Posted on Tuesday, 16th March 2010 by Linda Sherman
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For years you have been contributing to the Thrift Savings Plan (TSP), building your retirement savings. After you leave federal service, have you considered what you should do with your TSP savings? You could choose one or any combination of these options:
- Leave your money in TSP.
- Withdraw all or some of your TSP funds.
- Purchase an annuity.
- Transfer to an Individual Retirement Account (IRA) or new employer’s tax deferred retirement plan.
- Transfer all or some of your TSP to a ROTH
Financial planning is a key element of any retirement plan and the TSP is a major asset for most federal retiree’s. Visit our financial planning forum for assistance with developing your personal comprehensive retirement plan.
Leave your money in TSP – You could leave all your money in TSP. Money within the TSP account can still be moved to and from the TSP investment fund options available: G, F, C, S, I and L funds. The advantages of leaving your money in TSP are the low administrative fees and no trading costs. There is one withdrawal option available with TSP that is not available with an IRA. If you leave federal service after you turn 55, but before you are 59 ½, you can withdraw money without the 10% early withdrawal penalty you would incur with an IRA. If you left federal service before you turned 55, or you transfer your TSP account to an IRA, there is a 10% penalty for most funds withdrawn prior to age 59 ½. There are number of issues to consider when deciding what to do with your TSP when you retire.
Withdraw all or some of your TSP funds – You could elect a partial withdrawal, a series of monthly payments, a full withdrawal, or a mixed combination of withdrawal options. All withdrawals are subject to a mandatory 20% federal income tax withholding, unless the funds are transferred directly to a traditional IRA.
Partial withdrawal – A one-time partial withdrawal must be $1000 or more and is available only if you did not previously receive an age-based, in-service withdrawal while you were employed.
A series of monthly payments – Monthly payments over $25 can be a specified dollar amount or distributed according to the IRS life expectancy tables. TSP calculators can estimate how long the series of payments will continue before the account is depleted. If you received monthly payments based on life expectancy tables, the amount of the payments will change every year based on your age and account balance. You must receive your first Required Minimum Distribution (RMD) by April first of the year after you turn 70 ½.
A single lump sum withdrawal – You could withdraw your entire TSP balance in a single payment often used to pay off a home mortgage or consumer debt at retirement. Although you may be longing to scream, “I’m debt FREEEEEEEE!,” it is not a decision to make without considering the tax consequences and your long term retirement income needs. Any withdrawal from TSP is taxable in the year you receive the funds. You should discuss your withdrawal plans with a financial planner and/or tax professional before making a major withdrawal decision.
Mixed Withdrawal – You can create any combination of the above and/or purchase an annuity and/or transfer money directly to an IRA.
Purchase an annuity – One option to consider is purchasing an annuity. An annuity is an insurance product providing a continuous stream of money over your entire lifetime. Annuities may be for your lifetime only, or for your lifetime and the lifetime of a joint annuitant, usually your spouse. TSP annuities also have the option of paying a fixed amount each month or an amount that increases from 0-3% with the Consumer Price Index (CPI). If you purchase the annuity through TSP, the annuity provider is Met Life, which has a superior A+ rating according to the AM Best rating system. You could purchase an annuity from another insurance provider, but make sure you compare and consider companies with similar quality ratings.
The advantage of an annuity is that you will never outlive the payments from the annuity no matter how long you live. The disadvantages include inflation risk and reduced inheritance. Generally, annuities are appealing to conservative individuals. You enjoy the security of continued payments for your entire lifetime. Yet, you may not have considered the effect inflation could have on your annuity. While inflation rates in the past ten years have been relatively low, even low rates have an adverse effect on disposable income. For example, if you elected $2000 in level monthly payments beginning in 1999, it would only be worth $1521 in 2009 due to inflation over the past ten years. If you had elected this same $2000 per month payment in 1970, by 1980 the equivalent payment would only have been $1008, because of the double digit inflation during this period. Even if you had elected the increasing payments option, the increase would have been limited to 3% and would not have kept up in years with high inflationary rates.
Another concern when purchasing an annuity is that once the money is paid to the annuity company, there is no money left for an inheritance. You could purchase a survivor benefit or cash refund feature for the annuity, but this will lower your monthly annuity payments.
Transfer to an IRA – The main advantages of transferring your TSP to an IRA are the investment options and withdrawal options. There are an almost limitless number of investment choices with an IRA. The most common assets held in an IRA are stocks, bonds and mutual funds. You could research and select the investments yourself, or you could pay an investment advisor to help manage your investment choices. If you hire an investment advisor, there will be fees or commissions for the services provided. Investment advice can be extremely valuable in selecting assets that match your risk tolerance and in optimizing the portfolio performance. If you hire an advisor, you should meet with the advisor at least annually to measure your portfolio’s performance against appropriate benchmarks, and discuss any changes in your investment objectives.
Money in an IRA is usually more accessible than in TSP. You can take money out of an IRA at any time, provided you pay the income taxes and the 10% early withdrawal penalty (if applicable). With TSP you can only take a partial, one-time withdrawal after you separate from federal service. Additional post-employment withdrawals must be either for the entire amount in TSP or in a series of payments. While you are employed with the federal government, you can only take money out of TSP for two reasons: a financial hardship, or a one-time, age-based withdrawal (at age 59 ½ or older). Therefore, maintaining a separate IRA outside of TSP could be advantageous if you need to access the funds.
An IRA has additional withdrawal options which avoid the 10% early withdrawal penalty. With an IRA, you can withdraw money for a first-time home purchase, educational expenses, or elect substantially equal periodic payments paid over your life expectancy without penalty.
| Exceptions to 10% Early Withdrawal Penalty |
IRA |
TSP |
| Death |
Yes |
Yes |
| Attainment of age 59 ½ |
Yes |
Yes |
| Disability |
Yes |
No* |
| Substantially equal periodic payments (72t) |
Yes |
No |
| Medical Expenses (IRA – if expenses exceed 7.5% of AGI) (TSP hardship – if used to pay medical expenses) |
Yes |
Yes |
| Qualified Domestic Relations Order (division in divorce) |
Yes |
Yes |
| Attainment of age 55 prior to separation of service |
No |
Yes |
| Education expenses for self, spouse, child or grandchild |
Yes |
No |
| First time home purchase by self, spouse, child or grandchild (up to $10,000) |
Yes |
No |
| Payment of health insurance premium by unemployed |
Yes |
No |
* IRS must determine if withdrawal meets the IRS definition of disability.
Source: Retirement Planning and Employee Benefits for Financial Planners, by M Dalton
Required Minimum Distributions – The IRS requires minimum distributions to begin by April first of the year following when you reach 70 ½ for both TSP and traditional IRAs. If the minimum distribution is not distributed by the required date, a 50% excise tax is charged on the amount not distributed. The percentage of the distribution increases as you age. The distributions are made according to the Uniform Lifetime Table unless the spouse is ten years younger, or more, than the owner of the IRA, in which case a Joint Life Expectancy Table is used.
What should you do with your TSP savings? Talk with your trusted financial advisor and consider utilizing multiple options including: TSP, an annuity and an IRA with diversified investments. Develop a comprehensive plan to manage your money that adjusts to changes in your portfolio’s investment value and inflation, so your retirement income can last a lifetime.
Additional sources of information:
TSP Roth Conversion
Inflation information
TSP Annuity Calculator
TSP Withdrawal Options after Leaving Federal Service
Important Tax Information About Payments from Your TSP Account
Full Withdrawal Form
Partial Withdrawal Form
Financial Hardship Withdrawals
Disability Withdrawals
Tax information on in-service withdrawals
Thornburg endowment spending policy
While the publisher and author have used their best efforts in providing retirement and benefits information, they make no representations or warranties with respect to the accuracy or completeness of the content of this article and they specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. The advice and strategies contained herein may not be suitable for your situation. You should consult with a financial professional where appropriate.
Visit http://federalretirement.net often to learn more about retirement options, benefits, and estate planning issues and I suggest signing up to receive my FREE monthly benefits newsletter.
Linda Duncan
Visit our other informative sites
http://federaljobs.net (Federal Career & Job Center)
http://searchfedjobs.com (Federal, State, & Private Sector Job Search)
http://federalretirement.net (FREE Retirement Planning Guide)
http://federalretirement.net/jobs.htm (Retiree Job Opportunities)
http://fedcareer.info (Career Development Center)
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Posted in UNCATEGORIZED | Comments (13)
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December 31st, 2010 at 12:03 pm
Arlena, The 10% penalty for withdrawing your money before age 59 1/2 does not apply if you separate from the federal government after age 55. You will still have to pay income taxes on the amount. For more information see: https://www.tsp.gov/PDF/formspubs/octax92-32.pdf
January 28th, 2011 at 2:28 pm
I am 43 yrs old and left Gov service after 15yrs of service in 2007. Upon leaving I took a lump sum payment of my TSP, however I did nothing with my FERS. How do I find out what if anything is there and how can I either move or withdraw the funds. thanks
February 21st, 2011 at 9:20 am
Hi C. James – Since you have over 5 years of creditable FERS service, you will be eligible to either withdraw your contributions, obtain an annuity at age 62, or a reduced annuity at your minimum retirement age (55-57). For more information see: http://www.opm.gov/retire/pubs/pamphlets/forms/RI90-11.pdf
Linda
March 28th, 2011 at 9:42 am
You are eligible for a deferred annuity at age 62. Go to http://federalretirement.net/fers_eligibility.htm#Deferred for additional information on this subject including the paperwork that you need to submit.
April 17th, 2011 at 4:59 pm
Dwight,
In reviewing the documents available on TSP, I do not see any restriction on making a one-time withdrawal after a divorce disbursement. For more information see: https://www.tsp.gov/PDF/formspubs/tspbk11.pdf or call TSP directly at: 1-TSP-YOU-FRST
Linda
April 23rd, 2011 at 10:13 am
I will turn 70 on Sep 5, 2011. This means I will be 70 and one half on Mar 5, 2012. Does that mean I can wait until April 1, 2013 before taking a distribution from my TSP?
Which life expectancy table would I use to calculate the minimum distribution amount? On April 1. 2013, I will be 71 years of age. The IRS life expectancy table shows 16.3 years, but a TSP document shows 26.5 years under the “Uniform Lifetime Table for Calculating Minium Distributions.”
Is the following document the latest and most reliable guide for obtaining information on distributions?
TSP-775 (12/2010)
PREVIOUS Editions obsolete
May 6th, 2011 at 11:37 pm
Basil – You can wait until the April after you turn 70½ to receive your first distribution, but then you will need to receive 2 distributions that year. See: https://www.tsp.gov/PDF/formspubs/oc97-17.pdf
If you want to receive the minimum distributions based on the IRS requirements, you can elect that TSP calculate that amount for you and distribute only the minimum is you use the TSP full withdrawal form: https://www.tsp.gov/PDF/formspubs/tsp-70.pdf This is perhaps the best way to make sure you are taking the minimum required amount.
Linda
August 25th, 2011 at 1:05 pm
I am taking a Voluntary Early Retirement (VERA) offer at age 53 with 32 years of service with the USPS.
This makes me retiring before 55, yet retiring on a legitimate offer with a reduced annuity as a penalty.
Am I disqualified from non-penalty TSP withdrawls before 59 1/2 just because I took this VERA 2 years before I reached 55? I’m still retired.
Thank you.
September 22nd, 2011 at 9:01 pm
Kim Z.
The 10% penalty for early withdrawal from your TSP account may be avoided for those retiring early, such as if I you elect to purchase an annuity or elect equal payments based. Here is the whole list of options from TSP:
If you receive a TSP distribution before you reach age
59½, in addition to the regular income tax, you may have
to pay an early withdrawal penalty tax equal to 10% of
any portion of the distribution not transferred or rolled
over. The additional 10% tax generally does not apply to
payments that are:
• Paid after you separate from service during or after
the year you reach age 55;
• Annuity payments;
• Automatic enrollment refunds;
• Made as a result of total and permanent disability;*
• Made because of death;
• Made from a beneficiary participant account;
• Made in a year you have deductible medical expenses
that exceed 7.5% of your adjusted gross income;*
• Ordered by a domestic relations court; or
• Paid as substantially equal payments over your life
expectancy.For more info see:https://www.tsp.gov/PDF/formspubs/tsp-780.pdf
Enjoy your retirement!
Linda
September 22nd, 2011 at 9:51 pm
Katie,
Be careful, an insurance salesperson will almost always talk with a potential client. However, you likely want to go through TSP to purchase your annuity because it avoids the sales commissions and are often a better deal. The TSP annuities are purchase through MetLife, but they are limited to the offerings listed on the TSP site. TSP can answer most question on the annuity options. TSP is available at: 1-TSP-YOU-FRST (1-877-968-3778). If you are looking for help deciding what annuity options to purchase, you may want to hire a certified financial planner (CFP).
Linda
October 8th, 2011 at 9:51 am
Hi David,
Thanks for you insightful comments. It was never my intent to encourage anyone to purchase an annuity with their TSP funds. Purchasing an annuity is just one option. Purchasing an annuity through TSP often proves to a better deal than purchasing an annuity through an agent, but everyone should “shop around” and look at ALL their options before purchasing. Retirees can also elect regular and recurring payments from their TSP, transfer their money to an IRA or leave their money in the TSP account until they are required to take the minimum distribution at 70 1/2. There are advantages/disadvantages to each option.
The TSP annuities do have optional features that allow for inheritance: cash feature and 10-year certain. However, this may not provide an equal inheritance to survivors.
You also make an excellent point – this is not a fantastic time to purchase an annuity because the interest rates are so low. The TSP annuity calculator can help see the difference the interest rate makes.
There more information about your withdrawal option at: https://www.tsp.gov/PDF/formspubs/tspbk02.pdf
In deciding what to do with your TSP funds you should at least consider:
1. Your risk tolerance – Do you prefer to have the chance of increasing your TSP balance or having a set amount you receive each month? Does the fluctuating market drive you crazy?
2. Your life expectancy – My grandmother lived 102. She outlived all her savings. An annuity would have been better in her case. On the other side of the family, my grandfather died of a heart attack at the race track at 55. His survivors would have been better off if his TSP funds remained in the account.
3. The purpose of the TSP money – Are you concerned about an inheritance? Or is this money to be spent during your lifetime? If you are concerned about inheritance, you may want to look at a Roth IRA account or talk with a financial advisor about your planning options.
4. Other sources of income – Many retirees today already have two annuities: Social Security and FERS/CSRS. Do you prefer this guaranteed source of income or are you more concerned that these recurring payments will not keep up with inflation?
Linda
November 11th, 2011 at 4:57 pm
Larry – That is a great question. I am uncertain why TSP only allows one withdrawal. It is just a guess, but I think it is to keep the administrative costs low for all the employees. Otherwise they would have to sell stocks every time there was a great sale at Macy’s and someone needed a little extra cash.
Linda
November 11th, 2011 at 5:07 pm
Katie,
Purchasing an annuity depends on your risk tolerance. It is very possible that the interest rates will rise in the future and net a greater annuity payment. However, the stock market continues to be volatile and your account balance could go down resulting in a lower annuity payment. I am risk taker, but what is your risk tolerance level? You may want to take this quiz before you decide: http://njaes.rutgers.edu/money/riskquiz/
Linda