Posted on Saturday, 18th May 2019 by

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Those approaching age 70 ½ and older are often perplexed about their Thrift Savings Plan RMD withdrawal options and how to efficiently manage the transaction’s proceeds. Some of the concerns are your TSP balance decreases with each withdrawal, annual income and taxes increase, and the earned income potential vanishes for the cash you now have in hand. There are many ways to use this windfall for the benefit of you and your heirs.  If you are required to take an RMD this year review TSP Changes & Required Minimum Distributions (RMDs) to determine your RMD amount and understand the process.

The first thing that came to mind for me was the potential increase in federal taxes, Pennsylvania doesn’t tax retirement account withdrawals. When you withdraw an RMD from the TSP, section 5 of the TSP-77 Request for Partial Withdrawal form requires an automatic 10% federal tax withholding for RMD distributions, 20% for an early withdrawal. They give you the option to increase your federal tax withholding and many use their RMD to pre pay taxes.

Request a  Federal Retirement Report™  today to review your projected annuity payments, income verses expenses, FEGLI, and TSP projections

Your RMD may be sufficient to avoid paying estimated quarterly taxes on other investment income such as realized capital gains, dividends, and interest that is earned on taxable investment accounts throughout the year. If you sold investments this year for capital gains and/or have dividends and interest income from taxable investment accounts, you can use your RMD to cover all or a major portion of your tax liability this year.

Many reinvest their RMD if they have sufficient income from their annuity and Social Security to cover expenses. Unfortunately, you can’t request an in-kind TSP transfer like you have the option to do with other retirement accounts. In-kind transfers allow plan participants to transfer shares from their retirement account to a taxable account to cover their RMD withdrawal.  The transferred shares must cover the full RMD on the date of transfer.  You can’t transfer TSP funds to a private sector account, only cash.

In-kind transfers offer those with other retirement accounts to retain their equity positions and simply transfer them to a taxable brokerage account. This is beneficial for those who don’t want to lose one of their core stock, bond, or mutual fund holdings.

One of the safest investments for your TSP cash is to buy short term Treasury Bills (T-Bills) direct from the government through their Treasury Direct program. Treasury bills are issued for terms of 4, 8, 13, 26, and 52 weeks and they are currently earning just over 2.4%. All you have to do is open an account online and transfer funds direct from your savings; at maturity the Treasury deposits your initial investment plus earned interest back into your savings account. You can elect multiple reinvestments if desired.  You might also find attractive CD rates at local banks, we recently found one local bank offering 13-month CDs at 2.6%.


Another option is to reinvest your RMD in one of your taxable brokerage accounts, possibly in a tax-efficient investment. To reduce future taxes, invest in municipal bonds, index funds that typically don’t generate significant capital gains or individual tax efficient mutual funds. Funds such as Vanguard Tax-Managed Balance Fund (VTMFX) or the Vanguard Intermediate Term Tax-Exempt Investment fund (VWITX) are considered tax efficient.

Your RMD could raise your income sufficiently to increase you and your spouse’s Medicare Part B premiums due to your Modified Adjusted Gross Income (MAGI). Medicare Part B premiums are income adjusted.

At age 70 ½ federal retirees have at least three potential sources of annual income to rely on: your FERS or CSRS annuity, Social Security if eligible, and now your TSP RMDs.  If you worked for other private sector employers or owned a small business you may have other retirement accounts to draw from.  You must take RMDs from your retirement accounts to avoid a costly penalty. Effective management of your retirement accounts can grow your retirement savings and possibly reduce your future tax liability. Take care when making your RMD elections this and every year.                                      

Request a  Federal Retirement Report™  today to review your projected annuity payments, income verses expenses, FEGLI, and TSP projections

Helpful Retirement Planning Tools / Resources

Disclaimer:Opinions expressed herein by the author are not an investment or benefit recommendation and are not meant to be relied upon in investment or benefit decisions. The author is not acting in an investment, tax, legal, benefit, or any other advisory capacity. This is not an investment or benefit research report. The author’s opinions expressed herein address only select aspects of various federal benefits and potential investment in securities of the TSP and companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that retirees, potential and existing investors conduct thorough investment and benefit research of their own, including detailed review of OPM guidance for benefit issues and for investments the companies’ SEC filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.Be Sociable, Share!

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