Thrift Savings Plan (TSP) Life Annuity Guide

One of the biggest financial decisions military and government retirees face is how to manage the funds in their Thrift Savings Plan (TSP). Participants in the TSP have multiple options when they leave government service, and your decision should be based on a range of individual factors.

For example, if you have enough monthly income through your pension, Social Security, and other income streams, you may be able to leave your funds in the TSP to continue growing. You can also elect to transfer those funds to another retirement account. Or you may find that you need to tap into your TSP funds to cover living expenses during retirement.

There are several ways to do that, including taking a lump sum withdrawal, electing to withdraw a fixed amount each month, or purchasing an annuity with the funds in your TSP account. You can also choose a combination of these options. This guide focuses on the TSP Life Annuity option, how it works, what it costs, and whether it makes sense for your situation.

What is the TSP Life Annuity?

An annuity is a fixed payment made to someone over a specific time period, usually monthly, and often for the remainder of their life. Annuities are purchased from insurance companies, which invest the money and pay you a monthly amount based on your agreement at the time of purchase.

The TSP Life Annuity is managed by MetLife Insurance Co., which currently holds the TSP annuity contract. When you purchase a TSP Life Annuity, you are purchasing what is known as a single premium immediate annuity. You hand over a lump sum from your TSP balance, and MetLife converts it into guaranteed monthly payments for life.

You are eligible to purchase a TSP life annuity if you:

• Are separated from Federal civilian employment or the uniformed services

• Purchase an annuity with $3,500 or more of your vested account balance (applies to traditional and Roth balances separately)

Types of TSP Life Annuities

There is no one-size-fits-all annuity, even within the TSP. The type of annuity you choose will significantly affect your monthly payout.

Single Life Annuity

A Single Life Annuity covers only the individual. When the person who purchased the annuity passes away, the payments stop. This option typically pays the highest monthly amount but provides no ongoing benefit to a surviving spouse or other beneficiary.

Joint Life Annuity

A Joint Life Annuity covers the individual and their spouse or another person chosen as a joint annuitant. If the joint annuitant is not your current or former spouse, they must be a close relation with an insurable interest in you, meaning they stand to benefit financially from your continued living.

Payments in a joint annuity continue as long as at least one member of the joint annuity is still living. There are two types:

50% Survivor Annuity. Pays out half the original monthly payment after either person passes away, regardless of whether the survivor is the principal member or the joint annuitant. If you name a joint annuitant other than your spouse who is more than 10 years younger than you, you must choose the joint life annuity with the 50% survivor benefit.

100% Survivor Annuity. Pays out the same monthly amount after one of the members dies, regardless of who dies first. The 100% Survivor Annuity typically pays less per month than the 50% option since the insurance company is taking on more risk.

TSP Life Annuity Payment Options

You have two options regarding your monthly annuity payments: level and increasing.

Level Payments

Level payments are a fixed monthly amount that does not take inflation into account. If your payment is $1,000 per month in year one, it will remain $1,000 for the life of the annuity. This option typically starts at a higher monthly payment than the increasing payments option.

Increasing Payments

Increasing payments can grow annually with the Consumer Price Index (CPI). However, annual increases are capped at 2%, regardless of how much the CPI increases in any given year. On the other hand, your annuity will never decrease, even in years of deflation, your payment stays the same. Increases are assessed each year on the anniversary of your first annuity payment.

When choosing between these two options, keep in mind that the level payment option starts higher but stays flat, while the increasing payment option starts lower but has the opportunity to grow over time. You will need to run the numbers and consider your specific circumstances to determine which is the better solution.

Note: The increasing payments option is not available to joint annuitants who are not a spouse — only the level payments option is available in that case.

Annuity Features for Beneficiaries

A common concern with annuities is the fear of dying before the annuity has paid out much money. The TSP addresses this with two optional beneficiary features, though selecting either will typically result in a lower monthly payment.

Cash Refund Options

The Cash Refund Option ensures you get your money’s worth out of your investment. If you and your joint annuitant, if applicable, die before the amount of your TSP balance used to purchase the annuity has been paid out, the remaining amount will be paid to your beneficiary or beneficiaries in a lump sum. This feature can be added to a single life or joint life annuity with either level or increasing payments.

Ten-Year Certain Option

This option ensures you receive at least 10 years of annuity payments. If you die before receiving payments for a 10-year period, your monthly annuity payments will continue to your named beneficiary until the 10-year period is met. If you live beyond 10 years, you continue receiving payments, but no annuity payments will be made to your beneficiaries when you eventually pass away. This feature is only available with a single-life annuity; you cannot choose it if you purchase a joint-life annuity.

How TSP Annuity Payments Are Taxed

The tax treatment of your TSP annuity payments depends on the type of TSP account used to purchase the annuity.

Traditional TSP Account

Annuity payments from a Traditional TSP are taxed as ordinary income when received — the same way withdrawals from a Traditional IRA or Traditional 401(k) are taxed.

Roth TSP Account

Annuity payments from Roth TSP contributions are not taxed since the contributions were made with after-tax money. Earnings on those contributions are also tax-free if they are qualified, meaning two conditions have been met: 1) five years have passed since January 1 of the calendar year in which you made your first Roth contribution, and 2) you have reached age 59½, become permanently disabled, or have died.

Military Combat Zone Tax-Exempt Contributions

If you have tax-exempt money in the traditional balance of your uniformed services TSP account and choose to purchase an annuity, the annuity provider will calculate the amount of tax-exempt contributions included in each payment and inform you of that amount. The tax-exempt portion will be spread over your life expectancy and, if applicable, your joint annuitant’s life expectancy.

Factors that Affect Your TSP Annuity Payment Amount

Several factors determine how much you will receive each month from your TSP annuity:

• The amount of money you use to purchase the annuity
• The type of annuity you select
• Your age at the time of purchase and the age of your joint annuitant, if applicable
• The interest rate index at the time of purchase
• Any additional features you select

The TSP website offers a Retirement Income Calculator to help you estimate how much you might receive based on your specific situation.

Pros and Cons of the TSP Life Annuity

Benefits of a TSP Life Annuity:

• Guaranteed lifetime payments without the stress of managing investments or the fear of outliving your money
• Predictable monthly income that makes budgeting in retirement straightforward
• Option to purchase a joint annuity that continues payments to your surviving spouse or joint annuitant
• Option to add inflation protection through the increasing payments feature

Disadvantages of a TSP Life Annuity:

• Annuities are permanent — once purchased, you cannot change or undo the decision
• The purchasing power of a fixed level payment will decrease over time due to inflation
• You cannot make large lump sum withdrawals against the principal as you could with other retirement plans
• A TSP annuity may not be necessary if you already have a military or government pension combined with Social Security and other income streams, the guaranteed income may be redundant

Should You Buy a TSP Life Annuity?

How you handle your TSP at retirement will likely be one of the largest financial decisions you make. Here are the most important considerations before purchasing a TSP Life Annuity:

• Your current and expected retirement income from pensions, Social Security, investments, and employment
• Your age, health, and life expectancy
• Your need for immediate monthly cash flow versus the ability to live off existing income
• Your retirement goals and lifestyle expectations
• Your desire to leave money to your heirs

For military retirees who already receive a pension, which provides guaranteed monthly income for life, the need for a TSP annuity may be less pressing than for civilian federal employees without a pension. However, for those who want to maximize guaranteed income and simplify their retirement cash flow, the TSP annuity can be a valuable complement to existing income streams.

Keep in mind that a TSP Life Annuity does not have to be an all-or-nothing decision. You can purchase an annuity with a portion of your TSP balance and use the remainder for other withdrawal options. Take your time with this decision, and consult with a fee-only financial planner who is familiar with military and federal employee benefits before committing.