Avoid Abandoning Your TSP
Required Minimum Distributions (RMD) must be taken from an employer retirement plan by April 1st following the year you turn age 70 1/2 (unless you are still employed by that employer), to avoid a 50% IRS penalty of the RMD that was not taken. If you don’t take the RMD by December 31st of the year you turn 70 ½ and instead, take it by April 1st of the following year, you will avoid the 50% penalty but you will have to take two RMD’s that year.
TSP has further restrictions that can be very harsh. Let me share a story that happened to a friend of mine, whom I will call Lisa:
Lisa is 73 years old and retired in January 2015. A few months after retiring she took a partial withdrawal from her TSP account, which satisfied her RMD for the year. Lisa has been hospitalized twice this year, for a very serious condition. Due to her illness, she got behind in her mail, and missed replying to a letter from the Thrift Savings Plan. The letter stated that if she did not notify TSP of her withdrawal election by April 1, 2016, her TSP funds would all be moved to the G Fund.
How is that possible? Let’s take a closer look… Lisa is in the CSRS retirement system. Her entire TSP account is from her own contributions and the investment performance of the funds she selected. CSRS does not match TSP contributions, so this is Lisa’s money and it does not seem fair that TSP can move her investments without her authorization, but they can. The way it works is if after retiring, a TSP account holder is 70 ½ years old or older and has not made a withdrawal choice for their TSP by April 1st, their funds are moved to the G Fund.
Now the story gets really interesting. Lisa received a letter from TSP stating that in order to avoid abandonment of her TSP, she would have to complete the TSP withdrawal choice by August 1st. Fortunately for Lisa, her health improved and she got caught up with her mail and learned of the issue with her TSP account. Lisa and I contacted TSP and were told that she is not required to take her full RMD by August 1st, but she has to start taking her distribution by August 1st. Financial advisors should be knowledgeable in the IRS rules regarding RMD’s. The IRS regulations require you to take your RMD by year end. TSP however mandates that you begin taking your RMD by August 1st once you reach your required beginning date, or you will abandon your TSP. Sadly, TSP has approximately $88 million in unclaimed assets.
These rules seem rather harsh and hopefully they will be changed if the distribution flexibility rules change in the future. TSP is looking to change them but as Greg Long, Chief Executive Officer Federal Retirement Investment Board stated earlier this year, the changes may take several years to occur.
