Managing Money
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The Thrift Savings Plan and Required Minimum Distributions ouldn’t it be great if federal employees could keep their Thrift Savings Plan (TSP) money in the tax-advantaged retirement plan indefinitely? But
alas, the law doesn’t allow that to happen. The TSP, like other retirement plans (except for Roth IRAs), is subject to required minimum distributions (RMD), which forces TSP participants to withdraw a bare minimum amount each year. Although Roth IRAs are not subject to RMDs during an owner’s lifetime, Roth accounts in employer-based retirement plans (including the Roth TSP) are. Thanks to the TSP Modernization Act, however, TSP participants may choose to satisfy their Roth TSP RMD by electing to have a withdrawal come 100 percent from their traditional TSP balance. While this may be helpful for participants wishing to preserve their Roth TSP balance, it’s still not as beneficial as a Roth IRA with no RMD requirements. TSP participants who would like to avoid an RMD based on their Roth TSP balance entirely may do so by transferring their Roth TSP balance to a Roth IRA prior to the year they must take their first RMD. RMDs generally start the year an owner turns 72, but the drop-dead date—known as the required beginning date (RBD)—for taking the first RMD is April 1 following the year a TSP participant turns 72. It’s important to point out that participants waiting until the following year to take their first RMD are merely delaying the first year’s RMD and not
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avoiding it altogether. In other words, they will have to take two RMDs in single year—one for the year they turned 72 and a second
THANKS TO THE TSP MODERNIZATION ACT, TSP PARTICIPANTS MAY CHOOSE TO SATISFY THEIR ROTH TSP RMD BY ELECTING TO HAVE A WITHDRAWAL COME 100 PERCENT FROM THEIR TRADITIONAL TSP BALANCE. RMD by December 31 of the year they turn 73. Those still working when turning 72 may be able to delay RMDs due to what’s referred to as the “still-working exception.” This exception applies only to the current employer’s retirement plan and allows an individual still working to delay RMDs until the year of separation, with a required beginning date of April 1 following the year of separation.
NARFE MAGAZINE JANUARY/FEBRUARY 2022
While the still-working exception appears straightforward, some participants retiring on December 31 may be surprised about the date that their first RMD must be distributed. For example, let’s assume a 73-year-old federal employee retires on December 31, 2021. To determine the first RMD, the IRS will apply the same deadline to everyone who separates from service during 2021, including those doing so on December 31. Regardless of whether the employee worked one hour, eight hours, or 16 hours on that date, the IRS considers 2021 to be the year of separation, which means the first RMD year is 2021 with an RBD of April 1, 2022. Although the still-working exception applies only to the current employer’s retirement plan, a federal employee who has other retirement plans and wishes to delay RMDs related to those other plans may do so by transferring them into the TSP. Otherwise, a federal employee working past age 72 will still have to take RMDs from those other retirement plans (except for Roth IRAs). Calculating an RMD is a straightforward process; simply divide the account balance as of the end of the previous calendar year by the distribution period as defined in the IRS’s Uniform Lifetime Table. For example, a federal employee who turns 72 in 2022 will divide his or her December 31, 2021, TSP balance
