One of the biggest challenges facing federal employees today is making sure they don’t run out of money in retirement or have to drastically reduce their standard of living at some point in the future. This concern perpetuates the number one question we get from federal employees:
“What do I do with my TSP when I retire?”
Most employees have a plan for putting money in the TSP, but they don’t have a plan for getting it out. As a FERS/CSRS employee, your pension is automatically distributed for you. This means that once you retire, you’ll receive a pension check for the rest of your life. You don’t have to manage it like a mutual fund, worry about the stock market or be concerned about running out of this payment stream during retirement.
How you manage distributions determines how long your money will last
This isn’t the case with the TSP. Not only are you responsible for saving and managing the account to accumulate a balance in the first place, but you’re also responsible for managing the distribution of the account to create income from it. It is how you manage distributions that determine how long your money will last, how much tax liability you’ll incur and how much income you’ll receive along the way. With an imminent increase in taxes, increasing health-care costs, inflation and a higher longevity than past generations, it is more important than ever to maximize this important asset.
The TSP contains the most overlooked opportunity for Federal employees, but it is also prone to the most mistakes, many of which are irreversible and trigger significant and unnecessary taxes and/or unnecessary risk. Our goal here is to make you aware of the basic options available to you and to encourage you to learn more about the critical considerations around this topic.
The TSP contains the most overlooked opportunity for Federal employees, but it is also prone to the most mistakes, many of which are irreversible and trigger significant and unnecessary taxes and/or unnecessary risk.
TSP Withdrawal Options
When you retire from federal service, you’ll essentially have 4 different options for withdrawing and/or converting your TSP to income:
- Leave it in the TSP
- Cash it out
- Elect the government’s annuity option
- Rollover to an Individual Retirement Account (IRA)
- A combination of all of the above
Each option has its own considerations and should be fully understood. What’s important is NOT which option to elect, but which option will help you most effectively achieve your retirement needs and goals.
You will have only two chances to make withdrawals once you retire from federal service. You can do a full withdrawal or a partial withdrawal.
A full withdrawal can be done in a lump sum, payment streams, annuity or a combination of these options. Many employees direct their full withdrawal into a private IRA. Others elect a government annuity or payments based on life expectancy or a specific dollar amount.
A partial withdrawal gives you the option to make a withdrawal and leave the remaining balance in your TSP. This can only be done one time. Once you exercise a partial withdrawal, you’ll only have one remaining withdrawal.
Age Based In-Service Withdrawal
Many employees have called this option the best-kept secret. It allows you to make a one-time withdrawal from your TSP while you are still working. However, unless you direct the withdrawal to another qualified plan/IRA you will trigger a tax liability. To meet eligibility you must be age 59. Many employees exercise this option by doing a trustee to trustee transfer of a portion of their TSP to begin coordinating a distribution plan that will optimize their nest egg in retirement.
Far too many employees neglect the importance of creating a formal distribution plan with the money they have saved…
Consequently these employees either run out of TSP retirement savings or forfeit substantial growth and/or protection they could have enjoyed in retirement. In working with literally thousands of federal employees on a one-on-one basis it has become obvious that what employees are really asking is, “how can I use my TSP and convert it to income so I don’t run out of money in retirement?” And while the answer to this question is different for everybody, many of the principles are the same. All too often people seek the right answers but fail to ask the right questions.
Your TSP is one of the most critical pieces to your retirement picture. Let Federal Benefits Group offer their expertise and help you understand what options are available to you and how each one effects your big picture goals during retirement.
Navigating the Federal benefit system can be confusing and overwhelming. Don’t take chances with your future and your retirement. Federal Benefits Group can provide you with the knowledge, information and advice to make the right decisions.
Call us today at (877) 317-4167 to secure your FREE counseling session appointment to review your federal benefits and retirement outlook!