Required Minimum Distributions

required minim distributionsThe Thrift Savings Plan (TSP) is a low-cost platform where federal employees can leave their funds after retirement. There are several advantages to leaving funds in the TSP after one retires; however, the money cannot remain in the account untouched forever. One question Retirement Benefit Institute’s trainers ask is, “Did you know that participants have to take Required Minimum Distributions (RMDs) from their TSP accounts beginning April 1st of the year following the year they reach age 72 and every year after?” Often federal employees are unaware of RMDs or fail to understand their true significance and tax implications.

RMDs for Federal Retirees

Required Minimum Distributions are mandatory withdrawals from TSP, 401(k)s, and IRAs. For federal retirees, RMDs must be taken from both traditional and Roth TSP as well as a traditional IRA. (Roth IRAs are not subject to RMDs.) RMDs are calculated based on three factors: the account holder’s age, prior year-end account balance, and the IRS Uniform Lifetime Table. Since age and the IRS Uniform Lifetime Table are two factors one has no control over, the only variable that can be personally maneuvered is the year-end balance of an account. It may be wise to speak with a financial professional about strategies regarding the handling of this element.

Withdrawing at Age 72

Frank and Bonnie are 71 years old. Bonnie retired under FERS and receives an annuity of $3,200 per month and Social Security of $1,500. Frank also receives a pension of $3,500 per month from his previous employer and Social Security of $1,200 per month. They live comfortably with the income received, and they have no need to draw from their investments. This year, when they reach age 72, the government will require them to begin taking Required Minimum Distributions from her Thrift Savings Plan, his 401(k), and their IRAs. This means Frank and Bonnie will have to draw money from their tax-deferred accounts and pay tax on them. For example, if they had a balance of $300,000 in an account at the end of the year (12/31), they would be forced to withdraw $11,320.75 from this account as an RMD during the following year. (See calculator here.)

Please Be Aware.

Note that any withdrawals from TSP will count toward the RMD amount. Failure to take the full RMD amount will trigger TSP to automatically send the amount needed to meet the full RMD.

In the example above, since Frank and Bonnie do not need the money for expenses, they may put it in an account where earnings will be taxed every year as well.

Another option to reduce future RMD amounts would be to convert some tax-deferred savings to a Roth IRA because there are no RMD stipulations for a Roth IRA. Plus, a Roth IRA can be beneficial for those who want to leave an inheritance to children or grandchildren. Before making decisions on Roth conversions, it is wise to seek professional advice