While the Thrift Savings Plan rules are relatively simple during your working years they become a bit more complicated once you cross into retirement.
After retirement you have 5 TSP options which can be exercised individually or in virtually any combination and they can be executed at the time of your choosing. You can:
1) Do nothing – If you don’t need immediate income from your TSP account and are happy with the investment choices, simply defer the decision. But at age 70 ½ this option expires. You will then be subject to IRS minimum distribution rules or face a hefty tax penalty. As a minimum you will need to select option 2)a. below upon reaching age 70 ½ .
2) You can Request TSP monthly payments – here you have 2 options:
a. You can have your payments automatically computed based on your life expectancy. I recommend using 5% as an assumed expected earnings rate in the Life Expectancy Monthly Payment Calculator. Note: you can make a one-time only change from TSP-computed life expectancy payments to a specified dollar amount later if you wish.
b. You can specify the amount of your monthly payments. You can change your monthly payment amount one-time per year during open season in December. If you choose this option and expect your TSP to last well into your golden years, see the 4% rule at the end of this article.
3) Take a one-time partial or full cash withdraw. This withdrawal is fully taxable without penalty in the year received if you are at least 55 years of age (other exceptions apply).
4) Make a one-time partial or full Rollover to an IRA account. Note: If you choose this option before reaching 59 ½ you will incur a 10% penalty in addition to regular income taxes on any subsequent IRA withdrawals.
5) Purchase an Annuity with all or some of your TSP balance. Currently the “TSP Annuity Interest Rate Index” is set at a paltry 1.75%. You may be wise to defer this option for a few years until the index rises to a more historical level of at least 3.5%. This could effectively double or triple your annuity payments in the future. If you need income now use option 2)b for the interim. You can use the TSP Annuity Calculator to help you to determine an appropriate withdrawal amount or follow the 4% rule at the end of this article. Go to Annuity Index Rates for current and past rates.
The real complications come into play when you begin to devise your plan. You may choose to exercise 1 option, all 5, or any combination of options now or in the future but note that options 3 and 4 only allow a one-time partial withdrawal. This means that if/when you go back the second time you need to cash out, rollover, and/or annuitize your entire TSP balance. You will not be allowed to continue option 2 if you want to exercise options 3 or 4 a second time.
If you are under age 59 ½ when you retire I hope you noticed the 10% penalty potential with option 4. If you are under age 59 ½ and are considering a full rollover to your IRA you might want to consider a partial rollover now and the remainder after reaching 59 ½ in order to keep your options open. With a partial rollover you still have the TSP monthly payment option available if it becomes necessary.
Under the 4% rule you simply multiply your TSP account balance by 4% to determine the maximum annual withdrawal for the first year. Each year there-after you will give yourself a small cost of living raise based on the consumer price index.
For example: If your TSP balance is $150k your 1st years maximum annual withdrawal will be $6k or $500 per month. If the CPI is 2% in the second year you will multiply $500 x 1.02 to come up with your new monthly payment of $510. If the CPI in the 3rd year is 1%, your new monthly payment will be $515 (510 x 1.01).