Thrift Savings Plan participants who separate from service during or after the year in which they reach
age 55 can begin withdrawals without penalty.
But those who separate before the year in which they reach age 55 and who wish to withdraw funds from
their accounts before age 59½ are subject to the IRS’ 10 percent early withdrawal penalty unless they
qualify for one of the exceptions described in IRS Publication 590, “Individual Retirement Arrangements.”
The first way around the early withdrawal penalty is through one of the circumstantial exceptions — when
the account owner is totally and permanently disabled, when distributions are ordered by a domestic
relations court, when the account owner dies or when the account owner has deductible medical
expenses exceeding 7.5 percent of adjusted gross income.
A series of so-called substantially equal periodic payments is one of two additional ways to avoid the early
withdrawal penalty.
The other is to use a withdrawal to purchase a life annuity, converting the cash to a stream of income.
Both options are available to all separated employees, regardless of their circumstances at the time the
withdrawals.
Substantially equal periodic payments are a useful tool for those TSP participants who retire before age
55 and would like penalty-free income from their accounts.
A series of substantially equal periodic payments is a stream of withdrawals that you, as the participant,
can take in accordance with IRS rule.
It is similar in concept to an annuity in that it is designed to convert a sum of cash into a stream of income
that lasts for life.
Unlike an annuity, however, it does not obligate the participant to pay an insurance premium, and it may
be discontinued, within limits, in midstream without penalty.
To avoid the early withdrawal penalty, a series of substantially equal periodic payments, must be taken at
least annually with the annual amount determined through one of three IRS-approved calculation
methods: the life expectancy method, the annuity factor method or the amortization method.
The life expectancy method calculates each year’s distribution by dividing the previous year’s ending
balance by your remaining life expectancy, according to published tables.
The result will be annual distributions expected with a high degree of certainty to last your lifetime, but
which may vary substantially in size from one year to another.
The annuity factor and amortization methods both rely on complex formulas that produce fixed annual
distributions amounts that may or may not ultimately last for life.
These two methods typically produce similar distribution amounts that are significantly higher than those
produced by the life expectancy method.
The substantially equal periodic payments option requires that the distributions continue, undisturbed, for
five years or until you reach age 59½, whichever is longer.
This means that once the distributions begin, they must continue and must not change, except as
allowed, for at least five year.
To avoid penalties, you must take exactly the amount produced by an accepted calculation method each
and every year, without adding any money to the account, during the required period.
Violating the rules will mean that penalty taxes and interest will be imposed on the entire stream of early
distributions taken — a strong incentive to stay within the rules.
Because of the complexities involved, you should seek the guidance of a qualified accountant or
consultant before beginning a series of substantially equal periodic payments.
Once the amount has been calculated and the decision made to begin, the series is initiated by electing regular monthly payments using Form TSP-70.
Keep in mind that committing to a series of substantially equal periodic payments from your TSP account
does not mean that you have to spend the money.
I have, in practice, advised clients to begin the series using the maximum allowable annual withdrawal
produced by the three calculation methods, even though the amount they needed was considerably less
The excess distributions can be accumulated in a taxable investment account to serve as a cushion
against unexpected or planned future expenses.
Written by Mike Miles
For the Federal Times
Publication August 20, 2007