Money Matters

Synthesizing a selective TSP withdrawal

With the recent improvements to the rules governing withdrawals from the TSP, the plan is now the best it has ever been. So good that I think it’s nearly perfect for its intended purpose.

There is still one limitation that causes consternation among some participants, however: the requirement that any money distributed from your account must come, proportionately, from each of the funds in which you are invested at the time the distribution is made. In other words, the asset allocation that will make up your distribution will always match the asset allocation of your account at the time the distribution is processed. If the asset allocation of your account at the time of the distribution is 30 percent C Fund, 10 percent S Fund, 5 percent I Fund, 20 Percent G Fund and 35 percent F Fund, for example, the distribution will be taken from these funds in those same percentages.

What if you are invested in multiple funds, but you’d like your distribution to come entirely from, say, the G Fund? Fortunately, there is a way around this limitation. You can “synthesize” a selective distribution by rebalancing your account to the allocation that would have been the result of your desired distribution after the withdrawal is complete.

For example, assume that your account at the time of the distribution contains $50,000 worth of G Fund shares and $50,000 worth of C Fund shares. That’s an allocation of 50 percent G Fund and 50 percent C Fund. Also assume that you’d like to take a distribution of $10,000 and have all of it taken from your position in the G Fund. If you could do this, after the distribution your account would contain $40,000 worth of G Fund and $50,000 worth of C Fund shares. That is an allocation of about 44 percent G Fund and about 56 percent C Fund.

But, under the TSP’s rules, $5,000 of your distribution will be taken from the G Fund and the other $5,000 will come from the C Fund. This will leave your account invested equally in the two funds, as it was before the distribution, with $45,000 in each. It should be fairly easy to see that if you rebalance your account, after the withdrawal, from 50 percent G Fund and 50 percent C Fund, to 44 percent G Fund and 56 percent C Fund, you’ll be in exactly the same position as if you had been able to take the entire distribution from the G Fund.

Since there will be some time lag between the time the withdrawal is processed and the time the rebalancing order takes effect, there will some “error” in the result, so it’s not a perfect duplication, but it should be close enough until something better comes along.

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