The Thrift Savings Plan is best defined as a defined contribution program primarily designed for members of the military, uniformed officers, and federal employees. This account is funded with the help of elective salary deferrals, which are amounts contributed to the plan by the employer for the employee.
TSP Account Closing Process
TSP agencies will offer matching contributions to the amounts put into the accounts, offering an easy bailout. On average, it takes two months or sixty days for the withdrawal request to be processed and the account to be subsequently closed. If you have a pending loan, it will be deducted from your existing TSP account balance. When you’re looking to close your TSP account, you can either withdraw all your money or transfer it into another retirement plan which you feel is more suitable to your needs. Let’s have an in-depth look at these two options in detail:
The process of cashing out your TSP account balance is called a TSP withdrawal, which is subject to taxation. Depending on your resident state, you may also have to incur state income tax. If you’re withdrawing on a premature basis, you may also have to undergo a nominal penalty fee of 10% – explained before.
i. Cashing out:
Not the most cost-effective, as tax rates are significantly more – withdrawing your money in cash is strictly advised against. When you’re withdrawing or cashing out your balance in paper currency, the Thrift Savings Plan will withhold 20% of it to offset income bill tax in the case of traditional TSP. Furthermore, if you’re under the age of 59.5 and choose to withdraw – you will owe them a 10% penalty.
Making a substantial and larger withdrawal through cashing out at once will put you into a higher tax bracket in comparison to those who have made withdrawals over the years.
ii. Absolute Withdrawals:
If you’re looking for a fast pay-out, you should perhaps get a full withdrawal through filling up form TSP70. TSP authorities have made this very convenient by offering us a host of methods including but not limited to withdrawing all at once, systematically, through an annuity, or any of these combinations for maximum versatility as they are described below:
A. Withdrawing all at once: If you’re looking for a lump-sum payment i.e the entire amount withdrawn at once, you have the option to do so albeit it comes with a fair share of taxable consequences.
B. Withdrawing monthly: If you want to withdraw your entire account over time in a spread-out manner, then this provision is for you. Under this, there are two mechanisms of ascertaining how you want to withdraw your TSP account balance.
Specific Dollar Amount:
The TSP account holder may request a specific dollar amount to be received each month until the TSP account has been emptied properly, this requires the monthly withdrawal to be 25$ or more and is overall a good and simple option.
Life Expectancy: It is possible to request TSP to calculate your monthly payment for you through their Internal Revenue Service (IRS) by using the IRS Life Expectancy Table. The first payment shall be made based on age and your account balance at the instance of the first payment and will automatically readjust the monthly payment through complex algorithms every year.
Annuitize is the process of converting an annuity investment into a series of periodic income payments. Thankfully, there are no tax consequences when you’re looking to annuitize your TSP account balance. The only obligation is paying the income tax on the amount you have withdrawn from your TSP account when cashing out. Through this process, you are allowed to convert all your funds into a consistent and guaranteed source of income for you as well as the beneficiaries of your TSP account. Once annuitized, you cannot undo it for your TSP account,
2. Rollovers and Transfers
‘Transfer’ and ‘Rollover’ are used very interchangeably when said about retirement plans. When you’re transferring your TSP account balance into another retirement account, you’re deferring on the payment of taxation on that money. This is interesting because you’re legally allowed to defer on paying tax for the money stored in your TSP account until you start making withdrawals from your new retirement account. Furthermore, there are no penalties occurred if it is transferred from Roth to Roth and traditional to traditional. There are three places where transferring your money into is a good idea, they include but are not limited to:
Rolling Over To a Roth or Traditional IRA:
If you have a significant TSP balance, you should choose this option as do most people. Rolling over your balance to a traditional IRA has a lot of benefits as follows:
- Traditional IRA has more investment options including but not limited to stocks, mutual funds, bonds, annuities and so on.
- Funds in a self-directed IRA can be used to buy assets and property of nearly any type including but not limited to FOREX, real estate, private placements, land, gold, small business, and other precious metals among many things.
- Tax Treatment in the Traditional IRA is similar to TSP
- Traditional IRA can easily be converted into a Roth IRA at any time as per your convenience.
- Fees are significantly lower in certain IRA investments when you avail a traditional IRA.
Rolling Over To A Similar Employer Plan:
If you’re changing employers, you should consider closing your TSP by rolling your balance into the new plan. However, one must be careful and do it if the circumstances allow it:
- If your new plan has a loan mechanism and will allow you to take loans
- If the 401k has a diverse scope of investment options
- If they’re willing to allow you to consolidate your retirement balance into a single account for convenience purposes.
Rolling Over and Transferring are complicated issues and you should do your due diligence before deciding to do this.