The rules for your Thrift Savings Plan are pretty straightforward while you are working, but they become increasingly more complex as you enter retirement and attempt to access the money that you have saved in your TSP.gov account.
You have 5 withdrawal options for your Thrift Savings Plan that you can select from.
Option 1) Leave your assets in the Thrift Savings Plan. If you do not need to access the money in your Thrift Savings Plan immediately you can defer your withdrawals until as late as when you are 70 ½ years old. At that time you will be required to withdrawal a percentage of your Thrift Savings Plan based on IRS Rules for what is called Required Minimum Distributions.
Option 2) Exercise one of two Thrift Savings Plan monthly payment options;
a. You can elect a monthly income that will be based on the current value in your Thrift Savings Plan at the time and an assumed rate of return. You can access the Life Expectancy Monthly Payment Calculator through TSP.gov.
Note: you can make a one-time only change from TSP.gov-computed life expectancy payments to a specified dollar amount later if you wish.
b. You can also specify an amount that you will receive as a monthly payment from your Thrift Savings Plan. The risk with this method is that if you choose a monthly income amount or a Rate of Return expectation that is too high – your monthly income may stop all together once your TSP.gov account has been depleted.
Option 3) Elect to receive a One-Time, full or partial, withdraw. Any withdrawal you make from your Thrift Savings Plan will be fully taxable. If you are under age 55 you will also be penalized with an additional IRS penalty. (other exceptions will apply).
Option 4) Roll part or all of your Thrift Savings Plan to your IRA account. Rolling your Thrift Savings Plan into an IRA can oftentimes be a very good idea. The number of available investments that are available to you through an IRA is much greater than through your Thrift Savings Plan. You can choose nearly any investment or combination of investments that make the most sense to you and your family.
Note: If you over 55 but younger that 59 ½ you should be aware that any withdrawal made from your IRA prior to age 59 ½ will be subject to a 10% penalty in addition to income tax.
5) Purchase an ‘Income Annuity” with all or some of your Thrift Savings Plan balance. Electing to receive an Annuity through your Thrift Savings Plan will give you a cash payment for the remainder of your lifetime. The amount of your payment is based on your Thrift Savings Plan balance and the current Thrift Savings Plan “Annuity Interest Rate Index.” The TSP.gov Annuity Interest Rate Index is a rate that will fluctuate based on the current interest rate market. Whatever the Annuity Index Rate is at the time you make this election will be the effective rate of return for your Thrift Savings Plan for the rest of your life.
Go to Annuity Index Rates for current and past rates.
Therefore, you will want to consider what the Annuity Index Rate is at the time of purchase. If you are considering this option you should also talk with a knowledgeable financial professional to ensure that you are getting the best possible return on your investment dollars. You may wish to explore what is called ‘Pension Maximization’ or other options that are available to you.
Note: You should speak to a Federal retirement expert before you make your income or rollover election decision. There are financial professionals who specialize in Federal and Postal retirement planning and can help you maximize your retirement income and benefits.
As you begin to put your plan together and decide which of the options above fit your needs best – you will begin to realize that there are a lot of moving parts and some potential pitfalls that may reduce your retirement income. You will also realize that there is likely a ‘Best’ solution for you and your family when it comes to how you access your Thrift Savings Plan.