Withdrawal Options

By Tammy Flanagan

March 24, 2006

Editor's Note: Be sure to watch Tammy Flanagan's appearance on GovExecTV's FedCast, starting Monday, March 27.

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 You will be taxed on the amount withdrawn unless you choose to transfer some or all of it to an IRA.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.

Tax Issues

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:

This means that if you retire (or resign) in the year you reach age 55 or later, there is no early withdrawal penalty on your TSP distributions. This also means if you are eligible to retire and do so before age 55 (this could apply to law enforcement officers or those taking voluntary early retirement or discontinued service retirement), you will be subject to this penalty on most distributions taken prior to age 59½ . In this situation, you might want to postpone your TSP withdrawal until you reach 59 ½ or later, unless you are covered under one of the exceptions listed above.

Below are three different TSP withdrawal options, and points to consider when weighing them:

Transfer to an IRA or Employer's 401k

Monthly Payments Let's look at some examples showing TSP distributions of monthly payments. First, some assumptions:

Balance: $100,000
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
Annuities There are five basic types of lifetime annuities: There are two types of joint annuities: In addition, there are two additional options, depending on the kind of annuity you choose: a 10-year defined payment (available for single annuities only) or a cash refund (for either single or joint annuities).

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:

Now assume a person chooses to begin the annuity at age 75: Resources Checklist

By Tammy Flanagan

March 24, 2006