What do I do with my TSP in retirement? Yes, this is the most common question I receive from people nearing retirement, and justifiably so.

To no one’s surprise, the answer is another “it depends.” But to make it easy, I’m going to break the options down into three choices so we can look at pros and cons of each.

The first thing to remember is that you don’t have to do anything with your Thrift Savings Plan. And you actually can’t do anything with it until you’ve been retired for at least 30 days. Once the thirty days has passed, you have some options (if you prefer the video version check it out here).

Option #1 – The TSP Annuity

The TSP annuity is different than the FERS Annuity—completely different, in fact. A TSP annuity involves turning the money in your TSP over to an insurance company (Met Life) in return for a guaranteed payment for the rest of your life.

There are many different combinations of an immediate annuity such as:

• Life only
• Life with period certain
• Joint life
• Life with remainder

A life only immediate annuity will provide you with the highest monthly payment. The more options you add on, the more the monthly annuity payment decreases. For example, a life only annuity may have a payout of $3000 a month, but a joint life annuity would have a reduced payout of around $2700 a month.

With each of the immediate annuity options above, a person gives up access to the balance in their TSP. A life with remainder annuity would provide income for the insured’s lifetime and pay out the remaining balance (initial purchase amount minus the total of monthly payments) to the beneficiary upon the insured’s death.

The main benefit to an immediate annuity is that you get a guaranteed income stream for your lifetime. But, as a FERS retiree, you will already have two guaranteed income streams in your FERS annuity and Social Security. It may not be necessary, then, to forfeit access to your investments in order to guarantee the rest of your income.

Pros:

• Guaranteed lifetime income

Cons:

• Loss of access to principal
• Dependent on interest rates
• Inflation could reduce buying power

Option #2 – Leave Money in TSP

In retirement, you have the option of leaving your money in the TSP, which really isn’t any different than it is when you are working. The big differences are that (1) you can’t contribute anymore and (2) you can’t take out any loans on your account. Other than that, your investment options are exactly the same and you can still make changes to your account balance just like when you were working.

One of the biggest benefits to leaving money in your TSP in retirement is having access to your funds prior to age 591/2. If you retire in the year that you turn 55 or later, then you have immediate access to your TSP without penalty. If you are a special category employee (SCE) and you retire in the year that you turn age 50 or later, then you have immediate access to your TSP, as well.

Pros:

• Keep your TSP the same way you are used to
• Access to your G fund
• Access to your funds sooner than an IRA and without penalty

Cons:

• Limited to your five investment options
• Required minimum distributions from Roth TSP
• Can’t choose which funds you are withdrawing from
• Possible beneficiary issues

Option #3 – Transfer to an IRA

The third option is to transfer funds in your TSP to an IRA. It’s possible to do a partial or whole transfer to an IRA without penalty. Forms TSP 70 and TSP 77 are used to make full and partial withdrawals. Each of these forms would be found in your TSP account.

But the TSP is cheap, why would you want to transfer out of it? Simply put, the TSP is no longer cheap compared to other major custodians. Looking back 10 years ago, the TSP was considered cheap when compared to other custodians, but this is no longer the case. It is now possible to get very similar funds or indexes as your TSP within an IRA. The only investment unique to your TSP is your G fund.

There are a few benefits to moving money to an IRA. The first and most obvious is that you have unlimited investment options within an IRA.

Another benefit of moving to an IRA is increased flexibility when withdrawing funds. When a retiree is withdrawing funds from their TSP, the funds come out according to how that person is invested. In other words, if a person has 70% C fund and 30% G fund, then their withdrawal is going to come from 70% of the C fund and 30% of the G fund. With an IRA, a retiree can choose to withdraw funds from any investment they want. This option is especially nice if you plan to use the bucket strategy, or the barbell strategy, in retirement. Regardless of your withdrawal strategy, an IRA is more flexible for withdrawals.

Additionally, moving money from Roth TSP to a Roth IRA can eliminate Required Minimum Distributions (RMDs). RMDs are required from Roth TSP, but they are not required from a Roth IRA. Not only does this grant you more flexibility on withdrawals, but allows you to leave your money to grow and compound income tax-free over a longer period. This is an especially financially savvy way to leave more of a legacy to your heirs.

Moving assets from TSP to an IRA also gives you the ability to do Roth conversions. TSP does not allow in -plan conversions.

The final benefit is in reference to children who may inherit your account. At a TSP account holder’s death, a living spouse can open a Beneficiary Participant Account BPA and keep TSP. When the spouse dies, the new beneficiaries have to withdraw funds from TSP. Those funds “cannot be transferred or rolled over into any type of IRA” according to the TSP website. This drawback to TSP could easily cost the beneficiary tens of thousands of dollars. But, an IRA beneficiary can move funds into an inherited IRA and leave those funds there for up to 10 years. The benefit of leaving funds in the account for 10 years would be to take withdrawals out over the 10-year time in order to spread out and reduce the tax liability.

If a TSP beneficiary passed with $500,000 left in the TSP, that beneficiary has to take all of the funds out within a 60-day time period and is going to be taxed on $500,000. If the same scenario were to happen with the funds in an IRA, beneficiaries could move the funds to an inherited IRA and take smaller distributions out over the 10-year time period. They could also have the potential to get more tax deferred growth over the 10-year time period.

Pros:

• More investment options
• Flexibility with investment withdrawals
• No RMDs from a Roth IRA
• More flexibility for persons inheriting your account
• Roth conversions are an option

Cons:

• Limited access prior to age 59 ½
• No access to the G fund
• If you move all of your money out of TSP, you cannot go back to it

Summary

The decision of what to do with your TSP is an important one. It also isn’t a decision that needs to be rushed since there is no deadline that has to be met. Here are a few highlights of the three options listed above:

• An immediate annuity is likely not a good option for federal employees.
• Do NOT move all of your money from TSP to an IRA if you think that you will need access to the funds prior to 591/2.
• Do NOT move all of your money out of TSP if you think there is a chance that you will want to move funds back in the future.
• TSP is not the cheapest custodian available.
• An IRA is more flexible for investment withdrawals and passing on assets.
• A Roth IRA can eliminate RMDs.

Please don’t take your coworkers’ advice on what you should do with your Thrift Savings Plan. Your TSP is a big part of your retirement, so take your time and make the decision that is best for you. If you find all of this overwhelming and would like a partner to help with your retirement journey, we should set up a call.

Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.