With perhaps thousands of federal employees having to leave federal service as a result of reductions-in-force (RIFs), the question becomes for many of these departing employees: How to access their Thrift Savings Plan (TSP) accounts? Many of these employees will be under age 55 and will not be able to get new jobs immediately. They have bills to pay, and accessing their TSP accounts in a penalty-free way is perhaps a short-term solution while they seek new employment.
This is the first of two columns discussing how separated federal employees younger than age 55 can make penalty-free traditional TSP withdrawals. Presented in this column is the TSP annuity and TSP monthly payments based on life expectancy.
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Using a Portion or All of the TSP Account to Purchase a Life Annuity
A TSP life annuity is a monthly benefit paid to the TSP account owner for life. There are several types of TSP annuities with different features to choose from. A TSP participant may choose a portion or all of their TSP account to purchase the TSP annuity. TSP has contracted with an insurance company who provides the annuity. Under TSP rules, only TSP accounts of more than $3,500 are eligible for a TSP life annuity and only the traditional TSP may be accessed for purchasing a TSP annuity.
The larger the amount a TSP participant uses of his or her traditional TSP account to purchase a TSP life annuity, the larger the monthly payments. Interest is also included in the traditional TSP annuity payments. TSP annuity payments are subject to federal and state income taxes but not subject to the IRS’ early withdrawal penalty of 10 percent.
TSP participants who are considering the purchase of a traditional TSP life annuity should note the following: (1) Once the annuity is purchased, the TSP participant cannot change or cancel the annuity; (2) The purchase of a TSP life annuity means that the TSP participant will receive lifetime monthly payments no matter how long the participant lives. However, when the TSP participant dies, any money left in the TSP annuity will be kept by the insurance company. The TSP participant has the option when purchasing the annuity to have a “cash refund” option in which any remaining funds in the annuity at the time of death of the participant will be paid to a named beneficiary. But purchasing the annuity with the “cash refund” option will result in lower annuity payments; and (3) The TSP participant has the option of purchasing a TSP joint and survivor TSP annuity. However, purchasing this option will also result in lower TSP monthly annuity payments. TSP annuity payments are fully taxable with no IRS early withdrawal penalty.
Request Monthly Payments from Their Traditional TSP Based on Life Expectancy
A TSP participant who leaves federal service before age 55 can request monthly payments from their traditional TSP based on life expectancy. While these payments are fully taxable, if done properly, the monthly payments will not be subject to an early withdrawal penalty of 10 percent.
To receive these monthly payments, a TSP participant has to go online to his or her TSP account and request “installment payments based on life expectancy.” The TSP participant will request that a specific portion of his or her traditional TSP account be used for the TSP to calculate monthly payments based on the participant’s life expectancy. The TSP will recompute every year’s monthly payments, based on the account balance and the recomputed life expectancy.
The following is an explanation of the TSP life expectancy monthly payment procedure works:
Step 1. Determine the life expectancy factor.
TSP participants who use single life expectancy in order to determine their monthly payment each year will look up their age each year in the IRS’ Single Life Expectancy Table in order to find their life expectancy for that year. The table can be found in IRS Publication 590-B (Distributions from Individual Retirement Arrangements). A portion of the table is reproduced here:
IRS Single Life Expectancy Table
Step 2. Determine the traditional TSP account balance to be used for the monthly payment calculation.
TSP participants can use all or a portion of their traditional TSP account balance. IRS guidelines state the initial account balance that is used to calculate the first-year monthly payment must be determined in a “reasonable manner.” While the IRS’ statement alone is not especially useful, the IRS also offers an example that demonstrates using the traditional TSP account balance of December 31 of the year before periodic payments are to begin. According to the IRS, it is reasonable to use a traditional TSP account balance for any date “within a reasonable period before the distribution.” For example, a TSP participant wants to start receiving a monthly payment starting April 1, 2025. The IRS states that it would be reasonable to choose the traditional TSP account balance as of any date between December 31,2024 and March 31, 2025.
Step 3. Calculate the annual payment and the monthly payment.
Divide the TSP account balance by the life expectancy determined in Step 1. The result is the total amount that must be distributed during the first payment year and spread evenly over the number of months remaining in the first calendar year. For the second year, the TSP participant will follow a similar procedure, using the account balance as of December 31 of the first distribution year and the recomputed life expectancy of the TSP participant for the second year.
The following is an example of traditional TSP monthly payments based on life expectancy:
Sheila, age 48, has 26 years of federal service and is eligible for early retirement via Voluntary Early Retirement (VERA). Sheila retires March 1, 2025. As of December 31, 2024, Sheila has a $835,420 balance in her traditional TSP account. On March 20, 2025, Sheila goes to her online account and access Form TSP-70 in order to request monthly TSP withdrawals based on her life expectancy. According to IRS’ Single Life Expectancy Table, Sheila’s life expectancy at age 48 is 38.1 years.
Sheila’s total payments for the remainder of 2025 (spread over nine months, starting April 1,2025 and ending December 31,2025) will be:
$835,420/38.1 = $21,927
Each month during the remainder of 2025, Sheila will receive a check of $21,927/9, or $2,436.33.
For the year 2026, Sheila’s monthly payment will be calculated as follows:
1. Traditional account balance as of December 31,2025 = $818,578
2. Sheila’s life expectancy factor in 2026 when she will be 49 years old = 37.1
Sheila’s total payments for the year 2026 will be:
$818,578/37.1 = $22,064
Each month during the rest of 2026, Sheila will receive a check of $22,064/12, or $1,838.67.
Sheila is required to take these monthly withdrawals based on her life expectancy until she is at least 59.5 years old. Note that Sheila’s monthly withdrawals can vary from year to year based on her account balance as of December 31 of the previous year and the smaller life expectancy from year-to-year as Sheila gets older. If Sheila decides to stop these monthly payments before she becomes age 59.5, then she will be subject to the 10 percent early withdrawal penalty on all previous monthly payments.
Specific Rules for Receiving TSP Monthly Payments Based on Life Expectancy
1. There are no age restrictions. A TSP participant could be of any age to request TSP monthly payments based on life expectancy.
2. Monthly payments will be computed each year based on the traditional TSP account balance of the previous December31 traditional TSP account balance, and the TSP participant’s next year life expectancy factor, or a joint life expectancy factor if there is a beneficiary.
3. Monthly payments must continue for the later of five years or age 59.5.
4. The TSP automatically withholds 20 percent federal income tax for all monthly payments made to the TSP participant. IF applicable, the TSP participant is responsible for paying any state income taxes due if the TSP participant lives in a state that has a state income tax.
5. Upon reaching age 59.5, or if later, five years from the month the TSP participant started receiving monthly payments, the TSP participant can at any time request a stop to the monthly payments based on life expectancy. The TSP participant can in the future resume receiving payments including a partial payment of at least $1,000, fixed dollar annual, monthly or quarterly payments, or a lump-sum withdrawal of anything remaining in the traditional TSP account. Once the TSP participant reaches his or her required beginning date (currently age 73), the TSP participant is subject to a required minimum distribution (RMD) for the rest of his or her life.
The TSP will report to the IRS all payments that are made directly to the TSP participant. The TSP participant who receives monthly payments based on life expectancy will receive from the TSP each January following the year of monthly payments Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.). Form 1099-R shows the amount of the gross (and taxable) distribution the TSP participant received in the previous year and the total amount of federal income tax withheld from the monthly payments.