The TSP Withdrawal Options And How They Are Taxed

after you separate or retire from the federal government or military you have a few options to access your tsp money in this video we're going to discuss the different ways that you can withdraw money from your tsp account and we'll review the tax implications of those distribution options that's coming up so stay tuned [Music] hi i'm jerrell harvey with fedway financial and this is the money briefing on this channel we cover topics related to personal finance federal benefits and retirement planning so if you're new here definitely consider subscribing for many people there tsp account is either their largest asset or their second largest asset only behind their house given the sheer size of most participants tsp and the amount of years that you spend investing into it is important to know what choices and options are available for taking money from the account after you separate from service if you have both traditional and roth money in your tsp you can specify whether the distribution comes from your traditional balance only your roth balance only or you can have the distribution come from both accounts based on a percentage in each one however you cannot choose which investment funds to withdraw from all withdrawals are deducted proportionally from each investment fund that you hold at the time of disbursement there are three basic ways to withdraw money from your tsp account the first withdrawal option is through installment payments with this option you have the flexibility to choose the frequency in which you receive payments you can choose to receive installments monthly quarterly or annually the minimum duration is one year and you will continue to receive payments unless you stop them or until your total account balance falls to zero in addition to choosing the frequency of payments there are two ways that you can set the installment amount you can choose a fixed dollar amount as long as it's at least 25 or you can receive your installments based on irs life expectancy tables if you go with the life expectancy option your initial payment will be based on your age and your total account balance value at the time your first installment every january the tsp will recalculate the amount of your installment based on your new age and your account balance at the end of the preceding year there are also a couple of other conditions that will trigger a recalculation the tsp will recalculate the installment if you roll over money to your tsp account or if you take an additional distribution outside of the normal payment schedule after you establish the installment payments whether it's based on a fixed dollar amount or life expectancy you can choose to stop payments and you can change the source of funding between your traditional and roth accounts you can also change the dollar amount and the frequency of your payments at any time but you can only modify those two things under the fixed dollar installment plan the second withdrawal option is taking a single distribution with this choice you can take one distribution of all your money or you can receive a partial payment from your tsp account any partial distributions must be at least a thousand dollars and while there's no limit on the number of partial withdrawals you can take the thrift savings plan will not process more than one distribution in any 30-day period also the tsp will allow you to take a partial distribution even if you're currently receiving installment payments which provides some flexibility if you ever need to pull extra money out beyond your scheduled payments the third distribution option is a life annuity it's the least common of the three options but you can have all of your money or a portion of your money go toward a life annuity currently the federal government contracts with metlife for its annuity program this option should not be confused with your first annuity which is your retirement pension from the government also going with this option is not the same thing as buying an annuity in the open market from a financial professional if you choose this option the thrift savings plan will purchase an annuity on your behalf from metlife once purchased the annuity is no longer part of your tsp account and you cannot change or cancel the purchase when you choose the life annuity you give up all control of your money in exchange for guaranteed lifetime monthly payments and since you will no longer manage or control any of the money that you put into the annuity you should think long and hard before choosing this option so let's pivot our conversation a little bit because you can't talk about withdrawals without talking about taxes the third savings plan will report all your withdrawals and distributions to the irs and to your state tax agency if there are state or local taxes in your area the thrift savings plan will also send you a form 1099-r which will include your gross distributions and the taxable portion of those distributions the 1099-r is typically mailed out near the end of january and you can also log into your tsp account to view download or print the form the tax treatment of your withdrawals will depend on the source of the distribution and the distribution method that you choose distributions from the roth portion of your tsp account will be tax-free if they're qualified meaning you are 59.5 or older and five years has passed since your first rough contribution on the other hand in most cases the tsp is required to withhold federal income tax on withdrawals from your traditional money as i previously mentioned the distribution method that you choose plays a factor into the tax treatment i'm only going to focus on the installment payment option and the single distribution option because withdrawals from those two methods come directly from the tsp so let's talk about the single distribution option first because it's relatively straightforward if you take a full or partial single distribution your payment will be subject to a mandatory 20 federal income tax withholding if you're taking the distribution because of rmd requirements the payment is subject to a 10 tax withholding you can choose to increase the amount of tax withheld on your single distribution but you're not allowed to decrease it or waive it now let's discuss how installment payments are taxed the biggest factor in determining the tax treatment of your installments is how long those payments are expected to last again you can receive your installment payments by either a fixed dollar amount or by a life expectancy amount when you choose a fixed dollar amount the expected duration of your installments is determined by three components the account balance the payment amount that you choose and an assumed earnings rate fixed dollar payments that are expected to last less than 10 years fall into one category if fixed dollar payments expected to last 10 years or more as well as payments based on life expectancy fall into a different category installment is expected to last less than 10 years have the same exact tax treatment as a single distribution they are subject to a mandatory 20 percent federal tax withholding and rmd related distributions have a 10 tax withholding you can increase the level of tax if you desire but you cannot decrease or waive the 20 or 10 percent tax withholding if your money is mailed to you or deposited directly into your bank account however i do want to point out you can avoid the mandatory 20 tax withholding or single distributions and installment payments expected to last less than 10 years if you choose to directly transfer the distribution to an ira or eligible employer plan but you're not allowed to transfer any rmd related payments to an ira or retirement plan if the payments are based on life expectancy or are expected to last 10 years or more the tsp is required to withhold federal taxes as if you are married with three dependents under this category the tax requirement is the same on rmd payments too you do have the choice to increase decrease or even waive the withholding on these longer-term payout options but you cannot transfer these distributions to an ira or employer plan additionally the tsp does not withhold for state or local income tax but that does not exempt you from paying state and local taxes on your distributions and withdrawals so you want to make sure that you account for those when you're planning and filing your taxes as we discussed there are a few options for accessing your money after you separate from service the installment payment and the single distribution options give you a lot of flexibility on determining the frequency and the amount of your withdrawals and distributions but you have to be mindful of how they will be taxed or how they will impact your overall tax situation if you've received any value from this video please click the like button and i enjoy hearing from you so please drop any responses or questions in the comments section thanks for watching and we'll see you on the next monday briefing

Channel: The Money Briefing

Views: 12,347

Keywords: TSP, Thrift Savings Plan, TSP Withdrawal, TSP Withdrawal Options, TSP Withdrawal Form, TSP Withdrawal Age, TSP Withdrawal Taxes, TSP Withdrawal Rules After Retirement, new tsp withdrawal rules 2022, Thrift Savings Plan Withdrawal, FERS, FERS Retirement, Federal Benefits, Federal Employees, Federal Retirement, Jerel Harvey, The Money Briefing, Fedway Financial

Id: hMxx3KTws88

Length: 10min 2sec (602 seconds)

Published: Thu Aug 18 2022