It’s a fact — your Required Minimum Distributions (RMDs) will increase if you maintain high tax-deferred balances in your traditional Thrift Savings Plan. The same applies to other tax-deferred plans you or your spouse may have had when working in the private sector. These include 401(k) or 403(b) retirement plans and traditional IRAs.
Keep in mind you are required to take separate RMDs from each of these types of retirement accounts starting no later than the April 1 following the year you turn age 72. When your RMDs are high, it can bump you into a higher marginal tax bracket.
“By spreading out your TSP distributions in the years before you turn 72, you can plan your taxes in a way that keeps you in a consistent, manageable bracket while avoiding a big tax shock when RMDs kick in.”
Spread Out Distributions From Your Traditional TSP Balance
The reason you have to take RMDs is simple: Uncle Sam never intended your TSP and similar accounts to grow tax-deferred forever. As the Internal Revenue Service (IRS) website bluntly states: “You cannot keep retirement funds in your account indefinitely.”
By spreading out your TSP distributions in the years before you turn 72, you can plan your taxes in a way that keeps you in a consistent, manageable bracket while avoiding a big tax shock when RMDs kick in. When you think about it, as your spread out your TSP distributions you’re also spreading out your tax burden.
Remember: Income Taxes May Increase In The Coming Years
If you stay too focused on keeping your taxes low in the current year, you may be overlooking a harsh reality: the marginal tax rates may be considerably higher when you turn age 72. Right now, tax rates are low. However, no one knows what the tax rates will be 10 or more years from now. And no one knows how the stock market will be doing in the year you turn 72. Spreading out your traditional TSP distributions can also help average out fluctuations in the stock market.
What Counts Towards Your RMDs?
If you’ve set up installment payments that exceed the amount of your RMD, you won’t be subject to RMDs when you turn 72. The same applies to any single withdrawals that exceed your RMD. However, if the total amount of your installment payments fall short, you’ll have to make up the difference to satisfy the RMD. If you haven’t made any TSP withdrawals by age 72, you may have to have to withdraw even more funds from your TSP to cover what you owe Uncle Sam.
Never under-estimate the value of tax planning. Touch base with an FRC® trained advisor who can connect you with a highly-experienced tax professional.
