Significant changes to required minimum distributions (RMDs) for qualified retirement accounts are currently taking place. The largest demographic who this will affect is older Americans, particularly federal employees and annuitants who own Thrift Savings Plan (TSP) accounts. There are tens of thousands of federal employees whose TSP accounts are valued over 1 million dollars.
These recent changes regarding RMD rules will likely shift the future value of federal annuitants’ TSP accounts.
In December of 2019, the first of many major changes to the RMD rules came once the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed. The biggest change from the SECURE Act passage is the age rising to 72 from 70.5 for when RMDs are effective (Jan. 1st, 2020).
An important detail is that individuals who are becoming age 70.5 any time after December 31, 2019, the “required beginning date” (RBD) (the latest date in which the first RMD must be taken) is April 1st following the year the individual becomes age 72. Therefore, any federal employee born after June 30th, 1949 has an RBD of April 1st following the year they reach age 72. Future RMDs must be taken every year by December 31st of that year.
The RMD rules apply to the Thrift Savings Plan (TSP), both the traditional and the Roth version of the TSP traditional IRAs, to qualified retirement plans such as the 401(k) and 403(b) retirement plans, both the traditional and the Roth version. The only type of retirement account that is not subject to the RMD rules are Roth IRAs, since they do not come with required withdrawals until after the Roth IRA owner’s death.
Under the SECURE Act, a retired federal employee with a TSP account who reached age 70.5 before Jan. 1st, 2020 (anyone born before July 1st, 1949) are required to continue to annually take their TSP RMDs. Although this was waived for 2020 due to the CARES Act, TSP RMDs are resuming in 2021.
This age reduction of the RBD to age 72 from age 70.5 is a small change yet still beneficial. Perhaps the most helpful part to this change is the fact that it allows for another one to two years of tax-deferred growth.
Additionally, the change allows a TSP participant extra time to do something with their tax-deferred retirements accounts in order to minimize the tax consequences of future RMDs when they start in one to two years.
The TSP has sent out a notice to any retired or departed federal employee born before July 1st, 1949 with a TSP account what their 2021 RMD is. If these federal employees own other retirement accounts such as traditional IRAs and 401(k) retirement plan accounts, RMDs must also be taken from each of these accounts as well before Dec. 31st, 2021, and each year after. Please be aware that federal employees who do not take their RMDs in any year by December 31st are subject to a 50 percent IRS accumulation penalty.
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