Turning TSP Distributions into an Annuity

The least-used option for withdrawals from a Thrift Savings Plan is annuities, although payments can also be made in lump sums, monthly installments, or a combination of the three. The percentage of TSP withdrawals that take the form of annuity purchases is in the low single digits.

However, be sure to be at least aware of its qualities before you rule it out as an option. One difference between the TSP and the standard FERS or CSRS retirement benefits is the amount of customization available for the annuity benefit.

The TSP provides three fundamental annuity types:

• Single life: a lifetime annuity that is only paid to you.

• Joint life with spouse: an annuity paid to you while you are still alive. The survivor will receive an annuity for the remainder of their life if either of you passes away.

• Joint life with someone other than your spouse: an annuity paid to you while you and the person you choose (but who is not your spouse) are still alive. There must be an insurable interest in you for this person. The survivor will receive an annuity for the remainder of their life if either of you passes away. A former spouse, blood relatives, or adopted relatives are closer than first cousins. A person with whom you are living in a relationship that would constitute a common-law marriage in jurisdictions that recognize common-law marriages is presumed to have an insurable interest in you as well.

Joint life annuities can offer a survivor benefit of either 100% or 50%. Accordingly, if either of you passes away, the monthly payments will either remain at their current level (100%) or be cut in half (50%) for you or your joint annuitant.

The fundamental annuity types can be paired with several annuity features. These include rising payments, cash refunds, and ten-year payouts that are guaranteed. The monthly payment amount rises by 2% yearly with increasing payments. 

Your designated beneficiary will receive a cash refund of the difference between the sum of the payments and the account balance used to purchase the annuity if you (and your partner annuitant) pass away before receiving payments in an amount equal to the account balance used to purchase the annuity. If you have a ten-year certain payout and pass away within ten years of the beginning of your annuity, your beneficiary will continue to receive payments for the remaining ten years.

Not all features can be coupled with all types of fundamental annuities. Also, remember that once an annuity is purchased, the money is transferred to a private corporation, which then provides the benefit rather than the TSP.

You can use the calculator tools on www.tsp.gov to figure out how a specific sum would translate into income for various scenarios.

The spouses’ rights requirements will apply to your withdrawal decision if you are a married participant with an account balance of more than $3,500. If you are a married FERS participant, unless your spouse waives that right, you are entitled to a joint and survivor annuity with level payments, a 50% survivor benefit, and no cash refund feature. The TSP is required to inform your spouse of your withdrawal choice if you are a married CSRS participant.

• Level payments: Simply put, level payments are the same monthly sum for the duration of your life.

• Increased payments signify that, on the anniversary of the initial payment, the monthly annuity payments will rise by around 2% annually. With either the single-life annuity or the joint-life annuity with your spouse, growing payments are an option; however, increasing payments cannot be selected if your joint annuitant is someone other than your spouse.

• Cash refund: TSP life annuities do have the potential to give beneficiaries a death benefit. There is a cash-refund option, whether you have a single or joint-life annuity. If you choose this option, your beneficiaries could get a lump sum payment for the balance of your account if you pass away before the capital you used to buy your life annuity has been distributed.

In conclusion, a TSP life annuity pays you regular payments for the remainder of your life and might also be utilized to help others. You must relinquish control and access to the entire “pool” of TSP funds in return for the predictable income an annuity can provide.

It’s essential to comprehend how this piece works in conjunction with a FERS pension, Social Security payments, any life insurance, and other available retirement assets, even though converting TSP to a life annuity may be beneficial in some circumstances. It may be a good idea to speak with a financial expert to learn how a TSP life annuity can fit into your financial strategy.