Posted on Sunday, 11th March 2012 by

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Over the years I’ve talked to many federal employees about their Thrift Savings Plan (TSP). Unfortunately most don’t have an understanding of what their options are at retirement.

First, let’s discuss your current TSP allocation. Does your current allocation still meet your needs and goals? What I have found is most folks seldom reallocate investment options during their working years. The issue is that when you finally sit down to prepare for retirement you may find most or all of the money in your TSP invested in more growth oriented funds C, I, and S; which may have added more risk than you were aware of. It’s a good thing to look at your account at least yearly to see if your allocation meets your specific needs and adjust your allocation to align with your personal situation.

Secondly, should you consider taking advantage of the new Roth TSP option that will be available in May. Dennis Damp wrote an article titled Roth TSP Contributions – Are They Right For You That you will find informative.

Thirdly, let’s look at the TSP options you have when you retire.

  • In-Service Withdrawal: If you’re over 59 ½ and still working you may do a one time in-service withdraw. You may withdraw the funds in cash or roll it over into a personal IRA.
  • Partial Withdrawal: After retirement you are allowed one partial withdraw. In short, if you would like to withdraw a lump sum to pay bills, go on a trip, buy a vehicle, roll to an IRA, or whatever you choose, you are allowed to do one partial withdrawal.
  • Monthly Income: You are allowed to take monthly payments. Each year you will be able to set a withdrawal amount for the year; which can be recalculated to the prior December.
  • Annuity Options: Moving your TSP to an annuity is an option. There are a number of annuity options to consider. I’ve been asked a number of times to compare and evaluate annuities available to the general public versus TSP annuity options. To be honest, annuities available to the general public typically have a higher payout. For example: let’s take a husband, age 64 and his spouse, age 60. They were looking at an annuity with joint life income with installment. The regular annuity available to the general public allowed for an approximate $100 monthly increase in income. You may ask why? In short, annuity calculations are determined based on current age, length of income period, and a current interest rate. It does make sense to evaluate your income options if you are considering the annuity option.
  • IRA Rollover: You may roll your entire TSP account into an IRA and have a few different options. One of the most common misconceptions is that you will be taxed on the entire amount should you take this option. That is not true. If you roll your entire amount directly to your new IRA using a direct or trustee-to-trustee transfer, you will not pay tax until you start taking income. You may also create multiple IRAs and transfer the funds directly to accommodate various beneficiary designations. Your IRA can be funded using various investment vehicles. Let’s explore some of our options.

IRA Funding Options:

  • Fixed Annuity: The first option would be a fixed product; which may be a fixed annuity or an income annuity. As mentioned prior, I have performed a number of analyses comparing the benefits of the annuity offered by the Thrift Saving Plan and what is available in the private market. If you’re leaning toward this option, I would evaluate what is available before making a decision.
  • Variable annuity: Variable annuities provide some living benefits that vary by insurance company and various state regulations. Variable annuities can offer a death benefit guarantee and/or a lifetime income guarantee. Most variable annuities offer a number of different choices with regard to income and growth options called riders that can be added at an additional cost to the annuity to meet your specific needs.
  • Mutual Funds: A mutual fund is a professionally managed type of collective investment account that pools money from investors to buy stocks, bonds, short-term money market instruments, and/or other securities. Your current TSP is invested in mutual funds. There are many different mutual funds offering a wide range asset class, objectives, and risk tolerance.
  • Managed accounts: Managed accounts employ third party money managers who invest in a variety of different assets including stocks, bonds, mutual funds, exchange traded funds (ETFs), etc. One of the advantages of a managed account is that fee’s are assessed on an annual basis so that there is typically no front end or back-end charge. A managed account allows you to have multiple investments, fund companies, and possibly multiple investment vehicles in one account. Since there are no sales charges assessed, you have greater flexibility to utilize different investments and different investment companies without concerns about meeting break point levels which allows you to make changes as the need arises.

Withdrawals of a tax-deferred accumulation are subject to the ordinary income tax, and possibly a 10% federal tax penalty for withdraws prior to 59 ½. Guarantees are backed by the claims –paying abilities of the issuing insurance company and do not apply to the investment return or principal value of a sub-account.

Before investing, consider the mutual funds and/or variable annuity’s investment objectives, risks, charges, and expenses. Contact Paul Risser for a prospectus containing this information. Read it carefully.

In short, your options are quite varied when looking at your specific financial situation. Take the time to asses what’s best for you. Seek professional help to determine answers to your retirement questions such as:

  • How would you like to take your income in retirement?
  • Do you want the flexibility to pick and choose and make changes as the need arise?
  • Do you want to take lump sum withdrawals or change your monthly income amount anytime you wish?
  • Do you prefer to be in a more static position where you’re allowed one partial withdrawal and a fixed income?

There’s no right or wrong answer, but you should be informed so you can make a decision that best fits your financial situation. I’m fully licensed to be able to assist you with your personal financial questions and would be happy to help.

Paul H Risser, host of this site’s Financial Planning Forum, is an Investment Advisor Representative with and Securities and Investment Advisory Services offered through Transamerica Financial Advisors, Inc. (TFA) member FINRA, SIPC and a Registered Investment Advisor. Non-Security products and services are not offered through TFA. TFA and Risser Financial Services are not affiliated.

All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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