[1]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 [2]
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 [3] 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 [4] available: G, F, C, S, I and L funds. The advantages of leaving your money in TSP are the low administrative fees [5] 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federal service before you turned 55, or you transfer your TSP account to an IRA, there is a 10% penalty for most funds withdrawn prior to age 59 ½.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 [6] 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 [7] 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 Overview [8]
- TSP Fund Choices [8]
- TSP Considerations [6]
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 [9] often to learn more about retirement options, benefits, and estate planning issues and I suggest signing up to receive my FREE monthly benefits newsletter [10].
Linda Duncan
Visit our other informative sites
http://federaljobs.net [11] (Federal Career & Job Center)
http://searchfedjobs.com [12] (Federal, State, & Private Sector Job Search)
http://federalretirement.net [9] (FREE Retirement Planning Guide)
http://federalretirement.net/jobs.htm [13] (Retiree Job Opportunities)
http://fedcareer.info [14] (Career Development Center)
http://postofficejobs.info (Postal Career Center)
http://ehsjobs.org (Environmental Health & Safety Job Center)
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Educational Opportunities [16] (Find educational opportunities in your area)
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