Should I withdraw funds from my Thrift Savings Plan at one time or over several years?
I am almost 70.5 years old and I need to close out my Thrift Savings Plan. Should I withdraw my funds throughout the next three years in equal parts or withdraw it all at one time when I turn 70.5 years old?
You mentioned that you need to close out your TSP due to your age which doesn't sound correct to me. While you may need to begin taking Required Minimum Distributions (RMD's) in the year you turn 70.5, I highly doubt you need to close out the plan. I would start off by looking further into the plan rules. Secondly, any distributions taken from your TSP are treated as ordinary income (i.e. taxed at your marginal tax rate). Therefore, from a tax standpoint, you should take out the mimimum required amount. If you were to take a one time distribution, you would likely lose a significant portion of your portfolio to taxes.
You have a few options when it comes to withdrawing from your TSP account. The two biggest factors you want to think about are taxes and the need for income. I would hesitate to recommend a full single payment withdrawal because you would likely be faced with a large income tax bill. Your other full withdrawal options are monthly payments (which can be a dollar amount you specify up-front or an amount based on your life expectancy). This will provide you regular income and spread out the taxes over multiple years (depending on your balance amount). You can also use your balance to purchase an annuity, which again, can spread out the taxes and provide income. The downside to these three options is if you are not only looking for income, but growth of the account as well, then these three options may not work for you. In this instance, you may benefit more from rolling the TSP account over to a traditional IRA, where it can be invested in a more growth oriented investment. If you do a direct rollover from the TSP to the IRA, rather than to yourself, you can avoid paying income taxes on the full amount at the time of the rollover. You would be required to begin mandatory distributions at 70 1/2, but the balance left in the IRA would still have the opportunity to grow. Which option is best for you really depends on you current situation and your goals for the account. I would recommend reaching out to a fee-only planner who can take a closer look at your situation and help you make the decision.
I normally recommend that clients rollover their retirement plans into a IRA or Roth depending on the money in the plan. This allows me to actively manage their portfolio with many more options. For my clients that have required minimum distributions, we set-up the distributions monthly, quarterly, annually, or whatever works for the client. If you withdraw the entire amount, you may have a big tax bill, so be careful.
I am not sure why they are telling you that you need to withdraw ALL of your TSP. The only time, I am aware, where an organization can force you to take all of your money out, is if the balance is under $5000K. You only have to take your RMD at 70.5, it is not necessary to take out money in excess of your RMD. If that’s not the case, I would explore whether it makes sense to roll the account to an IRA. But taking a full distribution of your TSP in one calendar year, could have severe tax implications. Often taking distribution of a retirement account over many years is the best approach.
I would find an independent fee-only advisor and have them review your options with you. I would not go to a broker and have them review with you. If you are going to a bank, or a large institution to talk with an advisor, you are likely talking to a broker.
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