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Required Minimum Distributions (RMDs) – Are You Ready?

Posted By Dennis Damp On In BENEFITS / INSURANCE,FINANCE / TIP,LIFESTYLE / TRAVEL,RETIREMENT CONCERNS,SOCIAL SECURITY / MEDICARE,SURVIVOR INFORMATION | Comments Disabled
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(Updated 1-12-2024) The Internal Revenue Code (IRC) requires that you begin receiving distributions from your account in the calendar year you become age 73 and are separated from federal service. Your  traditional account is subject to these required minimum distributions (RMDs). The TSP calculates RMDs using your age, your prior year-end account balance, and the IRS Uniform Lifetime Table.

 

RMD Puzzel
 

Originally, ROTH accounts [2] under the 401(a) laws were subject to RMDs, this has fortunately changed under the new 2022 SECURE Act. TSP Participants are no longer required to take ROTH RMDs prior to the account owner’s death. You will receive a taxable distribution as specified on your end of year 1099R.

Your First RMD

The first year you are 73 or older and separated from service is called your first distribution calendar year. If you do not withdraw enough to meet the requirement during your first distribution calendar year, the TSP is required to disburse your first RMD to you by April 1 of the following year. That date is called your required beginning date, and it happens during your second distribution calendar year. For administrative purposes, the TSP will issue this RMD on March 1 or the last business day before March 1 of your second distribution calendar year. Your RMD deadline for your second distribution calendar year is December 31 of that same year, so they will send your RMD in December. In the years that follow, you’ll have just one RMD, due December 31.

For those just turning 73 this year and receiving their first RMD, if you don’t request it by December 31st of this year, you will receive two RMDs next year. The TSP automatically issues your first RMD on March 1st of your second year if you don’t request it in the previous year; all RMDs from then on will be issued in December.  Those on Medicare should look at this closely, receiving two RMDs in one year could increase your Medicare Part B premiums [3] due to their Income Adjusted feature.

You will fully or partly satisfy your RMD with any withdrawals you choose to make. If you don’t make any withdrawals or if your withdrawals fall short of the required amount, The TSP will automatically send you the amount that’s still required.




Penalties for Not Taking an RMD

If you withdraw an insufficient amount from a retirement account the penalties are severe, 25% of the shortfall plus the income tax owed. If you report and pay the shortfall within two years the penalty drops to 10%. Fortunately, the TSP will send your distribution automatically if you don’t request a withdrawal as long as they have your correct address. TSP participants must update their mailing address if they move. Otherwise, they will not send out your RMD check, but they will still report the amount to the IRS as taxable income. Log into your TSP account at www.tsp.gov [4] to verify they have your correct address.

NOTE: TSP accounts no longer use a participant’s account number for the login ID. Significant TSP account access and security changes were implemented earlier this year. You must establish a new log in ID when you first sign on.  Review these changes [5] if you haven’t visited the site since the changes were implemented.

Rule Change

The IRS rule changes in 2019 allow TSP participants to keep their funds in the TSP when they reach age 73. You can leave your entire account balance in the TSP when you leave federal service if the balance is $200 or more. You will no longer be able to make employee contributions. However, you can transfer money into your TSP account from IRAs (although not from Roth IRAs) and eligible employer plans. Your account will continue to accrue earnings, and you can continue to change the way your money is invested in the TSP investment funds by making interfund transfers.

Determining Your RMD

Typically, the TSP will send you a letter at the beginning of each year that you are eligible for an RMD. My letter was dated 01/05/2021 and it listed the full amount that I am required to withdraw. If you misplaced this letter sign into your TSP account and look under Account Information on the left side of the screen; click on “Correspondence from the TSP.”  All of the letters and notices they send out are available for you to view and download.

To request your RMD prior to December when they are sent out automatically, sign into your account and select “Withdrawal Requests for Separated and Beneficiary Participants.” This should be highlighted on your screen.  Use their TSP-99 (WEB) form to request your withdrawal online. It only takes a few minutes to complete and you can print out the form for your records.  I also received an email from them shortly after, copy below:

The Thrift Savings Plan (TSP) received your request for a financial transaction or installment change.

If you did not make this request, please call the ThriftLine toll-free at 1-877-968-3778 and select option 3 to speak to a Participant Service Representative. If you are outside of the U.S. and Canada, call 404-233-4400. Hearing-impaired participants may call our TDD number at 1-877-847-4385.

Thank you for being a valued TSP participant.

They must withhold a minimum of 10% for federal taxes however you can request withholdings up to 99% of the distribution for federal tax. There is no minimum required for state tax, you can elect a withholding if desired.

The TSP sends out a 1099 R in January of the following year for your withdrawal; your traditional account RMD distribution is taxed as ordinary income.

The rules are slightly different for inherited RMD withdrawals for a spouse’s Beneficiary Participant Account (BPA). A spouse can retain the account for their lifetime. The Internal Revenue Code (IRC) requires that you begin receiving annual distributions from your beneficiary participant account within certain deadlines. These rules are complex; you may also wish to consult a tax advisor. Depending on the deceased date of birth the rules vary. Review the TSP’s brochure titled, Tax Information About TSP Withdrawals and Required Minimum Distributions for Beneficiary Participants [6] for additional information.

When the beneficiary participant dies, the funds in the BPA cannot remain in the TSP. The account will be distributed directly to the BPA participant’s beneficiary(ies) indicated on Form TSP-3. If no valid Form TSP-3 is on file, the account will be distributed according to the order of precedence. These payments are subject to certain tax restrictions and cannot be transferred or rolled over into an IRA or eligible employer plan in accordance with page 9 of the TSP Beneficiary Guide [7]. In addition, these payments will be fully taxable in the year the beneficiary(ies) receives them. Any payments from tax-exempt money are not subject to taxes when distributed.

Cautionary Note

For annuitants and beneficiary participants with large TSP accounts, it may make sense to transfer their TSP account to an IRA at another financial institution. According to TSP’s Withdrawal Guide [8], “You can transfer part or all of your single withdrawal or eligible installment payments to an IRA or an eligible employer plan (for example, the 401(k) plan of a new employer).” Inherited IRAs [9] permit non spousal beneficiaries to spread the tax burden over a ten-year period in most cases.

There are exceptions to this IRA rule, Fidelity Investments [10] states the following requirements for non-spouses, “If the original account owner died on or after January 1, 2020, in most cases you will need to fully distribute your account within 10 years following the death of the original owner.  However, there are exceptions if you are considered an eligible designated beneficiary. Eligible designated beneficiaries include a minor child of the original account owner, a disabled or chronically ill individual, or any other person who is not more than 10 years younger than the deceased account holder.”

Beneficiaries of a beneficiary participant TSP account must take an immediate withdrawal upon the account owner’s death as noted above. Discuss this with your accountant, financial advisor [11], or estate planning attorney.

Update Your Beneficairy Designations

It’s a good idea to review your beneficiary designations, especially if you remarry or wish to change beneficiaries. I submitted an updated TSP-3 Designation of Beneficiary form this week; the addresses changed and my daughter married six years ago. It was time for an update. You can fill out the TSP-3 form online, just click on Beneficiaries under “Personal Information” that is listed under My Account.

If changes are needed, click on “Change Beneficiaries.” There is  an option to edit, remove and change your beneficiary listings. Review the TSP video [12] on how to make beneficiary updates and changes.

Here is a list of resources that you may find helpful.

Helpful Retirement Planning Tools

Disclaimer: The information provided may not cover all aspect of unique or special circumstances, federal regulations, medical procedures, and benefit information are subject to change. To ensure the accuracy of this information, contact relevant parties for assistance including OPM’s retirement center. Over time, various dynamic economic factors relied upon as a basis for this article may change. The advice and strategies contained herein may not be suitable for your situation and this service is not affiliated with OPM or any federal entity. You should consult with a financial, medical or human resource professional where appropriate. Neither the publisher or author shall be liable for any loss or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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