Dealing with a TSP Account After Retirement

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After retiring from federal service, what exactly should you do with your TSP? This is a question on the lips of thousands of federal workers, and it’s about time you got an answer. In fact, the vast majority of people getting close to retirement seek answers to this question. 


We hope this doesn’t disappoint, but there’s actually no universal answer to this question. Before you click away in frustration, you should know the reason for this is that everybody’s situation is unique. What works for one person may not be the best solution for another. 


Although there’s no universal answer, what we can do is provide the most common solutions. From here, you can decide which is best for your own position. 


Before we launch into the three options, you should first know that you won’t be able to do anything with your TSP until 30 days have passed since your retirement date. Also, you don’t have to do anything. But we’re getting ahead of ourselves…here are the three options! 


Option 1 – Keep the TSP Active 


Often, federal workers nearing retirement start panicking because they believe that drastic action is required with their TSP. In reality, you can leave the funds in the account. If you’re to do this, keep in mind that the account will change in a couple of ways. 


You won’t be able to take loans on the account 

You can’t make any contributions 


If you’re happy with this, your funds will remain in the same investment options, and near enough, everything else follows the same rules as your working days. 




Why should you consider this option? Firstly, all those under 591/2 will have access to the funds. As long as you’re 55 or over (or turn 55 in your retirement year), your access to the TSP funds opens as soon as you leave work. For those considering an SCE (special category employee), this reduces to 50. 


In terms of other benefits, some people like leaving their accounts as it has been for many years – they like the consistency and familiarity. Elsewhere, you can access the secure G Fund and reach funds earlier than an IRA (and without a penalty!). 




No solution is ever perfect, and one of the biggest drawbacks of leaving your TSP the same is that you only have five investment options. Furthermore, those with a Roth TSP will need to meet the minimum distributions while you don’t have full control over withdrawals and funds. Some people have also experienced beneficiary problems. 


Option 2 – Create a TSP Annuity 


While some people compare this to the FERS annuity, there are some significant differences. If you choose this option with your TSP, you essentially transfer your TSP balance over to MetLife, and the insurance company uses these funds to create an annuity. By design, this means regular, guaranteed payments until death. 


Depending on your preferences, and this is something that you’ll discuss with your financial professional, you have options including ‘life only,’ ‘joint life,’ ‘life with period certain,’ and ‘life with the remainder.’ As an example, a ‘life only’ policy generally offers the highest payment per month. Then, the amount you can expect each month reduces with every option you add. For example, you’ll receive less per month with a joint-life annuity compared to life-only annuities. 


When making this change, it’s important to understand the implications because many before you have been tripped up. For one thing, you’ll no longer have access to the full balance. Instead, you’ll receive a set amount per month for the rest of your life. After you pass away, the beneficiary will receive the remaining balance. 




Of course, the biggest advantage of an immediate annuity is that you get income for life. Does this suit your needs? Or is it unnecessary with two income streams already guaranteed through Social Security and FERS? This is something that you need to sit down and calculate or talk through with a finance expert. 




On the other hand, some people reject this idea because they want access to a larger amount than just the monthly payment. Also, you could lose buying power as a result of inflation (interest rates also play a role!). 


Option 3 – Open an IRA 


As the third and final option, you can transfer some or all of your funds into an IRA – this comes without a penalty. If this is your chosen option, it all starts with the TSP 70 and 77 forms, which can be found inside your account. 


At the moment, you might wonder why you would consider taking this route when the TSP is so cheap. The truth is that other custodians are likely to be cheaper after entering retirement. Ultimately, the world has changed over the last ten years. Though the TSP was cheaper than every other custodian at this time, you’ll find similar indexes and funds in an IRA to what you get in a TSP these days. Naturally, the only one that you’ll potentially miss due to its uniqueness is the G Fund. 




This is normally the chosen option for those who seek more freedom with their investment options – this is something that the TSP just cannot compete with. Additionally, withdrawals work differently. When withdrawing from a TSP, you take the money from funds according to how you invest it. 


For example, let’s say that your investment is split equally between the G Fund and C Fund. When withdrawing, the money is taken equally from these two funds. On the other hand, taking from an IRA is more flexible because you choose where it comes from; this is useful for those following the barbell (or bucket) strategy. 


Some federal workers can also avoid required minimum distributions (RMDs) by transferring money to a Roth IRA from a Roth TSP. As you’ve probably guessed, this requirement simply doesn’t exist with a Roth IRA. Once again, this gives you more flexibility and means that you can leave all funds to grow without worrying about tax. Over time, you build your legacy and leave something behind for loved ones. 


Sadly, you cannot perform in-plan conversions in a TSP, and this is another reason to choose an IRA (where Roth conversions are simple!). If you keep your TSP, a child or another beneficiary inheriting your account has limited options. While a spouse can utilize a Beneficiary Participant Account, children left with the account after the passing of this spouse have little choice but to withdraw all funds. 


Every year, beneficiaries lose thousands of dollars because of this problem. On the other hand, beneficiaries of an IRA can use an inherited IRA and don’t have to worry about the funds for an entire decade. Rather than receiving everything at once and then paying the price in terms of tax, the beneficiary can split the withdrawal over ten years. 


Let’s say that you have a TSP containing $600,000 – leave it in the TSP after death, and your beneficiary will need to withdraw this amount within 60 days. You probably don’t need us to explain that the tax on this amount will be substantial, and a good amount you worked hard to build is lost instantly. Open an IRA, and your beneficiary slowly withdraws the amount over ten years. 




We said earlier that no solution is ever perfect, and you might encounter some issues with this one. Namely, the fact that you won’t have access to funds before 591/2 years of age. If you want access to your money before this point, you may need to explore another of these options. 


Also, you’ll lose access to the G Fund, a fund that offers security and accommodates a conservative approach at a time where you need it the most. Furthermore, you cannot go back to the TSP after removing your funds. In the past, we’ve spoken to people who regret making the decision so suddenly because they couldn’t reverse their actions thereafter. 


Making the Right Decision


What is the right decision? This is a loaded question and one that needs to be answered with care. With no deadline, please don’t feel as though you have to rush the decision. Take your time, consider your options, speak with a financial professional, and think about your needs not only now but also in the future. 


Federal employees aren’t likely to benefit from an immediate annuity, and you also shouldn’t move your money across to an IRA if you need access before 591/2. Likewise, don’t move all of your money away if you don’t want to close the door on the TSP. Remember, remove all of your funds, and you’ll no longer have access to the TSP. 


These days, you’ll find cheaper custodians than the TSP. Also, the IRA is better for passing on assets to loved ones and for withdrawals. With a Roth IRA, you can also eliminate required minimum distributions (RMDs). 


Feel free to listen to the advice of colleagues, but don’t base your decision on this alone. Instead, take your time and consider all of your options. 

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