A rule taking effect at the start of the year will align the Thrift Savings Plan, the employer-sponsored plan for U.S. civil service employees, retirees and members of the uniformed services, with other IRA savings accounts, meaning federal retirees can keep money growing in their “after-tax” accounts for longer.
Beginning Jan. 1, 2024, only traditional TSP balances will be subject to mandatory withdrawals. Historically, a required minimum distribution, or RMD, applied to the combined balance of the traditional and Roth TSP account. Participants could’ve skirted that by choosing to take an RMD only from their traditional balance, but that left it subject to tax.
“This means an overall smaller amount of [the] TSP is subject to the RMD, which effectively creates a smaller RMD and does indeed allow TSP participants to maintain more dollars inside their accounts,” said Thiago Glieger, a private wealth expert for Maryland-based RMG Advisors, to Federal Times in an email.
That’s simply because the bigger the balance, the larger the RMD is, according to the formula.
That’s one of many changes for retirees provided by the Secure 2.0 Act, which passed last year and intends to make retirement planning more flexible. It also brings TSP account holders more in line with the private sector, which never subjected Roth IRA accounts to RMDs during the account holder’s lifetime.
According to the IRS, Roth accounts in a 401(k) or 403(b) plan are subject to the old RMD rules for 2023. Beginning in 2024 and beyond, the change for the TSP will be in effect, according to the rule published in the Federal Register on Oct. 31.
“You must still take RMDs from designated Roth accounts for 2023, including those with a required beginning date of April 1, 2024,” the agency said.
Other changes affecting RMDs under the law include a reduced penalty of 25% instead of 50% on the withdrawal if a retiree fails to take it. The age when a retiree must take their first withdrawal is also increasing to 75 from 73 in 2033.
“This change means that if you turn 72 in or after 2023, you can delay your RMDs one more year, allowing the funds in these accounts to grow tax-free for longer,” writes Jim Miller in a column for the American Legion.
In years past, when inflation has been high, Congress has been urged to pass a provision to temporarily suspend RMDs so retirees don’t deplete their savings in a time of high prices.
More than 6 million people use the TSP, which manages approximately $709.6 billion in assets.
Molly Weisner is a staff reporter for Federal Times where she covers labor, policy and contracting pertaining to the government workforce. She made previous stops at USA Today and McClatchy as a digital producer, and worked at The New York Times as a copy editor. Molly majored in journalism at the University of North Carolina at Chapel Hill.