An examination of your options at retirement.
If you’re like many federal employees, a big question you’ll have at retirement is what to do with the savings you’ve accumulated in your Thrift Savings Plan account. But before you can answer this big question, you must consider several other smaller ones:
Are you going to continue to work after you retire? If so, you probably won’t need to begin monthly withdrawals from your TSP. You may continue to leave your money invested in the TSP and make interfund transfers as needed to rebalance your account to minimize risk and maximize growth.
You will no longer be permitted to contribute new money to your account or to borrow from your TSP once you are retired, but you can remain invested in the C, F, G, S, and I Funds, along with the five Lifecycle funds. You also can transfer the money to your new employer’s 401(k) plan or to an Individual Retirement Arrangement.
Are you retiring past age 70 ½? If so, you will need to factor in required minimum distribution rules, whether you leave your money in the TSP or move it to an IRA. You may be able to avoid required minimum distributions if you’re going to continue to work and transfer your savings to your new employer’s 401(k).
Do you need to take a lump sum withdrawal from the TSP to cover a large expense or to decrease your debt? You may not receive as much as you think. If you choose to take a $30,000 lump sum partial withdrawal from the TSP, you will receive a payment of $24,000. Why? Because the TSP withholds 20 percent to help you pre-pay your taxes. And that may not cover all the taxes you have to pay on your withdrawal. Also, have you considered the early withdrawal tax penalty of 10 percent? If you’re leaving federal service before the year you turn 55 and take a distribution before age 59 ½, you may be subject to this penalty. Here’s a TSP publication with tax information about payments.
Does your basic retirement benefit and any other sources of defined benefit income cover your monthly living expenses? If not, you may need to set up a monthly payment option from the TSP or other retirement savings plans that you may have. You can choose a specific dollar amount each month from the TSP (and change it annually) or have the TSP compute the payments for you based on your life expectancy. You can also purchase a life annuity to receive a lifetime stream of payments, but that involves giving up control of your money. Each of the different types of withdrawals can be done directly through the TSP using Form TSP-70.
Pros and Cons
The advantages of leaving your money in the TSP include the following:
- Low administrative expenses
- The G Fund, which invests exclusively in a nonmarketable short-term U.S. Treasury security that is specially issued to the TSP
There are some advantages to an IRA, too:
- The ability to take multiple partial withdrawals
- A wider array of investment choices
A recent Government Accountability Office report highlighted the complexity in rolling over funds to an IRA versus the simplicity of leaving the funds in the employer plan (such as the TSP). When rolling over, a participant must:
- Choose an IRA provider from a multitude of choices
- Allocate assets between equities, fixed income and other investments
- Review complicated financial and legal documentation
- Calculate the fees and administrative expenses to determine the true cost of a “no-fee” IRA
- Make a direct transfer to the new plan to avoid the automatic tax withholding when requesting a lump sum distribution from a retirement account
Given all these considerations, what should you do?
- Weigh your options carefully. As the great philosopher Dr. Phil says, “every pancake has two sides.” Remember, some of your decisions are irrevocable.
- Look at all of the available choices for withdrawal and future investment options for the money you will keep invested.
- Consider your legacy. What will happen to your money if you don’t live long enough to spend it all? This raises a whole other set of questions.
- Be sure to read the TSP’s basic information on withdrawal options.
- Seek professional guidance if you are not sure how to evaluate your options.
- Remember, there’s no one-size-fits-all option. What is good for your neighbor, your co-worker or your brother may not be best for your situation.
- Keep the old adage in mind: “If it sounds too good to be true, it probably is.”
NEXT STORY: Furloughs Still a Reality For Thousands