TSP Required Minimum Distributions, Annuities, and Transfers

Gail recently asked, “If I use my Thrift Savings Plan (TSP) Required Minimum Distribution (RMD) to purchase an annuity, can I avoid paying taxes on that RMD?” Using your Thrift Savings Plan (TSP) Required Minimum Distribution (RMD) to purchase an annuity doesn’t eliminate the taxes due on the withdrawn funds.

RMDs are Taxable as Ordinary Income

Required Minimum Distributions (RMDs) are mandated withdrawals from tax-deferred retirement accounts like a traditional TSP once you reach a certain age (currently 73). These distributions are considered taxable income in the year you receive them, regardless of how you subsequently use the funds.

Annuity Purchases

The current TSP annuity rate is an attractive 4.85%. All or part of your TSP account can be used to purchase a life annuity through an outside vendor. Purchasing an annuity means that you pay now to receive monthly payments for the rest of your life (or, if you choose a joint life annuity, for the lives of you and your joint annuitant).

Essentially, you give up your money and control of it in exchange for guaranteed lifetime monthly payments. If you choose the annuity option, the TSP will purchase an annuity for you from its list of annuity providers. Once purchased, your annuity is not part of your TSP account, and you cannot change or cancel the purchase.

Annuity payments are taxable. If you purchase a TSP annuity, the annuity payments you receive later will be subject to federal income tax as ordinary income. The taxes on the original contributions and earnings are deferred until the annuity payments are accepted.

For those who transfer their TSP to an IRA at another financial institution, annuities can be purchased for as little as several years to lifetime; additional annuity options are available.

TSP Annuity Fact Sheet

Key takeaway

You are subject to taxes on the RMD when you withdraw it from your traditional TSP, regardless of whether you use those funds to purchase an annuity. The annuity payments themselves will also be taxable when you receive them.

Annuities are long-term retirement investments, and they lock up your funds for an extended period. These funds aren’t available for emergencies or other short-term needs. Many also have surrender charges as high as 10% in the early years.

Roth TSP

If you have a Roth TSP balance, your contributions were made with after-tax dollars, and the TSP annuity payments composed of Roth contributions will not be taxed. The taxability of the Roth earnings depends on whether the distribution meets the IRS rules for qualified Roth distributions.

Rollovers

While you can roll over all or part of traditional TSP installment payments (if the duration is less than 10 years) to a traditional IRA or other eligible employer plan to continue tax deferral, you cannot roll over any part of your RMD.

Transferring Your TSP Account

After retirement, federal annuitants can transfer all or a part of their TSP account to a professional financial management firm or to a self-managed retirement account with companies like Fidelity and Vanguard, where many more investment options are available.

They can open a retirement account for you and assist with transferring all or part of your TSP to a brokerage account, where you can purchase any mutual fund, stock, ETF, or bond if desired.

If you elect to do this, be sure to have your TSP funds transferred directly to the new retirement account; otherwise, the transfer would be considered taxable by the IRS.

Federal employees can also make an age-based in-service withdrawal any time after they reach age 59½ as long as they are an active civilian federal employee or a member of the uniformed services.

Some use the age-based withdrawal option to transfer a part of their TSP to a private retirement account that they can personally manage or to a financial planner to compare their performance and services.

If you are an experienced investor, this may be the best approach. Others, with limited investment experience or who lack the time needed to manage their accounts personally, may consider moving funds to a fee-based financial advisor who manages their accounts on their behalf.

Helpful Retirement Planning Tools

Disclaimer: The information provided may not cover all aspects of unique or special circumstances. Federal regulations, medical procedures, investment information, and benefit details are subject to change. To ensure the accuracy of this information, contact relevant parties for assistance, including OPM’s retirement center. Over time, various dynamic economic factors relied upon as a basis for this article may change.

The information contained herein may not be suitable for your situation. This service is not affiliated with OPM or any federal entity. You should consult a financial, medical, or human resource professional where appropriate. Neither the publisher nor the author shall be liable for any loss or other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Dennis Damp

Dennis V. Damp is an author, retired federal manager, business owner, career counselor and veteran. Damp is the author of 28 books, a recognized benefits expert, and a retired federal manager with 35 years’ service. Dennis has been a guest on hundreds of radio talk shows, CNN’s YOUR MONEY and the Lou Dobbs Cable TV shows, lectured at universities and colleges, produced Internet web sites and training videos, and has written hundreds of articles for national magazines and newspapers. His books have been featured in the Wall Street Journal, Washington Post, New York Times and U.S. News & World Report.

Dennis joined the Air Force in 1968 and spent over three years on active duty and an additional seven years with the Air National Guard. He was hired by the Department of Defense (DOD) after leaving active duty and transferred to the Federal Aviation Administration (FAA) in 1975. He spent the remainder of his career in various positions with the FAA. His last position was technical operations manager at the Pittsburgh International Airport’s air traffic control tower.