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What Should Federal Employees Do With The TSP After Retirement?

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What should I do with my TSP after going to federal service? Yes, this is the most common question I get from people approaching retirement, and rightly so.

Not surprisingly, the answer is another “depends,” but to make it easier, I’ll divide the options into three choices so we can see the pros and cons of each.

The first thing to remember is that you don’t have to do anything with your savings plan. And you actually I can not do anything about it until you are retired for at least 30 days. When thirty days have passed, you have some options.

Option # 1 – TSP rent

TSP rent is different from FERS annuities – actually completely different. TSP annuity involves handing over money to your TSP insurance company (Met Life) in exchange for a guaranteed payment for the rest of your life.

There are many different combinations of direct annuities such as:

  • Just life
  • Life with a certain period
  • Living together
  • Life with the rest

A lifetime immediate annuity will provide you with the highest monthly payment. The more options you add, the more the monthly annuity decreases. For example, a lifetime annuity may have a payment of $ 3,000 per month, but a joint lifetime annuity would have a reduced payment of about $ 2,700 per month.

With each of the above immediate annuity options, the person waives access to the balance on their TSP. Living with the remaining annuity would provide income for the life of the insured and pay the remaining balance (initial purchase amount less the total monthly payments) to the beneficiary after his death.

The main benefit of an annuity is that you get a guaranteed income stream for your life. But, as a FERS pensioner, you will already have two guaranteed income streams in the FERS annuity and social security. Then you may not need to lose access to your investments to guarantee the rest of your income.

Pros:

  • Guaranteed lifetime income

Against:

  • Loss of access to principal
  • Depending on interest rates
  • Inflation could reduce purchasing power

Video: FedSmith author Brad Bobb explains options for what you can do with your TSP after retirement

Option # 2 – Leave money in the TSP

In retirement, you have the opportunity to leave money in TSP, which is really no different than when you work. The big differences are that (1) you can no longer contribute and (2) you cannot take out loans at your own expense. In addition, your investment opportunities are exactly the same and you can still change your account balance, just like when you worked.

One of the biggest benefits of leaving money in a retired TSP is access to your funds before age 591/2. If you retire in the year you turn 55 or later, you have immediate access to your TSP without penalty. If you are an employee of a special category (SCE) and if you retire in the year you turn 50 or later, then you also have direct access to your TSP.

Pros:

  • Maintain the TSP in the same way you are used to
  • Access to your G fund
  • Access your funds before the IRA and without penalty

Against:

  • Limited to your five investment opportunities
  • Minimum required distribution from Roth TSP
  • You cannot choose from which funds you withdraw money
  • Possible user questions

Option no. 3 – Transfer to IRA

The third option is to transfer funds from your TSP to the IRA. It is possible to make a partial or full transfer to the IRA without penalty. Forms TSP 70 and TSP 77 are used for full and partial withdrawals. Each of these forms will be found in your TSP account.

But TSP is cheap; why would you want to switch from it? Simply put, TSP is no longer cheap compared to other major caregivers. Looking back 10 years, TSP was considered cheap compared to other caregivers, but that is no longer the case. It is now possible to obtain very similar funds or indices as your TSP within an IRA. The only investment unique to your TSP is your G fund.

There are several advantages to transferring money to an IRA. The first and most obvious is that you have unlimited investment opportunities within the IRA.

Another advantage of switching to an IRA is increased flexibility in withdrawing funds. When a retiree withdraws funds from his TSP, the funds go out according to the way that person is invested. In other words, if a person has 70% C fund and 30% G fund, then their withdrawal will come from 70% C fund and 30% G fund.

With the IRA, a retiree can choose to withdraw funds from any investment he or she wants. This option is especially nice if you plan to use bucket strategy, or cataract strategy, in retirement. Regardless of your withdrawal strategy, the IRA is more flexible to withdraw money.

In addition, moving money from Roth TSP to Roth IRA can eliminate the required minimum distribution (RMD). RMDs are required by the Roth TSP, but are not required by the Roth IRA. This not only gives you more flexibility in withdrawing money, but also allows you to let the money grow without income tax for a longer period of time. This is a particularly financially smart way to leave more inheritance to your heirs.

Moving funds from TSP to IRA also gives you the ability to make Roth conversions. TSP does not allow conversions in the plan.

The final benefit applies to children who can inherit your account. In the event of the death of the TSP account holder, the living spouse may open a BPA account of the beneficiary participant and retain the TSP. When a spouse dies, new beneficiaries must withdraw funds from the TSP. These funds “cannot be transferred or transferred to any type of IRA” according to the TSP website.

This lack of TSP could cost the user tens of thousands of dollars, but an IRA user can move funds to an inherited IRA and leave them there for up to 10 years. The benefit of leaving funds in the account for 10 years would be to withdraw the withdrawal within 10 years in order to allocate and reduce the tax amount.

If a TSP beneficiary has passed with the remaining $ 500,000 in the TSP, that beneficiary must withdraw all funds within 60 days and will be taxed with $ 500,000. Should the same scenario happen with funds in an IRA, beneficiaries could move the funds to an inherited IRA and make smaller allocations over a period of 10 years. They could also have the potential to achieve higher deferred tax growth over a 10-year period.

Pros:

  • More investment opportunities
  • Flexibility with investment withdrawal
  • There are no RMDs from the Roth IRA
  • More flexibility for people who inherit your account
  • Roth conversions are an option

Against:

  • Restricted access before 59 ½
  • No access to G fund
  • If you move all the money out of the TSP, you can’t get it back

Summary

Deciding what to do with your TSP after retirement is important. It is also not a decision to be rushed because there is no deadline that must be met. Here are some highlights of the three options above:

  • A current annuity is probably not a good option for federal employees.
  • Yes NO transfer all your money from the TSP to the IRA if you think you will need access to funds before 591/2.
  • Yes NO move all the money out of the TSP if you think there is a chance that you will want to return the funds in the future.
  • TSP is not the cheapest guardian available.
  • The IRA is more flexible to withdraw investments and transfer assets.
  • Roth IRA can eliminate RMDs.

Please do not listen to the advice of your colleagues on what you should do with your savings plan. TSP is a big part of your retirement, so take your time and make the decision that is best for you.

© 2021 Brad Bobb. All rights reserved. This article cannot be reproduced without the express written consent of Brad Bobb.

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