What Are the New Rules for TSP Withdrawal Options?

The Thrift Savings Plan (TSP) serves as a retirement savings and investment vehicle for federal employees and members of the uniformed services. It operates similarly to a 401(k) plan, allowing participants to save for retirement with tax advantages. Recent changes to TSP withdrawal rules aim to provide participants with increased flexibility in accessing their retirement funds.

Key Changes to TSP Withdrawal Options

Changes to Thrift Savings Plan withdrawal options became effective on September 15, 2019, following the TSP Modernization Act of 2017. These revisions altered how participants can access their savings, moving away from a more restrictive framework. Previously, individuals were limited to a single partial withdrawal after separating from service or faced an irrevocable decision regarding full account distribution.

The new rules permit participants to make multiple partial withdrawals after separating from federal service. There is no overall limit on the number of these post-separation partial distributions. A 30-day waiting period between requests was eliminated effective May 15, 2024, further streamlining access to funds.

Another change removed the requirement for separated participants over a certain age to make an irrevocable election for a full withdrawal. Participants are no longer forced to empty their accounts or commit to a specific withdrawal method, such as an annuity, once they reach the age for required minimum distributions (RMDs). They can now keep their funds within the TSP.

The updated regulations grant participants flexibility with installment payments. Individuals can now initiate, halt, or modify the amount and frequency of their monthly, quarterly, or annual payments. This contrasts with previous limitations that restricted changes to an annual open season. Participants also gained the ability to designate whether withdrawals should come from their traditional balance, Roth balance, or a proportional mix of both.

Understanding Post-Separation Withdrawal Choices

After separating from federal service, participants now have several flexible options for withdrawing funds. The minimum amount for most partial withdrawals is $1,000.

Participants can opt for partial withdrawals, taking specific amounts from their account without liquidating the entire balance. The new rules enable multiple partial distributions.

For those seeking a regular income stream, installment payments offer flexibility. Participants can set up payments to be disbursed monthly, quarterly, or annually. They can adjust the payment amount, change the frequency, and pause or restart payments.

A total distribution, or lump-sum withdrawal, remains an option for those who wish to close their TSP account entirely. While previously such a decision might have been influenced by limited partial withdrawal options, the increased flexibility of multiple partial withdrawals and adjustable installment payments may reduce the perceived need for an immediate full withdrawal. The TSP also continues to offer the option of purchasing an annuity, which provides guaranteed lifetime payments through an outside vendor.

In-Service Withdrawal Options

The Thrift Savings Plan offers withdrawal options to participants still actively employed in federal civilian service or the uniformed services. These “in-service” withdrawals are distinct from post-separation distributions and are generally intended for particular circumstances. Recent rule changes primarily expanded flexibility for post-separation withdrawals, though some adjustments affect in-service options.

One type is the financial hardship withdrawal, available for documented financial need. Acceptable reasons include recurring negative monthly cash flow, unpaid medical expenses, personal casualty losses not covered by insurance, or legal expenses related to separation or divorce. The withdrawal amount is limited to the certified financial need, with a minimum of $1,000, and is drawn from the participant’s own contributions and their associated earnings.

Financial hardship withdrawals are subject to federal income tax, and if the participant is under age 59½, a 10% early withdrawal penalty tax applies. These withdrawals cannot be repaid to the TSP account. For FERS employees and uniformed services members, spousal consent is required, while CSRS employees must provide spousal notification.

The second type is the age-based in-service withdrawal, available to participants aged 59½ or older. These withdrawals can be taken from any vested portion of the account and are not subject to the 10% early withdrawal penalty. Under the new rules, participants can now make up to four age-based in-service withdrawals per calendar year, an increase from the previous limitation of one.

Navigating the Withdrawal Process

Initiating a Thrift Savings Plan withdrawal involves procedural steps once a participant has determined the appropriate withdrawal type. The TSP has transitioned to more online-centric processes to facilitate these requests. Participants begin by logging into their My Account on the TSP website, which guides them through the necessary steps.

The following forms are used for withdrawals:
Form TSP-70 for post-separation full withdrawals.
Form TSP-77 for partial post-separation withdrawals.
Form TSP-75 for in-service age-based withdrawals.
Form TSP-76 for financial hardship withdrawals.
Although many requests can be initiated online, some may require printing a partially completed form for additional signatures or supporting documentation before submission.

Required supporting documentation includes proof of identity or direct deposit information for fund transfers. Depending on the participant’s marital status and the type of withdrawal, spousal consent or notification is necessary. Ensure all required fields are accurately completed and any necessary attachments are included.

Once submitted, the TSP processes the request, and participants can expect communications regarding the status of their withdrawal. While specific processing times can vary, the online system aims to provide a more efficient experience. Participants should confirm their mailing address and direct deposit information are current to avoid delays in receiving funds.