TSP Wants to Compete More with IRAs

The agency that administers the Thrift Savings Plan is hoping Congress goes along with its plan to lift multiple withdrawal restrictions imposed on TSP investors and to increase the number of investment options offered beyond the current limited number of TSP investment funds.

The Federal Retirement Thrift Investment Board has asked Congress to pass legislation that would drastically revamp and relax the TSP’s withdrawal and investment regulations, which are highly restrictive especially compared to the withdrawal and investment flexibility of an Individual Retirement Account (IRA).

Whether Congress agrees to modify these regulations is unclear.

According to FEDweek, “Even assuming Congress enacts the needed legislation, potentially a long process itself with no guarantee of success, making those changes likely would take more than a year afterward.”

The board’s motivation is a response to the outflow of hundreds of millions of dollars from the funds into other retirement investment vehicles, like an IRA, because of the sheer abundance of restrictions placed on TSP participants.

The TSP is one of three investment planks extended to federal employees to help them secure a smooth road to retirement, the other two being the basic annuity (pension) and Social Security.

Specifically, the Federal Retirement Thrift Investment Board wants to enable TSP participants to be able to invest in an array of mutual funds.

Currently, TSP participants are only allowed to invest in six major funds that offer varying degrees of risk and potential return on investment. Our website provides a thorough explanation of the funds.

By opening up the investment window, the board hopes to entice TSP participants to keep their money in the funds, as well as work toward making the TSP more competitive with IRAs offered by private sector investment houses.

The board also wants to relax the cumbersome withdrawal rules imposed on TSP investors. The current TSP rules essentially create a matrix of complex disincentives to discourage TSP investors from pulling their retirement money from the fund, even though they may have a financial or retirement need for it.

TSP officials have noted that many federal workers have transferred their money into other investment instruments, like IRAs, because of the restrictive withdrawal rules that are currently on the books. According to federal statistics, almost half of TSP investors end up moving their money into other funds that are often managed by private sector investment houses.

Conversely, IRAs provide a wide range of withdrawal options, making it easier for IRA participants to access their hard earned cash for their retirement or other financial situations.

If Congress approves the board’s recommendations, TSP investors would be able to make multiple withdrawals from their funds after age 59½ while working or after they leave federal service and still be able to avoid a tax penalty.

“Currently, federal employees above age 59½ and those separated are allowed to make one partial withdrawal arrangement, and the second one after that must cover the entire remaining balance. If the TSP allowed multiple withdrawals without penalties, large numbers of federal retirees would leave their TSP savings untouched and benefit from the low fees,” according to an article posted on Public Sector Retirement.

However, some withdrawal restrictions will remain in place, like the rules that define when an in-service hardship withdrawal can be made. Also left unchanged would be a tax code regulation that requires a minimum number of withdrawals after a federal worker reaches the age of 70½.