Q. I’m a federal law enforcement officer and I’ll be retiring in March after 25½ years of creditable service. I intend to take my Thrift Savings Plan funds when I retire and receive monthly payments based on my life expectancy. I understand this life expectancy option and an annuity are the only ways I can eliminate the IRS 10 percent penalty for early withdrawal since I’ll be 53 when I retire. The TSP manual (on page 16) states I have a one-time opportunity to switch from the life expectancy payments to specific dollar amount payments. I called the TSP representative and she confirmed that I can switch from the life expectancy payments to specific dollar amount payments when I reach 59½. Since I’m a “trust but verify” kind of guy, I’d like to ask the following questions:
Is the TSP representative correct about switching from the life expectancy payments to specific dollar amount payments when I turn 59½?
Is age 59½ the earliest I can do the switch in order to eliminate the IRS 10 percent penalty for early withdrawal?
If I can switch from the life expectancy payments to specific dollar amount payments, can I then change the dollar amount on a yearly basis?
A. What you’re considering doing is taking a series of Substantially Equal Periodic Payments as allowed under IRC Section 72(t) in order to avoid the early distribution penalty. There are three methods you may use in calculating these payments, including the minimum distribution method you’ve mentioned. The other two methods; the fixed amortization method and the fixed annuitization method, generally produce larger, but fixed, distribution allowances. In order to avoid the penalty, the distributions must continue, without disruption, for five years, or until you reach age 591½, whichever is longer. The TSP permits you to switch from calculated RMD payments to fixed monthly payments at any time. Once you are receiving fixed monthly payments, the TSP allows you to change the amount of those payments once year, in January. Keep in mind that the TSP’s rules and the IRS’s rules are two different things.
