We've been talking about the accumulation vehicle of your Thrift Savings Plan, which is one of the best out there. Once you retire though, we get tons of questions about what to do with your TSP because now you've moved to the de-accumulation stage of your life.
So what options do you have in actually removing the money from the Thrift Savings Plan?
1. THRIFT SAVINGS PLANS AS A RAINY DAY FUND
The first thing you currently can do inside TSP is take out a single payment. The good thing about that is, you can take out however much you want. You can take the whole thing out or just a portion of it, but you're only allowed to do that one time.
TSP is not like a bank where you can just reach and grab money as you need it.
You can take a single portion or the full balance out of the account, but currently you're limited to that choice: one partial withdrawal, one time, ever. And that withdrawal must be proportionately split between your Roth and Traditional balances. You can’t choose between your taxable or tax-free funds: you must withdraw from both.
After that, if you make a second withdrawal from your Thrift Savings Plan, they'll close your account and send you a check for the remaining balance.
So if you retire and immediately use a chunk of your TSP to buy a new vehicle, and then three years later you have an emergency and you need $15,000, TSP will say, "We're sorry. We're closing your account. Here's the rest of your money in full."
That’s a pretty negative arrangement. However, it will be changing this September. As of September 2019, you’ll be able to make unlimited withdrawals after your first thirty days of retirement– and you can withdraw from either your Roth or your Traditional TSP separately.
You can watch our video on the TSP Modernization Act of 2017 to learn more about the details.
In the meantime, however, a single withdrawal is your only option for using your Thrift Savings Plan as a rainy day fund.
2. THRIFT SAVINGS PLANS AS REGULAR [LIMITED] INCOME
The next option you can choose is Thrift Savings Plan monthly payments, which can supplement your FERS pension or your social security amount.
You can, in effect, tell TSP what you want to withdraw on a monthly basis. However, you can currently only change that amount one time per year during open season.
You're locked in for 12 months on that decision. If you get to July or August and you have an emergency, too bad. You've locked in how much you're going to draw out on a monthly basis.
Once the Modernization Act takes place in September of 2019, you can make changes to your regular payments any time during the year. You can also opt for annual or quarterly payments instead of just monthly; and you can make rainy day lump sum withdrawals while still receiving regular income from your Thrift Savings Plan.
The one issue with taking monthly withdrawals fromTSP is, your money is still in the G, F, C,S, I, and the L Fund. At a certain point, the funds can deplete, and without proper planning you can run out of money a lot faster than you anticipated.
So here’s the problem: you want a regular income check and it needs to supplement your other two buckets of retirement (your pension and your social security), but you don't ever want that to run out.
The number one fear of retirees is running out of money. So, if you’re in that boat, what do you do?
3. THRIFT SAVINGS PLANS AS REGULAR, UNLIMITED INCOME
Thrift Savings Plans actually have an annuitization option with Metropolitan Life. Basically, it's a regular payment for your entire life: you will continue to receive that payment as long as you live, much like social security or your pension.
TSP then takes your money and they give it to Metropolitan Life. Then MetLife determines how much your monthly payments will be based on your age and if you choose single or joint income. Again, you don't get to determine the amount, but they will pay you for the rest of your life. You will never run out of money again.
Now, you've got to be careful about “Lifetime Only” payments. The downside to them is, if you die one month after you retire and you had $300,000 in your Thrift Savings Plan, the income’s over. That one check before you passed was all you’ll ever get of your hard-earned money.
There are other options you could elect, such as a cash refund; a ten-year certain; joint for you and your spouse; level income; or increasing income. Remember, this is irrevocable. If you choose this option, you will never run out of income again…but you also can never change your mind.
WHAT DOES REQUIRED MINIMUM DISTRIBUTION (RMD) IN A THRIFT SAVINGS PLAN LOOK LIKE?
The great thing about TSP is that if you’re working, even if you're older than 70.5, you do not have to take out RMDs. However, once you retire, if you're older than 70.5, you're required to start taking money out of your Thrift Savings Plan.
One of the things that you also are allowed to do with TSP is make a transfer or a rollover to an individual retirement account of some kind. When doing so, you need to make sure that you put it into the right account. That's one of the specialties of United Benefits. We help people understand what their pension is going to look like with FERS, CERS, Social Security, and more. Each individual we meet has a different story and a different need.
Decisions about Thrift Savings Plans and other retirement arrangements are highly-impactful…and therefore highly stressful. It’s a good idea to sit down with someone who understands the system and the options available to you.
Remember, if you choose some of the annuitization options with the Thrift Savings Plan, it's no longer with TSP: it's actually with MetLife. The level income option is a great option: it's a high-paying dollar figure and it looks attractive, but it loses purchasing power because it stays stagnant over the course of your retirement and doesn’t adjust for inflation. The alternative is the increasing option, but it has its drawbacks as well. It's capped and it's tied to the CPI.
Which is better for you? That depends. Everybody’s different.
Our job is to be the expert that can walk through your options with you, so you can feel secure in your decisions about TSP– today, tomorrow, and many years from now.
How do you plan to use your Thrift Savings Plan after you retire?
United Benefits has assisted thousands of federal employees on several impactful topics. We can help you, too. Ask us anything!
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