What in the world should you be doing with your stagnant Thrift Savings Plan?
If you’ve ended some form of employment with the U.S. Federal Government, whether recently or years ago, you might be wondering what to do with the assets saved in your Thrift Savings Plan (TSP).
One option that a lot of folks don’t know about is rolling over TSP to annuity. If you want a guaranteed, lifelong stream of steady income post-retirement, an annuity might be the right option for you.
What is a TSP?
First, a brief intro to your TSP.
The Thrift Savings Program is a retirement savings plan for employees of the U.S. Federal Government, including both civilians and members of the armed forces. It’s similar to a 401(k) in that it has a defined contribution plan (you are the individual account holder) and a tax deferred retirement plan (taken out of your paycheck and put into your account before taxes).
The contribution limits for a TSP are similar to a 401(k) as well. In 2017, the contribution limit for a TSP is up to $18,000, with a $6,000 “catch-up” contribution for those over the age of 50. (A “catch up” contribution allows you to add more to your retirement plan after a certain age, so you can make sure you have enough in the bank when retirement comes.) The maximum limit per year is $54,000.
Why close your TSP?
The Thrift Savings Program is popular because it has low management fees, low-cost smart investments, high contribution limits, and simple usability.
But after you leave the service of the government, you can no longer contribute to a TSP account. At this point, you have five options for your TSP:
- Leave assets in TSP
- Roll into IRA
- Roll into new employer’s 401(k)
- Withdraw in a lump sum
- Transfer into qualified annuity
Although you need to consider all five, for this article we’ll focus on rolling over TSP to annuity.
Leaving assets in TSP
But first: here’s why you may want to rollover your TSP in the first place.
Leaving your assets in a TSP account is convenient and simple, but it’s not going to help you in the long-run. The money left in the TSP will continue to grow with interest, but it won’t be increasing nearly as rapidly or appropriately as it could be. Furthermore, many individuals choose to roll over their TSP plan, because it limits the amount of money you can withdraw in retirement. Plus, when you withdraw your TSP, you get it in a lump sum that could prove a challenge for many budget-concerned retirees.
If you decide to leave your assets in your TSP for now, you can always roll it over into another program, like an annuity, at a later date.
Transfer into qualified annuity
Other options like TSP, IRA, or 401(k) hand you a lump sum upon retirement that you can budget as you wish. Some plans provide payment installments, but only up to the amount that would equal the lump sum.
Annuities, however, offer consistency of payments that can guarantee you always have money on hand forthe rest of your life.
An annuity provides the greatest security for longevity risk, meaning that it will continue to pay you even if you live to be 150. Basically, your TSP assets turn into an investment that will provide you with a steady stream of monthly income in your retirement.
“An annuity provides the greatest security for longevity risk. Live forever, get paid forever.”
What is an annuity?
An annuity is a program sold by financial institutions like Sunpath Financial, who take your funds and grow them in preparation for your retirement. An annuity provides a monthly “paycheck” for an indefinite amount of time. The annuity is funded during the “accumulation phase,” which starts after you purchase the annuity, and the “annuitization phase,” which is when the payments start. Examples of annuities include Social Security and pensions.
Retirees too often start spending their retirement check quickly, living outside their means. This leaves them without any assets if they live past the years they budgeted for. To mitigate this risk, an annuity trades this lump sum for a series of monthly payments.
This plan is designed to provide the annuitant (the participant in the annuity) with a reliable and steady cash flow during their retirement years. Basically, it r
Why roll over a TSP to annuity?
- Deferred taxes
- No early withdrawal penalties
- Not limited to amount of money you invest
- Can do a partial rollover from TSP to annuity
- Heirs may be able inherit a portion of your annuity
- Can’t outlive your plan
- Guarantees income stream for retried life
- Rolling over TSP to annuity is final and irreversible
- Occasional high fees
- Some states charge tax premiums on annuity plans
- Heirs may not receive balance if you outlive the annuity investment
What are my annuity options?
1. First, you must choose between single or joint annuity.
A single life annuity provides level or increasing payments to you, the single annuitant, as long as you live.
A joint life annuity provides monthly payments to you and a partner who has an insurable interest in you, like a spouse or financially dependent family member. In the case of death of one individual in the joint life annuity, payments for the survivor continue. This can be 100% or 50% survivor annuity.
A 100% survivor annuity means that the survivor will receive the same monthly payments as when both members of the annuity were alive. A 50% survivor annuity will pay only half of the monthly annuity payment to the survivor. Generally, the monthly payment when both are still alive is higher for the 50% survivor annuity.
For example, you and your wife have a joint life annuity. Each month you get paid $2,000. Your wife unfortunately passes away. If you have a 100% survivor annuity, you would continue to receive $2,000 every month after her death. If you have a 50% survivor annuity, you would receive $1,000 every month.
2. Next, you must decide if you want level or increasing payment options.
Level payments mean that the amount of your monthly payment stays the same year to year. Increasing payments mean that your payments can increase each year on the anniversary date of your plan. This increase is based on inflation, as measured by consumer price increase. Don’t worry— your annuity level can’t decrease or stop based on changes in the market, though.
3. Decide on a fixed or variable annuity.
Similarly, you’ll need to decide on fixed or variable annuities. Fixed annuities give regular, stable payments to the annuitant.
Variable plans are dependent upon how well the investments of the annuity fund are doing. This means that if your investments are doing well, you could receive greater cash flows; if they’re not doing so great, you could have a poor or less stable cash flow. This tends to be riskier than most retirees are willing to take. But you have to risk it to take the biscuit!
4. You should also consider your beneficiaries.
All annuity payments stop after you die or after you and your partner die if you have a joint annuity. This means that any beneficiaries and heirs could be left without… unless you opt for certain annuity features like cash refund or ten-year certain.
The cash refund will pay the beneficiary the remainder of money leftover that was used to purchase your annuity. For example, you purchased your annuity with $50,000. You and your joint annuitant die after having received payments equal to $35,000. That remaining $15,000 will go to your beneficiary. This can be applied to any type of annuity.
A ten-year certain works in a similar way, but only for 10 years after purchase of the annuity. If you die before 10 years of annuity payments, your beneficiary will be paid for the rest of that 10-year period. However, if you live beyond the 10-year certainty, you will still receive annuity payments but your beneficiary won’t receive payments after your death. This plan can’t be combined with a joint life annuity.
How much will you get in annuity payments?
The total value for all annuity options is generally comparable. Your monthly payments, though, will be dependent upon a variety of factors including:
- Single or joint annuity
- 100% or 50% survivor annuity
- Level or increasing annuity
- Fixed or variable annuity
- Age when annuity is purchased
- Age of partner if joint annuity program
- Amount used to purchase annuity
- Interest rate index at time of purchase
How do you rollover TSP to annuity?
The minimum threshold for an annuity purchase is $3500, and separate balances or lines are not totaled towards this minimum. You can rollover a portion or total of your TSP to annuity, as long as you meet this minimum.
You can purchase an annuity through the TSP program, but this may lead to certain concerns down the road. Working with a private financial company like Sunpath Financial will make it simple and easy to rollover your TSP to annuity, while also growing your investments at a steady rate.
The Bottom Line
If you want a guaranteed stream of payments for the rest of your days, a single or joint annuity is the best option for your retirement program. Don’t worry about living outside your means, running out of money, or not being able to provide for yourself or your family. Rolling over a Thrift Saving Plan to an annuity is the best way to ensure a stable retirement income in an unstable world.
Let Sunpath Financial be your guide. Let’s get the ball “rolling over” from TSP to annuity to get you on a secure path of investments for the long, healthy, happy road ahead of you.