The TSP (Thrift Savings Plan) is an amazing tool to grow your money for retirement.
But once you retire, is it still the best place for your money?
Spoiler: Sometimes, but certainly not always.
3 Options for your TSP at Retirement
Here are the main three things you can do with your TSP once you retire.
- Buy an Annuity
- Keep it in The TSP
- Roll it into an IRA
Note: Where you decide to put your money is a huge factor in deciding how much money you are actually able to spend in retirement!!
I’ll break down the major pros and cons of each option.
Buy an Annuity
Once you retire from the government you have the option to buy an annuity with your TSP. MetLife is the insurance company that currently has the contract to provide these annuities.
In short, annuity is when you hand some or all of your TSP over to an insurance company (MetLife) and return they promise you a monthly payment for the rest of your life.
You can also elect an option for the payments to last for your spouse’s lifetime as well.
Pros
The major advantage of the annuity option is that you don’t have to worry about investing your TSP funds in retirement because MetLife handles it. And regardless of what the market does, you will continue to get that guaranteed monthly payment.
Cons
The annuity option is by far the most restrictive option. Once you hand your money over then you lose complete control over it.
If you need extra money to repair your roof then you better find another option to fund it outside of your TSP annuity.
Also, if you die early then your there is no money left to go to heirs because the payments (most often) stop once you pass (or when you and your spouse pass with a joint annuity).
In my opinion, because federal employees already have 2 fixed income sources from their pension and Social Security, you don’t need another one in the form of a TSP annuity. That is just overkill in which you give up all the potential growth of your TSP funds to an insurance company.
Fixed income is important but so is control and flexibility.
Keep it in The TSP
The TSP has served you well over your career and so why not just keep it where it is?
Pros
One of the TSP’s greatest strengths is simplicity. There are just 5 core funds to pick from (not counting the mutual fund window or L funds) and they are all relatively low fee.
It is often easier to get to know 5 options in the TSP compared to the thousands of options somewhere else.
Cons
While the TSP is simple, it is not built with flexibility in mind. And in retirement, this flexibility can be worth thousands of dollars.
For example, if you withdraw money from the TSP you can’t choose which funds your money comes from. It just comes pro rata from the funds you are invested in.
So if you are 50% G fund and 50% C fund then your withdrawals will come 50/50 out of each. This is a problem when the market is down and you’d prefer not to touch your C fund because you want to wait until the market recovers and not sell when things are down.
Another downside of the TSP is that it doesn’t allow you to use basic tax-reduction strategies like a Roth conversion. To use these strategies, you’d have to move out of the TSP into an IRA (and these strategies have helped save our clients thousands of dollars).
Also, if you have money in the Roth TSP it will still be subject to RMDs (forcing you to take the money out) at 72 but if you move that money to a Roth IRA then you won’t have to.
Roll it into an IRA
An IRA is another type of retirement account that many federal employees move their money to once they retire to gain flexibility.
And as long as you move your Traditional TSP to a Traditional IRA and your Roth TSP to a Roth IRA then you will not owe any taxes when you make the transfer.
Pros
An IRA will generally have way more options and flexibility than the TSP. Many people move to an IRA to get access to more funds some of which have even lower fees than the TSP.
Also, an IRA allows you to implement tax-saving strategies such as Roth conversions.
Not to mention that a Roth IRA is completely exempt from taking RMDs.
Cons
Whenever there are more options then there are more opportunities to make mistakes. I have seen many people pick funds that have really high fees or make mistakes when moving their money to an IRA.
You will want to make sure you do your research before making any big moves.
Also, the TSP benefits from the rule of 55 while IRAs do not.
The rule of 55 says that if you leave the government in the year you turn 55 or later then you can access your TSP right away without a 10% early penalty. For most retirement accounts (including IRAs) you have to wait until 59 ½ to avoid this penalty.
Conclusion
Where you keep your investments in retirement is one of the biggest decisions you make with your money. It is so crucial that you do enough research until you feel confident and comfortable in your decision.
Our firm specializes in helping federal employees find the best place for their money while taking advantage of every tax-saving opportunity that they can. We’d love to chat about what makes sense for your situation. Feel free to make an appointment here.
