Here’s a pop-quiz question for you: How many partial lump-sum withdrawals are you allowed to take from your TSP account during your lifetime? Go ahead, write down your answer.
Everyone knows that the answer is “one”, right? In fact, that is the stated limit in every TSP publication that I can remember seeing. This limit is also one of a number of common reasons that TSP participants decide to roll their account assets from the best retirement investment vehicle in the United States into an IRA after retiring. But, while the TSP’s withdrawal restrictions are inconvenient, and maybe even unacceptable in some situations, they are not as restrictive as they appear at first glance.
Let’s consider some ways to get your money out of the TSP that are not clearly explained in the literature and so, are often overlooked. Basically, there are two kinds of withdrawals you may take from a TSP account: partial and full. Each of these is allowed once during the lifetime of each participant. A partial withdrawal is accomplished using form TSP-75, TSP-76 or TSP-77 to request an age-based, in-service withdrawal, a financial hardship withdrawal, or a partial withdrawal when separated, respectively. A full withdrawal is requested using form TSP-70.
Generally, as a participant, you may submit one form TSP-75, TSP-76 or TSP-77 during your lifetime, and it must be done before you have submitted TSP-70. Once you have submitted form TSP-70, your option to submit any of the three partial withdrawal request forms is gone, and your only option is to take a full and final distribution of the remaining account balance. I do count this as a partial lump-sum withdrawal since it is the completion of a full withdrawal which will end your participation in the TSP.
These rules appear to make it impossible to take more than one partial lump-sum withdrawal from a TSP account during the life of the account. But, if you plan ahead, there are ways around this limitation. It’s possible to extract as many as 3 partial lump-sum payments from your TSP account, if you do it right.
If you haven’t yet retired, you can take a loan from your account and then leave a balance unrepaid after you have retired. After 90 days of separation from service, and unpaid loan balance will be declared a taxable distribution – effectively a partial lump-sum distribution. But, this distribution does not count against your lifetime limit. You may still file one of the three partial distribution request forms either before, or after, the loan balance is declared to be taxable. For participants in the right circumstances, this is a way to take as much as $50,000 from your TSP account while preserving your option to request a partial lump-sum distribution.
If you’ll take a look at form TSP-70, the form used to request a full withdrawal, you’ll find that in section IV on page 2 there is a space to specify a percentage of your account’s balance to be paid to you in a lump-sum as part of a full withdrawal. The other options that may be elected as part of a full withdrawal are a life annuity contract and monthly payments. Each of these three options are applied to a percentage of your account balance, and the total of the percentage you enter here must equal 100 percent. That’s what makes it a full withdrawal.
The decision to take a life annuity is complex and risky, so I’ll leave that for another discussion. This leaves the remaining options of taking a single and continuing monthly payments. If you only wanted, say, 20 percent of your account balance in a lump-sum payment now, you could enter “20” on line 23a of the form, and then enter “80” on line 23b and “0” on line 23c. This will put a check in your hands for 20 percent of your account right away, and then begin distributing the remainder of your account in monthly payments. You may specify the amount of those payments or allow the TSP to compute them for you based on your life expectancy, and then change the amount of the payment once each year during an election window in December. If you want the single payment right away, but don’t need the monthly payments yet, you can set the amount of the monthly payments to as little as $25 per month and leave it there for as long as you like. While this means that you’ll be taking monthly payments that you don’t need in order to get the single payment, the effect of these payments on your account – and on your tax returns – can be nearly zero.
Written by Mike Miles
For the Federal Times
Publication April 11, 2016