Options for Withdrawing Funds from the Thrift Savings Plan: Option 2 – TSP Annuity

This is the second of four FEDZONE columns discussing TSP withdrawal options that are available to all separated Thrift Savings Plan (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.

This column explains TSP life annuities, another withdrawal option for separated TSP participants. It needs to be emphasized that a TSP life annuity purchased with TSP account funds is not the basic annuity that a retired CSRS or FERS employee receives starting immediately after the employee retires. Nor is the TSP life annuity the military retirement pay that retired members of the uniformed services receive when they retire from the uniform services.

What is a TSP life annuity?

A TSP life annuity is not like a TSP account,  a traditional IRA or a Roth IRA, certificate of deposit, a brokerage or a bank account. When a separated 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 disadvantages associated with a TSP life annuity.

Amount of the TSP 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 that is used to purchase the TSP life annuity.
• The participant’s age when the annuity is purchased (and 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 a TSP life annuity are encouraged to go onto the TSP web site at www.tsp.gov and 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 withdrawals.

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 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 TSP 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:

Example 1. TSP participant Sheldon’s account balance 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.

TSP life annuity options 

Through the TSP’s annuity provider, 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 TSP participant’s spouse with level payments.

These different types of TSP annuities are  below, followed by a description and discussion of several additional annuity features that a separated TSP participant can choose. Note that the more features a TSP participant selects for his TSP life annuity, the less monthly payments the TSP annuity will provide. Only one type of annuity can be purchased per each withdrawal request.

Single life and joint life TSP annuities 

An annuity that provides monthly payments only to the separated TSP participant as long as he or she lives is a single life annuity. Certain single life annuity options; namely, (1) cash refund and (2) ten-year certain, provide for a beneficiary who may receive payments after the death of the 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 TSP participant and the person with whom the participant chooses to share the participant’s annuity (the participant’s joint annuitant) are alive, is called a joint life annuity.

If the TSP participant chooses the cash refund options, a named beneficiary will receive the balance in the annuity after the participant and joint annuitant have both died. In most cases, the joint annuitant is the participant’s spouse. When either the participant or the joint annuitant dies first, 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 depends 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  the TSP 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 or adopted 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 participant or the joint annuitant) is the same as the annuity payment while both TSP participant and joint annuitant are alive. However, the amount of the monthly payments that the TSP participant 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 surviving annuitant -whether the surviving annuitant is the TSP participant or the joint annuitant is decreased to 50 percent of the annuity payment while the TSP participant and joint annuitant are both alive.