TSP Withdrawals Could be Expanded with New Legislation

by | Apr 19, 2017

Last Updated May 30, 2024
TSP withdrawal

The TSP Modernization Act, introduced by Senators Rob Portman (R-OH) and Tom Carper (D-RI), could allow for more flexible withdrawal options. One of the primary goals of the bill is to encourage federal workers to leave their savings in their TSP after leaving federal service because of its low fees.

In a press release, Senator Portman calls the current rules “overly restrictive” and says the rules are almost forcing federal workers to transfer their retirement accounts to ones with higher fees. This new legislation would make four changes, outlined below.

Age-Based Withdrawals While in Service

Currently, the TSP rules only allow for one age-based withdrawal while employed. This new bill would allow for multiple age-based withdrawals and subsequent post-separation withdrawals.

Partial Post Separation

Now, the rules allow for one partial post-separation withdrawal and none for those who made an in-service age-based withdrawal. And after these, only full withdrawal options are available. However, this new bill would add some individual flexibility by allowing multiple partial post-separation withdrawals.

Full Withdrawal via Periodic Payments

Currently, periodic payments can only be selected in monthly intervals. Also, the payment can be adjusted only once per year and must occur just prior to the beginning of the next calendar year. These payments can be reduced to as low as $25/month but recurring payments can’t be stopped unless a participant withdrawals the entire remaining balance. Those enrolled in periodic payments status can’t elect a partial withdrawal or annuity purchase.

This new bill would make the following changes:

  • Allow a schedule of quarterly or annual payments.
  • Allow participants to change payment amounts anytime.
  • Permit stoppage of periodic payments while allowing the remaining balance to stay in the plan (subject to Required Minimum Distribution requirements).
  • Permit flexibility to select a partial withdrawal or annuity purchase while in periodic payment status.

Eliminate Withdrawal Election Deadline

This bill would eliminate this deadline which currently requires TSP participants to make a post-separation withdrawal election by April 1st of the year following the year in which they turn 70 ½ and are separated from federal service. This is separate from the IRS requirements to begin distributing RMD’s on the same day.

The Federal Retirement Thrift Investment Board (FRTIB), who administers the TSP, supports this new bill. The Executive Director said, “We are very appreciative of Senators Portman and Carpers’ leadership on this important issue. Enactment of this legislation will meaningfully improve TSP participants’ ability to responsibly access their retirement savings.”

Kim Weaver, the TSP’s Board Director of External Affairs, had this to say, “When these rules were written 30 years ago, most were thinking of the world as a defined benefit, a pension, and these kinds of rules make sense in a pension world. But now, when we’re in a 401k combined contribution world, they just don’t work as well anymore.”

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