One advantage of the Federal Employees Retirement System (FERS) is that is gives a person more flexibility. The older Civil Service Retirement System (CSRS) was sometimes referred to as “golden handcuffs” as the retirement program made it difficult for a person to leave federal employment as the retirement system provided a lifetime payment to a retired federal employee. A good portion of a person’s benefit of being a federal employee was actually not realized until after retirement when the retirement payments started.
Under the newer FERS system, a current federal employee has more mobility if a better opportunity comes along. And, for most federal employees who have a career with Uncle Sam and then retire, the FERS system still provides an opportunity for a comfortable retirement.
One of the most important aspects of federal retirement, particularly for those under the FERS system, is the Thrift Savings Plan (TSP). If you have a TSP account, and you are leaving active federal employment, you have several options about what to do with your existing TSP account. This is a quick summary of your options and considerations you should taken into account when making your decision.
There is no one right answer as to what you should do with your TSP. Your financial considerations may be fairly unique and these factors will impact your decision. In other words, you would be well advised to discuss your situation with your tax advisor and your financial planner before making a final decision.
The Thrift Savings Plan recommends that you ask these questions before you decide which course of action is best for you. On the assumption that most people making this decision will be retiring, most of this column is specifically geared toward a retirement situation.
- When should you begin withdrawing your money?
- How much do I think goods and services will cost during your retirement?
- Will you have enough income to cover your expenses after you retire?
- Do you need to provide income for your dependents or your heirs?
The Danger of Inflation
Inflation will increase the cost of goods and services the longer you are retired. For example, an item that cost $100.00 in 2003 will cost $126.61 in 2013. This period actually experienced very low official inflation rates. Using the same analogy, if you bought an item in 1985 for $100, by 2013, that item will cost $216.50 and the cumulative rate of inflation will be 116.5%.
Since we cannot accurately predict what the rate of inflation will be during your future years, at a minimum you need to be aware of the pervasive impact of inflation on your future standard of living and to take that into account in deciding whether you will have a sufficient income after you retire.
You Can Keep Your TSP After Leaving Federal Service
When you leave the federal service, you can leave your entire account balance in the TSP if it is at least $200 or more that you have invested. You cannot continue to make employee contributions but you can transfer eligible money into your TSP account from IRAs and employer retirement plans that may be eligible.
If you decide to keep your TSP account, you can continue to alter how your money is invested in the TSP funds by making inter fund transfers. Once you close your TSP after you leave the federal service, you cannot open up another account in the future.
If you do decide to transfer money into the TSP, the transfer will be considered an employee contribution to your account and will be distributed among the TSP funds as you have allocated them on your most recent contribution allocation request. You can make changes to this allocation of your investments through the TSP website or by calling the ThriftLine.
You should also make sure that your correct address is on file with the Thrift Savings Plan to make sure that any money that is withdrawn actually reaches you and that you are aware of any changes that are made in the TSP. If you have already left federal service, you can update your account in the “MyAccount” section of the TSP website.
Why Would You Leave Your Money in the TSP?
FedSmith published an article on the TSP in 2013 entitled A Financial Advantage for Federal Employees and Military Personnel. The article quoted Jason Zweig, a financial columnist with the Wall Street Journal, as follows:
“Can you beat the market by not even trying? Yes, if you are among the 4.6 million people fortunate enough to invest in the Thrift Savings Plan, a series of funds run exclusively for federal employees and members of the U.S. military.”
Mr. Zweig went on to make those observations about the TSP:
“The record of these funds is remarkable. In 2012, the bond fund beat its benchmark…the sixth year in a row that it has outperformed. The large-stock fund also outpaced the Standard & Poor’s 500-stock index by 0.07 point last year; it has beat the market in four of the past six years and tied it the other two. Both the small-stock and international funds surpassed their benchmarks in 2012 for the third year in a row.”
Obviously, Mr. Zweig is a fan of the Thrift Savings Plan’s advantages for those who are eligible to participate in it. And, if the performance record by itself is not sufficient to continue to invest, here is one more reason as noted by the same columnist: “The TSP funds are dirt cheap. The average U.S. stock index fund charges 0.59% in annual expenses, or $59 per $10,000 invested. The TSP funds charge just 0.025%, or $2.50 per $10,000–less than one-20th the cost.” (The emphasis is mine and not the author’s.)
Obviously the decision is a personal one. Some readers of FedSmith articles on the TSP bemoan the lack of diversity in the TSP funds. While this lack of diversity makes choosing the funds for your account less complicated, those who want more exotic investments for their assets including sector specific funds, real estate investment trusts, regional or country funds, etc., these options are not available in the TSP and may be a reason for investing at least some of your assets through a different source.
Withdrawing from Your TSP Account
After you leave the federal service, you can make a partial withdrawal or a full withdrawal from your account. If you have both a traditional account and a Roth balance in y our TSP account, the withdrawals you make will be paid proportionally from each balance.
If you are making a full withdrawal from your account, you can receive the amount in your account in a single payment.
If you decide to leave your money in the TSP, you will be required to start withdrawing your money by April 1 of the year following either:
- The year you turn age 70½, if you are separated from Federal employment or the uniformed services, or
- The year you separate from Federal service, if you have already reached age 70½.
Here is an extra added incentive to make sure you start to withdraw your money from the TSP by this deadline. If you do not begin withdrawing your account as required, your account balance will be forfeited to the TSP. You can reclaim it with; some time and effort but you will not receive earnings on it from the time it was forfeited.
You can also receive a series of monthly payments until all of the money is withdrawn. The amount you receive each month can be based on the Internal Revenue Service life expectancy tables and the TSP will compute this amount for you. The payments are based on your age and your account balance at the time of your first payment. The TSP will recalculate the amount of your payments each year on the anniversary of your first monthly payment.
You can also elect to receive a specific dollar amount each month. This will be paid to you until your entire account balance has been paid out of your account.
You can also withdraw your TSP account as a life annuity. This is monthly benefit paid to you for the rest of your life. Check out Your TSP Annuity Options for more information on these annuities.
Finally, you can withdraw your entire account balance through a combination of all available full withdrawal options.