Turning accumulated savings in the Thrift Savings Plan into a stream of income is a goal for federal employees who are hoping to retire at a comfortable level. This is particularly true for FERS employees who get a less generous pension than employees who are covered by CSRS.
How can you turn your TSP into an income stream? For the rest of this article, we’ll look at the choices you have inside and outside the TSP to generate a stream of income for your retirement.
If you leave your money in the TSP after you retire, there are two withdrawal choices that can generate a stream of income.
One of these choices is what the TSP refers to as “Substantially Equal Monthly Payments”. You can choose to have payments of a certain dollar amount per month, or you can choose to have the TSP send you payments based on the IRS life expectancy table. If you choose payments of a specific dollar amount they cannot be less than $25 per month and can be changed once a year, during an open season that runs from mid-October to mid-December.
As long as you retire in the year in which you reach the age of 55 (or later) you will not be subject to the 10% early withdrawal penalty on any monthly payments from the TSP. Special Category Employees (SCEs) can retire as early as the year in which they reach age 50 and be exempt from the penalty. If you retire earlier than the year in which you reach 55 (50 for SCEs), you can manage to avoid the penalty if you follow IRS rule 72(t). Under 72(t), if you base your monthly payments on the IRS life expectancy table and continue following the table for the longer of reaching age 59 ½ , or five years, you are exempt from the penalty.
The other choice for those who leave their money in the TSP is purchasing a TSP annuity. TSP annuities are sold by MetLife. A TSP annuity will guarantee that you will not run out of money in your lifetime. Joint annuities provide that protection for spouses as well as for those who have an insurable interest in your life. There are also different payment options and survivor benefit choices. There are no early withdrawal penalties with TSP annuities, regardless of your age when you begin payments. However, TSP annuities are irrevocable choices; absolutely no changes are allowed after you have purchased the annuity.
The book, Withdrawing Your TSP Account After Leaving Federal Service, has detailed information on these two withdrawal methods (as well as other methods).
Of course, you are not required to leave your money in the TSP. Many retirees choose to move their money into an Individual Retirement Arrangement (IRA). Within an IRA you can set up monthly payments, just like you can in the TSP. IRAs however, give you more flexibility in changing the amount of your payments. You can change the amount at any time. In fact, your payments do not even have to be taken monthly. You could set them up bi-monthly, semi-annually, or however you want. You could skip payments for a year or two and then resume them. IRAs have significantly more flexibility than the TSP, though they generally have higher fees.
Once you roll money into an IRA, you will face the 10% early withdrawal penalty on any money you withdraw before you reach the age of 59 ½. You can, just like with the TSP, follow IRS rule 72(t) to avoid the penalty.
Money that is in an IRA can also be used to purchase an annuity through an insurance company. You should thoroughly investigate any annuity investments, because all annuities are not created equal. Make sure you completely understand what you are getting in to before you invest your money. There are no early withdrawal penalties with annuities. Many annuities allow you to opt out, or change the payments with the payment of an additional fee. The Securities and Exchange Commission has an excellent publication on annuities available at http://www.sec.gov/investor/pubs/varannty.htm.
John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. Order your copy at shoplrp.com. Ask your human resources office to contact Federal Career Experts about pre-retirement training.