Answering listener questions on COLA, employee pay raises, and more. Listen to the Full Episode: Enjoy the show? Use the Links Below to Subscribe: ...Read More
TSP – “I can take my money out, however I want to in retirement!”
Hi, I’m Micah Shilanski from Plan Your Federal Retirement. Welcome to the FERS Federal Fact Check.
I want to talk about everyone’s favorite savings plan…the Thrift Savings Plan (TSP)! I love the TSP for accumulation. I think it’s one of the greatest accumulation tools feds have and it’s a really great place to save money and grow for retirement.
But I often hear a misconception when we are teaching classes and when we’re getting ready to retire, people say, “Micah, I can just take my money out of the TSP however I want to” and that’s actually not the case.
The TSP, while it is excellent at accumulation, it is pretty restrictive on distribution; being able to take money out.
I think it does a great job, but it has a few limitations.
It is a tool.
Like anything else and you have to understand how to use the tool so you can plan for your retirement.
Distribution Rules with the TSP
What can you do with the TSP?
Well, this is where it gets a little confusing. You actually only have two distribution options from the TSP.
Two; that’s it.
One partial and one full and that’s it.
Partial: you can go to TSP and say, “hey, I want to take a distribution out of my TSP account”.
The TSP office will send you money, you can transfer that money to an IRA account, you can send it to you and you can spend it and you’re subject to taxes and possibly a penalty based on your age if you get the money, but you can do that.
That is a partial withdrawal and it’s a one time. You go to the TSP, ask for $50,000, that was your one partial.
The next time you go to the TSP and you ask for money, you have to take a full withdrawal, that’s the only thing that’s left. But in the full withdrawal, you have a couple of different options. You have the ability to take monthly payments. You have the ability to take an annuity. You have the ability to take a lump sum.
Those are your distribution options once you take a full withdrawal of what you can elect on TSP Form-70. A lump sum is exactly what it sounds like. You are going to take all of the money out, whether it all goes to you, whether you transfer it, not rollover, transfer it to an IRA account, that is a lump sum.
You could do an annuity. Don’t confuse this with your FERS annuity, this is an annuity with MetLife. This is the annuity company TSP has aligned with that if you wanted an income stream for life and guaranteed, you can send your money to Snoopy and they will take care of that for you.
BE VERY, VERY CAUTIOUS HERE.
There are a lot of rules and limitations that you need to understand. Proceed with extreme caution before you do that. It’s not bad, but you really have to understand how it works.
There are also monthly payments. Monthly payments are where you go TSP and say, “hey, I want $1,000 a month” and they can send you either a $1,000 a month or they can send payments based on your life expectancy.
That is how monthly payments work. So, a lot of times I’m teaching classes and people go, “well, Micah, monthly payments sound like kind of what I want. I want a paycheck in retirement”. But, there’s a couple of extra limitations on monthly payments and what makes TSP great for accumulation kind of hinders it for distributions. So, I’m not talking about that right now. There’s two limitations on monthly payments that I don’t like.
Number one, that you can only make one change a year in your monthly payments and it goes into effect the next calendar year.
You can make one change a year and it goes into effect the next calendar year.
So, if it’s in January and I’m pulling out $1,000 a month, and then all of the sudden, $1,000 isn’t cutting it and it’s May and I need to pull out $1,500, I can’t go to the TSP and get more money. I have to wait until their “Open Season” in order for me to change my monthly election, which is at the end of the year, then it goes into effect in January.
I went from May to January and only getting $1,000 a month when I needed $1,500. I do not like that they’re very rigid in those payments. But, some people it works for them and, if it works for you, that’s great.
The second thing to be cautious of though on monthly payments is proportionate distributions.
Proportionate distributions means that you have to take money out however it is invested. Whether it is in a ROTH and pretax money, whatever the percentages are.
If it is 90% pre-taxed, 10% Roth, you get a 90/10 distribution. If it’s a third, a third, a third in the C, S, and I funds, it’s a third, a third, a third in C, S, and I funds that you’re selling. So, let’s talk about dollar cost averaging.
When you are working, the stock market is kind of doing this.
You hope it’s higher up over time, right? But you’re putting money in every pay period in the TSP, buy, buy, buy, buy, buy, buy, buy, buy, buy, buy, buy, buy and it works really, really good to grow money. But let’s say that you retire and this is what we’re all scared of, we retire and then all of the sudden the market crashes, right?
We see another 2008, it takes five years to get back to even, but now you are invested because you’re invested for the long term, and you’re invested in the TSP, but you were selling, selling, selling, selling, selling, selling, selling, selling, selling, selling, selling, selling, etc. to take money out of that TSP account so you can live on it.
If you’re doing that, what do you think you just did to your TSP?
You devastated it.
You don’t sell in those down markets like that. It’s a great way to lose money, which isn’t what we’re trying to do even in retirement.
My preference is you’re taking those monthly distributions from a fixed account, from a cash account, from something that can’t go down in value, but unfortunately, right now, the TSP forces you to take out proportionate however you have the money invested.
I don’t really care for that, but understand how these tools work. This is a great tool for you to save money for retirement. It’s a great tool to help keep you on track in retirement, but you have to understand how to get your money out so you can plan for your federal retirement.
I hope this video has been helpful. If you want to submit more questions for us to review and possibly respond to, we would love it.
Please go ahead and do that on our website. Until next time, I’m Micah Shilanski for Plan Your Federal Retirement. Take care!
Hi,I have a question regarding Roth TSP which I have not gotten a clear answer on. I will be 54 this year. I plan on retiring at 62 which is
“Hello, I am a retired 58 yr old federal employee that retired after 34 years of service. My wife and I are looking at buying a trailer and horse camping
At age 59 1/2, I would like to use a TSP one time withdrawal to pay off a mortgage then eventually transfer the balance to a IRA when I retire
Are you still allowed to contribute the maximum of $26,000 to the TSP even if you only work half of the year? Is there any advantage to maxing out your
Get the most out of your federal retirement benefits by taking advantage of the FERS resources created by Micah Shilanski, CFP®, and the team of independent financial advisors at Shilanski & Associates, Inc. Join the thousands of federal employees who trust us to guide them in their retirement planning journey because of our unique perspective of how your FERS benefits contribute to your comprehensive financial plan.
7 CLASSIC RETIREMENT MISTAKES Federal Employees Make