Should I keep money in my TSP after retirement?
One of the most common questions we receive from federal employees is "What should I do with my Thrift Savings Plan once I retire or leave federal service?".
Let's be honest, the answer to that question is most likely "it depends". Everyone's situation is different, and there's a lot that goes into determining the right option for you.
The TSP is the backbone of the federal employees retirement system (FERS) and is a great savings vehicle while you're working. The first thing you should do is check to ensure you're taking full advantage of it.
Maximize your TSP
As a federal employee you can get an employer match for up to 5% of your income, so a great way to maximize your contribution is to automatically move 5% of your paycheck into the TSP. This allows you to take full advantage of the employer match.
But once you're no longer working for the federal government, whether it's through retirement or deciding to take a job with a private employer, the TSP changes. Getting the money out of your thrift savings plan can be a bit more complicated than putting it in.
That being said, there are really four options when it comes to your Thrift Savings Plan. It's best to start by understanding each of those options.
Option 1 - Leave your money in the TSP
If you retire before you reach the age of 70 1/2 you can choose to leave your money in your TSP account for the time being. However, keep in mind that you must take distributions starting April 1 of the year after you turn 70 1/2.
This option allows you to keep your money where it is and it may continue to grow over time. However, your investment options are limited to the five TSP funds. In case you're not aware of the options they are the I fund , G fund, C fund, S fund and F fund. If you want more information on each of these funds you can find it here.
This option also limits you if you're leaving federal service for another job in the private sector. Once you leave federal service you can't contribute to the TSP. Any additional retirement savings will need to go into another account, such as a 401(k) offered through your new employer.
Option 2 - Annuitize your TSP
With a TSP Annuity you turn the entire balance of your TSP over to MetLife in exchange for regular monthly payments. While that may seem appealing, it's important to realize that with this option you are purchasing an annuity through MetLife.
If you decide that purchasing an annuity is right for you, you'll want to do your research to determine if the MetLife annuity is the right option. You may find that you can purchase an annuity through another company that would provide the same monthly payment without requiring you to turn over your entire TSP.
You also need to realize that, unless you select survivor benefits, once you die your investments are gone. If you live to be 100 you'll get a check every month until then, but if you die a year after you purchase the annuity your investments are gone.
Option 3 - Take a monthly TSP withdrawal
You can choose to take a fixed amount directly from your TSP account each month until your TSP funds are exhausted.
In order to make the monthly payments, the TSP will sell as many shares as required to meet the monthly withdrawal amount. This withdrawal has to be made each month, and no changes can be made during the year you are taking the distributions.
You change the following year's distributions by filing a TSP 78, but once you've set your monthly withdrawal amount it will continue to be distributed monthly unless you make a change for the following year.
Keep in mind that, if the market fluctuates, it could have a significant impact on the overall balance of your TSP. Your withdrawal is also dispersed according to how your TSP is invested.
That means if you have 50% of your investments in the G fund and 50% in the I fund, the TSP would automatically take 50% of each month's distribution from the G fund and 50% from the I fund regardless of how each of those funds are performing.
Option 4 - Transfer to an IRA
You are able to do either a partial or a full transfer to an IRA without penalty.
The TSP is great for accumulation during your working years, but your investment needs change once you reach the distribution phase of retirement. For more information on the difference between the two phases check out this post.
Transferring the balance of your TSP account to an IRA will allow you all the flexibility that comes with an IRA. You can choose to withdraw funds from any investment you choose, and move your money from one fund to another.
If you have a Roth TSP you can transfer the funds to a Roth IRA. A Roth TSP has a required minimum distribution (RMD), but a Roth IRA does not.
By transferring your funds to an IRA you also have the option of doing a Roth conversion, which is not an option with the traditional TSP.
There is also a benefit for your heirs if you've transferred your TSP to an IRA. While a surviving spouse can access your TSP, other beneficiaries cannot. They are unable to keep the funds in the TSP, and they also can't transfer them to any type of IRA once they are inherited.
That means that your heirs must take an immediate withdrawal of all funds in the TSP, which can have significant negative tax implications for them. If, for example, you had $500k left in your TSP account upon the death of you and your spouse, they would need to take an immediate withdrawal of $500k, most likely putting them into a significantly higher tax bracket for all their income in the year they were required to take the distribution.
If the funds had already been moved to an IRA your heirs would then have the option of taking distributions over 10 years, enabling them to minimize the tax implications.
The Bottom Line
Once you understand your options and the potential pros and cons of each, you're in a better position to make the right decision for you. It's also a good idea to talk to a financial advisor who understands your specific needs as a federal employee.
To learn more about your options and how a federal employee financial advisor can help you, make an appointment for a free consultation call.