Micah and Tammy have been seeing lots of mistakes and missteps happening lately, with more people reaching out to see whether they were wrong or...Read More
When you are ready to retire, you have several TSP retirement choices. You can…
Let’s take a closer look at each option…
You can leave the money in your Thrift Savings Plan account until April 1st of the year after you turn 70 ½. After that, you must start taking distributions.
If you don’t need the money right away, why not leave it invested?
Pros – Your money can continue to be invested and may grow in value over time.
Cons – You are limited in your investment choices – you can only invest in the specific funds in the TSP.
You can get a fixed dollar amount from your TSP each month in retirement.
The money is taken out of your TSP retirement account, and the withdrawals will continue as long as your money lasts.
If you choose this option, TSP will place an order to sell however many shares are required to provide you with your monthly withdrawal.
Pros – You get a predictable monthly income as long as your money lasts.
Cons – There is no guarantee how long you will continue to receive monthly withdrawals. If your investments drop in value, you may have to make lifestyle changes.
You can also annuitize your Thrift Savings Plan account. This means you will ‘turn in’ your entire TSP account balance to get regular – usually monthly – payments for the rest of your life.
The amount that you receive each month will depend on the total value of your TSP retirement account when you annuitize it.
What many people don’t know is that when you annuitize your TSP, you are actually purchasing an annuity through Met-Life.
The insurance company, Met-Life, takes the total value of your TSP and agrees to send you a check for the rest of your life.
If you live to 120, you get a check till 120. But, if you do not select survivor benefits, and you die two days after annuitizing, the money is gone.
Pros – You get a guaranteed monthly income for the rest of your life.
Cons – This may not be best value for your money. You may get more money by buying an annuity from a different company, or get the same amount per month, but not give up your entire TSP.
For most people, transferring their TSP to an IRA has the most benefits and allows them the most flexibility.
In a way, when you choose this option – you get all the other options too.
When your money is in an IRA, you can…
Once your TSP retirement money is in an IRA, you have a much wider menu of options on how to invest it.
You can also buy annuities inside of an IRA, but now you can comparison shop and choose the annuity or other investments that are the best for you.
Be mindful of the company you choose to open an IRA with, because it affects your investment options. If you open an IRA with an insurance company, you will have more choices than if your money was still at TSP, but you may still be limited to what choices you can make.
If you open your IRA with an independent financial planning firm – you will have the most choices available to you.
Independent firms and brokerage companies are not required to sell you a particular investment or insurance contract. An independent firm will be able to do the best comparison shopping when it comes to diversifying your investments.
When the transfer is done correctly, 100% of your TSP retirement money goes to your IRA. You will not have to pay taxes or penalties at the time of the transfer.
You will still have to pay taxes on the money when it comes out (just like you would with your TSP) since you used pre-tax dollars to invest.
Pros – You get more choices when your money is in an IRA.
Cons – You need to make sure the transfer is done correctly – otherwise you could be required to pay a significant amount in taxes.
When transferring money from your Thrift Savings Plan account to an IRA – you need to be very careful.
The terminology you use is very important.
Some people think “transfer” and “rollover” are the same thing – they are not.
A transfer means TSP sends the money directly to the company holding your IRA.
A rollover means TSP sends the money to you.
In almost every case – you want a transfer – *not* a rollover. You want 100% of your TSP retirement money to go to your IRA.
When you do a rollover, TSP sends 20% of your funds to the IRS and they send 80% of the funds directly to you. This might sound nice – but it can lead to big trouble.
The trouble comes in 60 days when you have to send 100% of the value of your TSP retirement account to the new IRA custodian or face big fines.
For easy numbers, let’s say your TSP retirement account was worth $100,000 when you transferred it.
If the transfer is done correctly, $100,000 is sent to your IRA.
However, if you do a rollover, TSP sends the IRS $20,000 and you receive a check for $80,000. Within 60 days, you must deposit $100,000 in your IRA.
But, the IRS will not give you back the $20,000 it received.
You must come up with an *additional* $20,000 to deposit along with your $80,000 check to equal $100,000. If you don’t, you’ll have to pay a 10% penalty *and* be required to pay ordinary income taxes on the $20,000.
And, remember, in this example – the TSP retirement account was only $100,000.
What if your TSP retirement account was worth $500,000 before you did a rollover?
TSP would have sent you a check for $400,000 and the IRS a check for $100,000.
Then you would have to come up with an *additional* $100,000 to deposit a total of $500,000 in your IRA.
Trust me – in almost every case – you want a transfer, not a rollover.
I have helped many of my clients transfer money from their TSP retirement accounts or private 401k plans to IRAs.
When it’s time to do the transfer, I will help my clients fill out the TSP retirement forms or call the 401k company. We do it together to make sure everything is taken care of.
One reason – I have actually had customer service folks try to tell me that a rollover is the same thing as a transfer!
The other reason – a few years ago, I had one client who called their 401k company without telling me. He wasn’t trying to hide anything – he just thought he could take care of it on his own.
The client told the customer service person he wanted to transfer his money to an IRA, and the customer service person said, “Oh – you want to do a rollover.”
Fortunately, we were able to fix the situation once my client told me what happened.
But remember – just because someone answers the phone at a financial company doesn’t mean they know what they’re talking about.
This brings us back to the one of the most important parts of planning your Federal Retirement: You are responsible for *your* retirement.
Customer service folks, or people in your agency’s HR department can provide you with lots of information – but they can’t tell you what is best for your personal situation.
And OPM will not review your paperwork and tell you that you might want to consider other options. OPM will simply process whatever paperwork they receive.
You need to know your options – and you want to make sure the people who are advising you know what they’re talking about.
This is one area that you want to get some help with. If you are working with an experienced financial planner, they will ensure that the transfer is done correctly.
Do you have questions about your Thrift Savings Plan choices – and how they apply to your personal situation?
Are you looking for someone to help you get the most out of your Federal benefits and help you manage your personal and retirement finances?
Consider finding a financial planner who is also experienced in Federal benefits.
Federal retirement benefits are complex. While your HR can be a helpful resource – *you* are responsible for your retirement. And you need to make sure you understand your benefits *before* you retire.
We seen the mistakes that people (and even some professionals!) can make, and we want to help you avoid them. Click the button below to learn more.
✗ Forgetting to check your beneficiary designations
✗ Expecting pension check to arrive in 30 days after retiring
✗ Not knowing the difference between SCD vs. RSCD
✗ Completing retirement paperwork incorrectly
✗ Failing to prepare financially for retirement
✗ Failing to understand tax consequences
✗ Getting bad advice
Click the button below and learn how to avoid these mistakes while planning YOUR retirement
“I watched the very helpful video on ROTH IRA conversions. I will be retiring by the end of 2022 and I do not have any funds in the Roth TSP,
“Is there a way, I can find out how much I will receive at retirement and when I can collect? I worked 24 years, but I don’t know my high
“If my TSP beneficiary is currently my Trust, then upon my death, will that transfer be made by a one time full payment -20% for taxes? If so would it
“If I erroneously select an annuity from the TSP instead of a withdrawal from it, can I reverse that option? Thanks.” – Orlando. Listen, we LOVE the Thrift Savings Plan
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.