A big decision you will face when you begin retirement planning is what to do with the funds in your Thrift Savings Plan account. The procedure appears painless because your choices are laid out on one easy form, TSP-70. There are three basic options for a full withdrawal: a cash payment, a series of monthly payments or an annuity.
But then it starts to get complicated. The cash payment can be transferred (or partially transferred) to another retirement account or paid directly to you. Plus, there are 18 types of annuities and two monthly payment options. You can mix and match these choices into hundreds of possible combinations.
And that's assuming you want to make a full withdrawal. There's a different form, TSP-77, to request a partial withdrawal. This option allows you to get some of your money now and decide about the rest later. You will be taxed on the amount withdrawn unless you choose to transfer some or all of it to an IRA.
This week, we will explore the withdrawal options available to retired federal employees and those who have resigned from government service, looking at the advantages and disadvantages of each.
Since there are tax issues related to TSP withdrawals, be sure to take the time to understand the tax consequences of your decisions. Start by looking at the TSP's tax notice linked in the Resources section below. 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 equal to 10 percent of any portion of the distribution not transferred or rolled over. The additional 10 percent tax generally does not apply to payments that are:
- Paid after you separate from service during or after the year you reach age 55.
- Made because you are totally and permanently disabled.
- Paid as substantially equal payments over your life expectancy.
- Annuity payments.
- Ordered by a domestic relations court.
- Made because of death.
- Made in a year in which you have deductible medical expenses that exceed 7.5 percent of your adjusted gross income.
Below are three different TSP withdrawal options, and points to consider when weighing them:
Transfer to an IRA or Employer's 401k
- This option provides more investment opportunities than the TSP's C, F, G, S and I funds, enabling you to diversify.
- Money in an IRA can be accessed when you need it. You can take as much out as you want, when you want it. The payment options available through the TSP require a monthly distribution payout.
- A spouse or a nonspouse beneficiary can inherit an IRA and distribute the amount over his or her life expectancy to reduce the tax burden. Conversely, only a spouse can keep an inherited TSP account tax-deferred, by transferring it to his or her own retirement account.
- Transferring money from the TSP requires some effort. You must set up the plan to accept the transfer and choose the investment mix. This takes some knowledge about investing, or the help of a professional. It can cost more than maintaining your investment in the TSP and at least initially involve a substantial investment of your time.
- Tax treatment of withdrawals from IRAs is a little different than the treatment of TSP withdrawals. This includes the tax on withdrawals by people under age 59½ and rules pertaining to minimum distributions required after age 70½.
- If you are willing to pay the taxes and are eligible, you may also transfer your TSP to a traditional IRA and then on to a Roth IRA for tax-free growth.
- This option allows you to receive a steady flow of income on a monthly basis. There are two basic choices: Either a specific dollar amount (which can be changed annually and must be a minimum of $25), or a life expectancy computation, which divides your TSP balance by a factor based on your age. Such payments are recomputed each year.
- You can also change to a final single payment at any time. This would allow you to transfer the balance to an IRA in order to change the frequency of the payout or to reinvest the balance in other investments.
- You can make a one-time-only change from TSP-computed payments based on life expectancy to a specific payment amount of your choice.
- Changes to the amount of your payment will become effective only once a year-on Jan. 1, if your request is received by Dec. 15 of the preceding year.
- By choosing monthly payments, your balance still is available should you decide to do something different later on.
- If the dollar amount you choose for a monthly payment will result in less than 120 payments, you may choose to transfer a portion of each payment to an IRA. This would allow you to gradually reinvest the balance of your TSP account into another IRA over a period of up to 10 years.
- While you are receiving payments, the balance in your TSP account continues to be invested, stays tax-deferred, and you may continue to make interfund transfers.
Age at first payment: 60
Projected future interest rate: 6 percent (balance in account continues to be invested in TSP funds)
Now, for the examples:
Elected payout: $1,000/month
Number of payments until account is depleted: 139
Length of time before account is depleted: 11 years, 7 months
Elected payout: $600/month
Number of payments until account is depleted: 359
Length of time before account is depleted: 29 years, 11 months Life Expectancy Payout: Assuming your payments began in January of the year you are age 60, your estimated monthly payment amounts would be as shown in the table below:
|Age 60:||$ 330.69||Age 75:||$ 459.57|
|Age 61:||$ 348.59||Age 76:||$ 486.30|
|Age 62:||$ 368.94||Age 77:||$ 512.08|
|Age 63:||$ 388.71||Age 78:||$ 541.70|
|Age 64:||$ 411.30||Age 79:||$ 570.01|
|Age 65:||$ 433.07||Age 80:||$ 599.57|
|Age 66:||$ 455.84||Age 81:||$ 630.39|
|Age 67:||$ 479.64||Age 82:||$ 662.50|
|Age 68:||$ 504.49||Age 83:||$ 695.89|
|Age 69:||$ 530.39||Age 84:||$ 730.56|
|Age 70:||$ 345.82||Age 85:||$ 761.31|
|Age 71:||$ 366.13||Age 86:||$ 792.61|
|Age 72:||$ 387.60||Age 87:||$ 824.35|
|Age 73:||$ 410.29||Age 88:||$ 856.37|
|Age 74:||$ 434.26||Age 89:||$ 888.50|
|Age 90+:||Payments continue until account is depleted, another option is elected or until death|
- Single with level payments
- Single with increasing payments
- Joint (spouse) with level payments
- Joint (spouse) with increasing payments
- Joint (nonspouse) with level payments
- 100 percent to the survivor
- 50 percent to the survivor
MetLife holds the contract for annuity purchases. The money you use to purchase an annuity is removed from your TSP account and sent to MetLife. And remember, you can't change your annuity or cash it out after it is purchased. In other words, this is a permanent decision. If interest rates go up, you are stuck with the rate on the annuity you purchased.
Upon your death, the balance of your annuity will be paid according to the type of annuity you selected. If you don't protect the principal by adding a joint annuity, cash refund or 10-year defined payment, your heirs will not inherit the balance of your investment.
An annuity is paid for life - you can't outlive it. Once it's purchased, you no longer have to manage your investment. The payments are computed and paid automatically. You will be taxed on the amount you receive each year.
This option may be more attractive to older, healthy people who are worried about outliving their money. If you are older, the payments are larger since they are based on your life expectancy. If you are in good health, you may live longer than your normal life expectancy. Now let's look at some annuity examples. Assume that the amount used to purchase the annuity is $100,000, and that the interest rate is 4.5 percent. If a person chose to begin the annuity at age 60, he or she could get:
- Single life annuity with no added features: $669/month for life.
- Single life annuity with increasing payments and a cash refund: $438/month. Assuming a 3 percent annual increase, in 10 years the monthly payment would be $571. If the annuitant died before receiving $100,000 in payments, the beneficiary would receive the balance of the original principal.
- Joint life annuity with spouse (also age 60), 100 percent to the survivor, level payments and a cash refund: $564/month for life, regardless of whether one or both spouses are living.
- Single life annuity with no added features: $981/month for life.
- Joint life annuity with other survivor (age 65), 50 percent to the survivor, level payments, and a cash refund: $777/month while both are living. When there is only one survivor, the payment is reduced to $388.50/month.
- TSP Tax Notice
- TSP Calculators (to compute life expectancy, specific dollar amount and annuity payments)
- Withdrawing Your TSP after Leaving Federal Service Booklet
- Form TSP-70: Request for Full Withdrawal
- Form TSP-77: Request for Partial Withdrawal When Separated
- At Home: Begin to consider when you will need the money invested in your TSP. Some options include using this money to supplement your monthly retirement income; using some of it to pay off bills and keeping the rest invested for other needs that come up during retirement; and keeping the money invested until after you decide to retire permanently -- if you plan to continue working after you retire from federal service.
- Financial Planner: If you use the services of a professional planner, they will provide a plan for creating the best use of your retirement savings when viewed as a part of your big retirement picture.
- Internet: Become familiar with the tools available at the TSP Web site. It is very simple to use the calculators and the publications are written in a manner that is easy to understand. Remember, you are your own financial planner first. If you need assistance, seek it when necessary.