave your money in TSP forever.  Find out what happens if you don't take it out...

 

Read More

Access Your Accounts

 

Sign-up for Newsletter