“It’s not earth-shattering but it adds significant flexibility,” he said. “The old rules, the old way of doing things, which were set up 30 years ago, were very limited in terms of how participants could access their money.” These policies have not been updated since the TSP’s creation in the 1980s.
The TSP, a 401(k)-style program for federal employees and military personnel, is the nation’s largest employer-sponsored retirement savings program, with 5.7 million account holders and just under $600 billion on investment as of July.
When account holders leave the government for retirement or other reasons, they may keep their accounts open and withdraw the money as a lump sum, in equal monthly payments, as an annuity or in a combination.
However, restrictions on those options have caused many of them to instead transfer their money to an IRA or a retirement savings plan of another employer where they have a wider range of choices for taking withdrawals.
Under the TSP’s new policies, those who keep their money there after leaving the government will be able to take partial withdrawals of any amount as often as once a month. Until now they have been limited to just one lifetime partial withdrawal, with a requirement that they then decide how they want to take out the rest.
Also, those who take dollar-amount payments will be able to change the amount at any time, rather than just once a year, and to receive them quarterly or annually, in addition to monthly.
Those currently working or on military duty will be allowed to begin investing again immediately after taking withdrawals because of financial hardships, rather than having to wait six months. And those past age 59½ will be free to take up to four withdrawals without tax penalties per year, rather than just one lifetime withdrawal.
For all types of withdrawals, those with both traditional pretax and Roth after-tax investments will be able to better manage the tax impact by choosing to take money from one or the other, or prorated from both as is now required. And investors no longer will have to designate how they want to withdraw their accounts once they pass age 70, although they still will be required to take certain payouts after that point.
The TSP earlier had announced the Sept. 15 launch for the changes, ordered by a 2017 law. The TSP also will add features to its website, tsp.gov, to help account holders with the new options, which will also be available to those who already have started taking withdrawals.
Of the roughly 200,000 people who took what the TSP calls a “post-separation” withdrawal in 2018, about 54,000 ordered a transfer to another tax-favored savings account, about 41,000 started monthly payments from the TSP and about 2,000 purchased an annuity.
The rest cashed out their savings, which typically triggers a big tax bill and is more common among those with smaller accounts.
“Every plan, ours included, tries to make it as easy as possible for people to accumulate wealth for their retirement,” Deo said. “This change allows us to address the second half of the equation, which is that when they need money to take a vacation, replace a roof, fix a car, deal with life, they have the flexibility to do so.”
Several financial advisers who regularly work with federal employees said the new policies address some of the reasons people move their money out of the TSP once they have the chance.
“It needed a reboot,” said Rich Zeitz, of Bravias Financial in Iselin, N.J. “The lack of accessibility and flexibility and control have been definitely putting federal employees at a huge disadvantage.”
“It does bring it closer to modern-day practices. Right now they’re really limited,” said Ilene Brostrom of Brostrom and Berlin Wealth Management in Bethesda, Md. “The ability to take multiple withdrawals, that’s big for some clients. For a lot of people, that’s the biggest amount of money that they have saved anywhere, and they want to be able to tap into it” as they need, she said.
However, withdrawal options are just part of a decision on where to keep their retirement savings. In favor of the TSP, they said, are low administrative fees and a fund that pays the higher interest rates of longer-term government bonds but without their risk of losses.
In contrast, they said, TSP investors often are dissatisfied with the limited range of investment options: just five basic funds, all of them tied to broad indexes, and five “life cycle” funds that mix investments in the basic funds according to target dates to begin withdrawals. Other drawbacks, they said, include a more complex and longer processing time for withdrawals and the TSP’s policy of giving information but not advice.
“They will have more reason to leave their money in the TSP, but I don’t think it’s a complete game-changer,” Brostrom said.
Zeitz said there are still some things the TSP doesn’t provide.
“I don’t think it’s going to change people who want to work with an adviser,” Zeitz said. “They feel like they don’t understand finance or they know that there’s other products out there. . . . They all say that they don’t want to leave their retirement to chance. They just want someone to go through retirement with them.”