Federal employees who exit service before age 55 can opt for monthly withdrawals from their traditional Thrift Savings Plan (TSP) based on their life expectancy. When executed correctly, these monthly payments avoid the 10% early withdrawal penalty, though they remain fully taxable. These monthly payments can provide steady support to help with living expenses and ease financial strain.
How TSP Life Expectancy Payments Work
Determine Your Life Expectancy Factor
Participants relying on a single life expectancy refer to the IRS Single Life Expectancy Table annually, matching their age to the corresponding factor for that year.
Select the TSP Balance for Calculation
Participants may use all or part of their traditional TSP balance. IRS rules require the initial balance to be set in a “reasonable manner.” For clarity, the IRS suggests using the balance as of December 31 of the year prior to the first payment. For instance, if payments begin on April 1, 2025, a balance from any date between December 31, 2024, and March 31, 2025, is deemed acceptable.
Compute Annual and Monthly Payments
Divide the chosen TSP balance by the life expectancy factor. This yields the annual payment, which is then evenly distributed over the remaining months of the first year. For subsequent years, repeat the process using the December 31 balance from the prior year and the updated life expectancy.
Key Rules for TSP Life Expectancy Payments
- No Age Limit: Participants of any age can request these payments.
- Annual Recalculation: Payments adjust yearly based on the prior December 31 balance and the participant’s (or joint, with a beneficiary) life expectancy.
- Duration Requirement: Payments must persist for at least five years or until age 59½, whichever is later.
- Tax Withholding: The TSP withholds 20% for federal taxes; participants handle any applicable state taxes.
- Stopping Payments: After reaching age 59½, or five years from the start, if later, participants may end these payments.
To initiate this, participants must log into their TSP account online and select “installment payments based on life expectancy,” designating a portion—or the entirety—of their traditional TSP balance for the calculation. Each year, the TSP recalculates the monthly amount using the updated account balance and the participant’s revised life expectancy.
Tax Reporting
All distributions are reported to the IRS and the TSP will send all participants Form 1099-R, detailing the gross taxable amount received and federal taxes withheld for the prior year. This ensures participants have clear records for tax filing.
For more information regarding your TSP and full range of federal benefits, schedule a consultation with a Federal Retirement Consultant®.
