Posted on Friday, 3rd October 2014 by

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So, what do you do with the funds in your Thrift Savings Plan (TSP) when you leave federal government service? You have two options. You can take a partial withdrawal which allows you to make a one-time-only withdrawal and leave the rest of your money in the TSP until a later date. You can also take a full withdrawal which allows you to withdraw all of the money from your TSP account. You can do it all at once (lump sum payment), over a period of time or you can purchase an annuity that will make payments to you for life. TSP allows you to choose any combination of these full withdrawal options. One of the full withdrawal options that few people know much about is the TSP Annuity option or “Life Annuity.”

What is a Life Annuity:

A life annuity is a monthly benefit paid to you for life. You are eligible to purchase a TSP life annuity if you are separated from Federal civilian employment or the uniformed services. You can withdraw all or part of your TSP account as a life annuity as long as the amount used to purchase it is $3,500 or more. If you have both a traditional and a Roth balance, the $3,500 minimum threshold applies to each balance separately. The TSP will purchase your annuity for you from its provider. The annuity provider is Metropolitan Life (MetLife). MetLife has been the provider for the TSP annuity program since it began in January 1988. No additional fees or commissions are charged, and your money is transferred to MetLife on a tax-deferred basis.

Don’t confuse the TSP annuity with your retirement annuity that you receive when you retire as either a FERS or CSRS employee, or the retired pay that you receive as a member of the uniformed services.

Types of Life Annuities:

A life annuity provides guaranteed monthly payments for as long as you are alive. If you want a life annuity that pays benefits to a survivor, or joint annuitant, you have that option. If you want a guaranteed stream of payments for as long as you (or your joint annuitant) are alive, an annuity may be the right choice. You can use your entire account balance to purchase a life annuity, or you can use a portion of your account balance to purchase an annuity.

The TSP, through its annuity provider, offers the following types of annuity options:

  • Single life annuity
  • Joint life annuity

A Single life annuity is an annuity that provides monthly payments only to you as long as you live.

A Joint life annuity is an annuity that provides monthly payments to you while you and the person with whom you choose to share your annuity (your “joint annuitant”) are alive. When you or your joint annuitant dies, monthly annuity payments will be made to the survivor for his or her lifetime. The amount of the payment while you and your joint annuitant are alive and the amount of the payment to the survivor depend on whether you choose a 100 percent or a 50 percent survivor annuity.

If you choose an annuity that provides for a joint annuitant other than your spouse, the joint annuitant must be either a former spouse or someone with an insurable interest in you. This means that the person is financially dependent on you and could reasonably expect to derive financial benefit from your continued life.
Two types of joint annuities are available:

100 percent survivor annuity. The amount of the monthly annuity payment to the survivor is the same as the annuity payment made while both you and your joint annuitant are alive.

50 percent survivor annuity. The amount of the monthly annuity payment to the survivor— whether the survivor is you or your joint annuitant — is cut in half (that is, cut to 50 percent) of the annuity payment made while both you and your joint annuitant are alive.
If you name a joint annuitant other than your spouse who is more than 10 years younger than you, you must choose a joint life annuity with the 50 percent survivor benefit. The only exception is for a former spouse if required by a retirement benefits court order.

Annuity Payment Options

Once you have chosen either a single life or a joint life annuity, you must decide whether you want to receive level or increasing payments.

Level payments. The amount of the monthly annuity payment remains the same from year to year. Thus, with a single life annuity, you receive the same monthly payment for as long as you live. With a joint life annuity, you receive the same monthly payment for as long as you and your joint annuitant are alive. The monthly payment to the survivor will depend on whether you have chosen a 100 percent survivor annuity or a 50 percent survivor annuity, but it will remain at the same level for the life of the survivor.

Increasing payments. The amount of the monthly annuity payment can change each year on the anniversary date of the first payment. The amount of the change is based on the change in inflation, as measured by the consumer price index. Increases cannot exceed three percent per year, but monthly annuity payments cannot decrease. You cannot choose increasing payments when the joint annuitant is not your spouse.

Additional Annuity Features That Allow for Beneficiaries

There are two additional annuity features available: the cash refund feature and the 10-year certain feature.

Cash refund. If you (and your joint annuitant, if applicable) die before the amount used to purchase your annuity has been paid out, the remaining amount will be paid to your beneficiary in a lump sum. This feature can be combined with either a single life or a joint life annuity, and with level or increasing payments.

Ten-year certain. If you die before receiving annuity payments for a 10-year period, payments will continue to your beneficiary for the rest of the 10-year period. If you live beyond the 10-year period, you will continue to receive payments, but no payments will be made to a beneficiary when you die. This feature can be combined with a single life annuity with either level or increasing payments. It cannot be combined with a joint life annuity.

How Your Annuity Is Taxed

If you have a traditional (non-Roth) balance in your TSP account, the taxes on those contributions (and the earnings) are deferred until the money is paid to you. Therefore, the TSP annuity payments comprised of traditional (non-Roth) amounts will be taxed as ordinary income in the years when you receive them. If you have a Roth balance in your TSP account, those contributions were made after tax. Generally, the TSP annuity payments comprised of Roth contributions will not be taxed.

Note: Your annuity payments are not subject to the IRS early withdrawal penalty, even if you are under age 55 when they begin.

How Your Annuity is Calculated

Your monthly payment is computed by the provider (MetLife) based on:

  • The amount of money you are using to purchase the annuity
  • Your age and life expectancy
  • Annuity features selected such as single/joint annuity and level/increasing payments
  • The annuity interest rate index. The interest rate index is 2.625% for annuities purchased in September and October 2014.

Use the TSP’s retirement annuity calculator to estimate you monthly payments.

Below are 2 examples for TSP single life annuities.

Maria bought an annuity in July 2006 at 70, when the interest rate index was 5.625 percent. She used $500,000 to purchase a single life annuity with increasing payments and a cash refund. Her initial payment was $2,862 per month. Assuming Maria receives 3 percent annual inflation adjustments, her annuity will pay $3,735 in 2016.

John bought an annuity in September 2014 at 70, when the interest rate index was 2.625 percent. He also used $500,000 to purchase a single life annuity with increasing payments and a cash refund. His initial payment was $2,400 per month. Assuming John receives 3 percent annual inflation adjustments, his annuity will pay $3,225 in 2024.

As you can see, both invested the same amount with increasing payments and a cash refund. Because of the difference in the interest rate index in 2006 and 2014, John’s monthly annuity is $510 less than Maria’s annuity after 10 years.

Advantages/Disadvantages of TSP Annuities

Some advantages of a TSP Annuity are:

  • You receive a lifetime income.
  • If the interest rate index is high, you receive this rate for the life of your annuity.
  • You can protect your principal and allow for increasing payments.

Some disadvantages of a TSP Annuity are:

  • Once purchased, you cannot make changes or stop annuity payments.
  • There could be little or no money left for your beneficiaries.
  • You can’t touch the money, once you’ve placed it in the annuity.
  • If the interest rate index is low, you receive this rate for the life of your annuity.

You’re probably asking, what is the best thing to do. It may be better to wait and see what your needs are in retirement, basing the decision on the other sources of income (pensions, investments, job, etc.) you have. If you have enough income through these other sources, a TSP annuity may not be to your benefit. The TSP Annuity options give you a lot of flexibility with your future but your decision should be based on your situation.

If you are interested in finding out more about a TSP life annuity, visit the Planning & Tools section of the TSP website http://www.tsp.gov. Also, TSP information can be found at http://www.federalretirement.net/tspconsiderations.htm.

Learn more about your benefitsemployment, and financial planning issues on our site and visit our Blog frequently at http://fedretire.net to read all forum articles.

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The information provided may not cover all aspect of unique or special circumstances, federal regulations, medical procedures, and financial information are subject to change. To ensure the accuracy of this information, contact relevant parties and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our article is not intended nor should it be considered investment advice and our articles and replies are time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change. The advice and strategies contained herein may not be suitable for your situation and this service is not affiliated with OPM or any federal entity. You should consult with a financial, medical or human resource professional where appropriate. Neither the publisher or author shall be liable for any loss or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

 

 

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