Options for the retired TSP

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What to do with my retired TSP? Yes, this is the most common question I get from people nearing retirement, and for good reason.

To no one’s surprise, the answer is another “it depends”. But to make things easier, I’m going to break the options down into three choices so we can look at the pros and cons of each.

The first thing to remember is that you have nothing to do with your savings plan and you can not do anything with it until you’ve been retired for at least 30 days. Once the 30 days are up, you have a few options.

Option #1 – The TSP annuity

The TSP pension is different from the FERS annuity—completely different, in fact. A TSP annuity is when your TSP money is turned over to an insurance company (Met Life) in exchange for a guaranteed payment for the rest of your life.

There are many different combinations of an immediate annuity such as:

  • life only
  • Life with certain period
  • Common life
  • life with remainder

An immediate life annuity will provide you with the highest monthly payment. The more options you add, the more the monthly pension decreases. For example, a life-only annuity may have a payout of $3,000 per month, but a joint life annuity would have a reduced payout of approximately $2,700 per month.

With each of the immediate annuity options above, a person forfeits access to their TSP balance. A life annuity with balance would provide income for the life of the insured and would pay the remaining balance (original purchase amount minus total monthly payments) to the beneficiary upon death of the insured.

The main benefit of an immediate annuity is that you get a guaranteed stream of income for your lifetime. But, as an FERS pensioner, you will already have two guaranteed streams of income in your FERS pension and your social security. So it may not be necessary to give up access to your investments to secure the rest of your income.

Advantages:

  • Guaranteed lifetime income

The inconvenients:

  • Loss of access to principal
  • Depending on interest rates
  • Inflation could reduce purchasing power

Option #2 – Leave money in the TSP

In retirement you have the option of leaving your money in the TSP, which is really no different than when you are working. The big differences are that (1) you can no longer contribute and (2) you can no longer borrow from your account. Other than that, your investment options are exactly the same and you can still change your account balance like when you were working.

One of the biggest benefits of leaving money in your TSP in retirement is having access to your funds before age 59.1/2. If you retire in the year you turn 55 or later, you have immediate access to your TSP without penalty. If you are a Special Category Employee (SCE) and retire in the year you reach age 50 or later, you also have immediate access to your TSP.

Advantages:

  • Keep your TSP the same way you’re used to
  • Access to your G fund
  • Access your funds sooner than an IRA and without penalty

The inconvenients:

  • Limited to your five investment options
  • Roth TSP Minimum Required Distributions
  • You cannot choose the funds you withdraw
  • Potential problems with beneficiaries

Option #3 – Transfer to an IRA

The third option is to transfer funds from your TSP to an IRA. It is possible to make a partial or total transfer to an IRA without penalty. Forms TSP 70 and TSP 77 are used to make full and partial withdrawals. Each of these forms would be in your TSP account.

But TSP is cheap, why would you want to get out of it? Simply put, the TSP is no longer cheap compared to other major custodians. 10 years ago, the TSP was considered cheap compared to other custodians, but that is no longer the case. It is now possible to obtain funds or indices very similar to your TSP within an IRA. The only investment unique to your TSP is your G fund.

There are a few advantages to transferring money to an IRA. The first and most obvious is that you have unlimited investment options in an IRA.

Another benefit of switching to an IRA is increased flexibility when withdrawing funds. When a retiree withdraws funds from their TSP, the funds come out based on how that person is invested. In other words, if a person has 70% fund C and 30% fund G, their withdrawal will come from 70% fund C and 30% fund G.

With an IRA, a retiree can choose to withdraw funds from any investment they wish. This option is particularly attractive if you plan to use the bucket strategy or the bar strategy in retirement. Whatever your withdrawal strategy, an IRA is more flexible for withdrawals.

Additionally, moving money from a Roth TSP to a Roth IRA can eliminate required minimum distributions (RMDs). RMDs are required from a Roth TSP, but they are not required from a Roth IRA. Not only does this give you more flexibility on withdrawals, but it allows you to let your money grow and compound your income tax-free over a longer period of time. This is a particularly financially sound way to leave more of a legacy to your heirs..

Moving assets from a TSP to an IRA also gives you the ability to make Roth conversions. TSP does not allow in-plan conversions.

The last benefit concerns the children who can inherit your account. On the death of the holder of a TSP account, a living spouse can open a Participating Beneficiary Account (BPA) and keep the TSP. Upon the death of the spouse, the new beneficiaries must withdraw funds from the TSP. These funds “cannot be transferred or transferred into any type of IRA” according to the TSP’s website. This inconvenience for TSP could easily cost the beneficiary tens of thousands of dollars. But, an IRA beneficiary can transfer funds into an inherited IRA and leave those funds there for up to 10 years. The benefit of leaving funds in the account for 10 years would be to withdraw withdrawals over the 10 year period to spread out and reduce tax liability.

If a beneficiary of the TSP passed with $500,000 remaining in the TSP, that beneficiary must withdraw all funds within 60 days and will be taxed on $500,000. If the same scenario were to occur with funds from an IRA, beneficiaries could transfer the funds to an inherited IRA and withdraw smaller distributions over the 10-year period. They may also have the potential to achieve greater tax-deferred growth over the 10-year period.

Advantages:

  • More investment options
  • Flexibility with investment withdrawals
  • No RMD from a Roth IRA
  • More flexibility for people inheriting your account
  • Roth conversions are an option

The inconvenients:

  • Limited access before 59 and a half years old
  • No access to G Fund
  • If you withdraw all your money from the TSP, you cannot return to it

Summary

The decision of what to do with your TSP is important. It is also not a decision that should be rushed since there is no deadline to meet. Here are some highlights of the three options listed above:

  • An immediate annuity is probably not a good option for federal employees.
  • Do NOT move all your money from the TSP to an IRA if you think you will need to access the funds before 591/2.
  • Do NOT withdraw all your money from the TSP if you think there is a chance that you may want to transfer funds in the future.
  • TSP is not the cheapest depository available.
  • An IRA is more flexible for investment withdrawals and asset transmission.
  • A Roth IRA can eliminate RMDs.

Please do not follow the advice of your colleagues on what you should do with your Thrift savings plan. Your TSP is a big part of your retirement, so take your time and make the decision that’s right for you.

© 2022 Brad Bobb. All rights reserved. This article may not be reproduced without the express written consent of Brad Bobb.

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