Learn all about TSP annuities in part 3 of Ed’s 4-part feature about withdrawal options for the Thrift Savings Plan
Ed Zurnforfer-
This is the third of four FEDZONE columns discussing the withdrawal options that are available to all “separated” Thrift Savings Plan (TSP) participants and “beneficiary” TSP participants. In these columns, a “separated” TSP participant means a civilian federal employee or a member of the uniformed services who has separated from that employment. A “beneficiary” TSP participant is a spouse beneficiary of a deceased civilian or a deceased uniformed services TSP participant who has a TSP account established in his or her name.
This column explains TSP life annuities, another withdrawal option for separated TSP participants and beneficiary TSP participants. It needs to be emphasized that a TSP life annuity purchased with TSP account funds is not the ‘basic annuity” or “guaranteed pension” that a retired CSRS or FERS employee receives starting immediately after the employee retires. Nor is the TSP life annuity the military retiree pays that member of the uniformed services receive when they retire.
What is a TSP Life Annuity?
A TSP life annuity is not like a TSP account, a traditional or Roth IRA, certificate of deposit, a brokerage or a bank account. When a separated TSP participant or a beneficiary TSP participant purchases a TSP life annuity, the participant gives up control of the TSP money used to purchase the annuity. In exchange, the participant receives lifetime monthly payments from the TSP annuity provider. But as will be explained, there are some definite disadvantages associated with a TSP life annuity.
Amount of a Participant’s Life Annuity Payments
The factors that affect the amount of a participant’s monthly annuity payments include the following:
- the amount of the participant’s TSP account used to purchase the TSP life annuity;
- the participant’s age when the annuity is purchased, and with a separated TSP annuitant, the age of the separated participant spouse’s age in case a joint annuity is purchased.
- the annuity options the participant chooses; and
- the “interest rate index” when the annuity is purchased.
Those separated TSP participants and beneficiary TSP participants who are interested in purchasing are encouraged to go onto the TSP website and to use the “TSP annuity calculator” to estimate their monthly TSP annuity payments. They will have to input certain information in order to obtain an estimate of their monthly payments. The exact amount of their monthly payments cannot be determined until the date of the TSP annuity purchase.
Purchasing a TSP Annuity
The process for purchasing a TSP annuity using money from a separated TSP annuitant or from a beneficiary TSP annuitant’s TSP account is the same as for requesting TSP installment payments or requesting a single (partial) withdrawal. Namely, the TSP participant must log into the “My Account” section at https://www.tsp.gov and click “Withdrawals and Changes to Installment Payments”. The online tool is then used for requesting any type of TSP withdrawal.
The minimum amount with which to purchase a TSP annuity is $3,500. This minimum applies separately to each balance – the traditional TSP and Roth TSP accounts used to purchase the annuity. The $3,500 minimum TSP account balance comes into play if a participant has both traditional TSP and Roth TSP balances and the participant chooses not to have the money for the annuity purchase come solely from one TSP account or the other. When that happens, the TSP will take the money from the participant’s two TSP account balances “pro-rata”, meaning in the proportion they make up the total account balance.
If a separated or beneficiary TSP participant chooses to have TSP funds for an annuity purchase taken from both the traditional TSP account balance and from the Roth TSP account balance, then the following rules apply:
- If using one’s total account balance to purchase the annuity and one of the balances is at least $3,500 but the other balance is not, then the TSP will purchase the annuity with the balance that is at least $3,500 and pay the other balance directly to the TSP participant as a cash payment.
- If the participant is using a portion of his or her account to purchase a TSP annuity and either of the TSP accounts has less than $3,500 then the TSP will reject the TSP participant’s TSP annuity request.
- If the result of the “pro-rata” calculation results in either the Roth TSP or the traditional TSP portion being less than $3,500, the TSP will proceed as if the participant does not have the minimum TSP account balance to proceed. The following example illustrates:
Sheldon account balances is $80,000 In his traditional TSP account and $20,000 in his Roth TSP account. Sheldon requests a TSP annuity of $10,000. The TSP will calculate $80,000/$100,000, or 80 percent, of $10,000 ($8,000) coming from his traditional TSP account and $20,000/$100,000, or 20 percent, of $10,000 ($2,000) coming from the Roth TSP. Since the $2,000 coming from the Roth TSP is less than $3,500, the TSP will reject Sheldon’s TSP annuity request of $10,000.
Life Annuity Options
Through the TSP’s annuity provider (Metropolitan Life Insurance Company), the TSP offers the following types of annuity options:
- Single life annuity with level or increasing payments;
- Joint life annuity with the separated TSP participant’s spouse with level or increasing payments;
- Joint life annuity with someone other than the separated participant’s spouse with level payments.
These annuities are described below, followed by a description and discussion of several additional annuity features that a separated TSP participant or a beneficiary TSP participant can choose. Note that the more features that are chosen when choosing a TSP annuity, the less in monthly payments the TSP annuity will provide. Only one type of annuity can be purchased per withdrawal request.
Single Life and Joint Life Annuities
An annuity that provides monthly payments only to the separated TSP participant or the beneficiary TSP participant as long as he or she lives is a single life annuity. Certain single life options; namely: “cash refund” and “ten-year certain” – provide for a beneficiary who may receive payments after the death of the separated or beneficiary TSP participant. But as will be shown below, the more features added to the single life annuity, such as increasing payments, “cash refund” and “ten-year certain”, the less monthly payment to the participant.
An annuity that provides monthly payments to the separated or beneficiary TSP participant and the person with whom the participant chooses to share the annuity. If the participant’s “joint annuitant” is alive, it is called a joint-life annuity.
If the participant chooses the cash refund options, a beneficiary may receive a payment after the participant and joint annuitant have died. In most cases, the joint annuitant is the participant’s spouse. When the participant or joint annuitant dies, monthly payments will be made to the survivor for his or her lifetime. The amount of the payment while the participant and the joint annuitant are alive and the amount of the payment to the survivor depend on whether the participant chooses a 100 percent or a 50 percent survivor annuity. A participant who chooses a joint-life annuity has to provide proof of the joint annuitant’s age.
If a participant chooses an annuity that provides for a joint annuitant other than the participant’s spouse, the joint annuitant must be either a former spouse or someone with an insurable interest in the participant. This means that the individual is financially dependent on the participant and could reasonably expect to derive financial benefit from the participant’s continued life. Blood relatives, but not relatives by marriage, who are closer than first cousins are presumed to have an insurable interest in the participant.
Two types of joint annuities are available:
- 100 percent survivor annuity. The amount of the monthly annuity payment to the survivor (either the TSP annuitant or the joint annuitant) is the same as the annuity payment while both TSP annuitant and joint annuitant are alive. However, the amount of the monthly payments that the TSP annuitant receives while the joint annuitant is alive is generally less than it would be compared to choosing a 50 percent survivor benefit.
- 50 percent survivor annuity. The amount of the monthly annuity to the survivor -whether the survivor is the TSP annuitant or the joint annuitant is to get 50 percent of the annuity while the TSP annuitant and joint annuitant are alive.
If a joint annuitant other than a spouse is named and the joint annuitant is more than 10 years younger than the TSP annuitant, then the TSP annuitant must choose a joint-life annuity with the 50 percent survivor benefit. The only exception is for a former spouse to when all or a portion of the TSP participant’s account is payable under a retirement benefits court order.
Level and Increasing Payment Annuities
Once the TSP annuitant decides on a single life or a joint-life annuity, the TSP annuitant can decide whether he or she wants to receive level or increasing payments. Choosing level payments results in the amount of the monthly annuity payments that remain the same from year to year. With a single life annuity, the separated TSP annuitant or the beneficiary TSP annuitant receives the same monthly payment for as long as he or she lives. With a joint-life annuity, a separated TSP annuitant receives the same monthly payment for as long as the separated TSP annuitant and joint annuitant are alive. The monthly payment to the survivor will depend on whether the separated TSP annuitant chooses a 100 percent survivor annuity or a 50 percent survivor annuity, but it will remain at the same monthly annuity amount for the life of the survivor.
Increasing payments is the amount of the monthly annuity that will increase by 2 percent on the anniversary date of the first payment. Payments from TSP annuities purchased before March 2, 2020 increase annually between zero and three percent, based on the Consumer Price Index. When TSP annuity payments start, they are smaller than they would have been had the TSP annuitant had selected level payments. However, the payments will increase every year. Increasing payments can be combined with either the single life annuity or the joint-life annuity with a spouse. Increasing payments cannot be chosen when the joint annuitant is not the TSP annuitant’s spouse.
Additional Annuity Features That Allow for Beneficiaries
Two additional annuity features allow payments to named beneficiaries. These features are the “cash refund” and the “ten-year certain” features which are discussed below. Note that when either of these features is chosen by the TSP annuitant, the monthly payments will be less than they would have been had the TSP annuitant chosen an annuity without either of these features.
- Cash refund. If the TSP annuitant and if applicable, the joint annuitant, die before the amount used to purchase the annuity has been paid out, any remaining amount in the annuity will be paid to the TSP annuitant’s designated beneficiary(ies) in a lump sum. For example, if the TSP annuitant purchased an annuity for $300,000 and the TSP annuitant, or both the TSP annuitant and joint annuitant in case of a joint annuity, die after receiving $200,000 in annuity payments, the designated beneficiary will receive a payment of $100,000. This feature can be combined with either a single life or a joint-life annuity and with level or increasing payments.
- Ten-year certain. If the TSP annuitant dies before receiving payments for a 10-year period, the payments will continue to a designated beneficiary for the rest of the 10-year period. If the TSP annuitant lives beyond the 10-year period, the TSP annuitant will continue to receive payments but no payments will be made to a beneficiary when the TSP annuitant dies. This feature can be combined with a single-life annuity or with either level or increasing payments. It cannot be combined with a joint-life annuity.
The table below summarizes the life annuity options and features:
* A married FERS or uniformed services participant must obtain his or her spouse’s waiver of the spouse’s TSP survivor annuity benefit if an option is chosen other than joint life with spouse, with level payments and 50% survivor annuity.
Summary of Annuity Options and Features
| Single Life | Joint Life with Spouse* | Joint Life with Other Survivor | ||||
| Level Payments | Increasing Payments | Level Payments | Increasing Payments | Level Payments | ||
| with no additional features or with cash refund feature or with 10-year certain feature | with no additional features or with cash refund feature or with 10-year certain feature | 100% survivor annuity or 50% survivor annuity or 100% survivor annuity with cash refund or 50% survivor annuity with cash refund | 100% survivor annuity or 50% survivor annuity or 100% survivor annuity with cash refund or 50% survivor annuity with cash refund | 100% survivor annuity** or 50% survivor annuity or 100% survivor annuity with cash refund** or 50% survivor annuity with cash refund |
** Available if joint annuitant is not more than 10 years younger than the participant.
To help better understand the various features and options available with TSP life annuities; an example is presented. An employee, John, age 59, retired from federal service on July 31, 2020, and in late August 2020 elected to use $250,000 from his traditional TSP account to purchase a TSP life annuity. Going to the TSP Web site, John accesses the TSP annuity calculator in order to get an estimate of his monthly TSP annuity income for two types of annuities, namely: (1) Single life (level payment with no cash refund), (level payment with cash refund), (level payment with 10-year certain), (increasing payment of 2.0 percent and no cash refund), (increasing payment of 2.0 percent with cash refund) and (increasing payment of 2.0 percent and 10-year certain); and (2) Joint life annuity with his wife Carol, age 57; (level payment, 100% survivor benefit, no cash refund). (level payment 50% survivor benefit, no cash refund); (level payment, 100% survivor benefit with cash refund), (level payment 50% survivor benefit with cash refund), (increasing payment of 2.0 percent with 100% survivor benefit and no cash refund), (increasing payment of 2.0 percent with 50% survivor benefit with no cash refund), (increasing payment of 2.0 percent with 100% survivor benefit with cash refund), and (increasing payment of 2.0 percent with 50% survivor benefit with cash refund). The monthly payment amounts for John aged 59 through age 77 following the annuity purchase date are presented in Chart I and Chart II:
Chart I (Single Life Annuity of $250,000 for John, age 59)
| Level Payments: | Increasing Payments: | ||||||
| Age | Basic features | With cash refund | With 10 year certain | Basic features | With cash refund | With 10 year certain | |
| 59 | $1,027.00 | $986.00 | $1,018.00 | $743.00 | $699.00 | $739.00 | |
| 60 | $1,027.00 | $986.00 | $1,018.00 | $758.00 | $713.00 | $753.00 | |
| 61 | $1,027.00 | $986.00 | $1,018.00 | $773.00 | $727.00 | $768.00 | |
| 62 | $1,027.00 | $986.00 | $1,018.00 | $789.00 | $741.00 | $784.00 | |
| 63 | $1,027.00 | $986.00 | $1,018.00 | $805.00 | $756.00 | $800.00 | |
| 64 | $1,027.00 | $986.00 | $1,018.00 | $821.00 | $771.00 | $816.00 | |
| 65 | $1,027.00 | $986.00 | $1,018.00 | $837.00 | $787.00 | $832.00 | |
| 66 | $1,027.00 | $986.00 | $1,018.00 | $854.00 | $803.00 | $848.00 | |
| 67 | $1,027.00 | $986.00 | $1,018.00 | $871.00 | $819.00 | $865.00 | |
| 68 | $1,027.00 | $986.00 | $1,018.00 | $888.00 | $835.00 | $883.00 | |
| 69 | $1,027.00 | $986.00 | $1,018.00 | $906.00 | $852.00 | $900.00 | |
| 70 | $1,027.00 | $986.00 | $1,018.00 | $924.00 | $869.00 | $918.00 | |
| 71 | $1,027.00 | $986.00 | $1,018.00 | $943.00 | $886.00 | $937.00 | |
| 72 | $1,027.00 | $986.00 | $1,018.00 | $962.00 | $904.00 | $955.00 | |
| 73 | $1,027.00 | $986.00 | $1,018.00 | $981.00 | $922.00 | $975.00 | |
| 74 | $1,027.00 | $986.00 | $1,018.00 | $1,000.00 | $940.00 | $994.00 | |
| 75 | $1,027.00 | $986.00 | $1,018.00 | $1,020.00 | $959.00 | $1,014.00 | |
| 76 | $1,027.00 | $986.00 | $1,018.00 | $1,041.00 | $978.00 | $1,034.00 | |
| 77 | $1,027.00 | $986.00 | $1,018.00 | $1,062.00 | $998.00 | $1,055.00 |
Chart II (Joint Life Annuity of $250,000 for John, age 59 and John’s wife Carol, age 57)
| Level Payments: | Increasing Payments: | ||||||||
| Age | 100% survivor | 50% survivor | 100% survivor with cash refund | 50% survivor with cash refund | 100% survivor | 50% survivor | 100% survivor with cash refund | 50% survivor with cash refund | |
| 59 | $858.00 | $1,004.00 | $850.00 | $984.00 | $575.00 | $716.00 | $569.00 | $964.00 | |
| 60 | $858.00 | $1,004.00 | $850.00 | $984.00 | $586.00 | $730.00 | $580.00 | $708.00 | |
| 61 | $858.00 | $1,004.00 | $850.00 | $984.00 | $598.00 | $745.00 | $592.00 | $722.00 | |
| 62 | $858.00 | $1,004.00 | $850.00 | $984.00 | $610.00 | $760.00 | $604.00 | $737.00 | |
| 63 | $858.00 | $1,004.00 | $850.00 | $984.00 | $622.00 | $775.00 | $616.00 | $751.00 | |
| 64 | $858.00 | $1,004.00 | $850.00 | $984.00 | $635.00 | $790.00 | $628.00 | $766.00 | |
| 65 | $858.00 | $1,004.00 | $850.00 | $984.00 | $647.00 | $806.00 | $641.00 | $782.00 | |
| 66 | $858.00 | $1,004.00 | $850.00 | $984.00 | $660.00 | $822.00 | $654.00 | $797.00 | |
| 67 | $858.00 | $1,004.00 | $850.00 | $984.00 | $673.00 | $839.00 | $667.00 | $813.00 | |
| 68 | $858.00 | $1,004.00 | $850.00 | $984.00 | $687.00 | $855.00 | $680.00 | $830.00 | |
| 69 | $858.00 | $1,004.00 | $850.00 | $984.00 | $701.00 | $872.00 | $694.00 | $846.00 | |
| 70 | $858.00 | $1,004.00 | $850.00 | $984.00 | $715.00 | $890.00 | $708.00 | $863.00 | |
| 71 | $858.00 | $1,004.00 | $850.00 | $984.00 | $729.00 | $908.00 | $722.00 | $880.00 | |
| 72 | $858.00 | $1,004.00 | $850.00 | $984.00 | $744.00 | $926.00 | $736.00 | $898.00 | |
| 73 | $858.00 | $1,004.00 | $850.00 | $984.00 | $758.00 | $944.00 | $751.00 | $916.00 | |
| 74 | $858.00 | $1,004.00 | $850.00 | $984.00 | $774.00 | $963.00 | $766.00 | $934.00 | |
| 75 | $858.00 | $1,004.00 | $850.00 | $984.00 | $789.00 | $983.00 | $781.00 | $953.00 | |
| 76 | $858.00 | $1,004.00 | $850.00 | $984.00 | $805.00 | $1,002.00 | $797.00 | $972.00 | |
| 77 | $858.00 | $1,004.00 | $850.00 | $984.00 | $821.00 | $1,002.00 | $813.00 | $992.00 |
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
