Thrift Savings Plan (TSP) Life Annuity Guide

Learn how the Thrift Savings Plan (TSP) Life Annuity can provide a reliable income stream in retirement, helping you maximize your military pension. Explore essential details such as payout options, eligibility requirements, and strategic considerations to fully utilize your benefits.
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One of the biggest financial decisions military and government retirees face is what to do with the funds in their Thrift Savings Plan (TSP). Participants in the TSP have multiple options when they leave government service. These options give you a lot of flexibility with your future and your decision should be based on many individual factors. For example, if you have enough monthly income through your pension(s), Social Security, and other income streams and investments, 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. Of course, you may also find that you will need to tap into your TSP funds to pay your living expenses during retirement.

There are a few ways you can do that, including taking a lump sum withdrawal, electing to withdraw a fixed amount from your portfolio each month, or, if you prefer a little more stability, you can elect to purchase an annuity with the funds in your TSP account. Or you can choose do a combination of these withdrawal options. We have covered most of these topics in previous articles, but we haven’t done a detailed explanation of the TSP Life Annuity option, which we will cover here.

What is the TSP Life Annuity?

An annuity is simply a fixed payment made to someone over a specific time period, usually on a monthly or annual basis, and often for the remainder of their life. Annuities are normally purchased from insurance companies, which then invest the money and pay you a monthly amount based on your agreement at the time of purchase (there are many factors that go into how much an annuity will pay out). The Thrift Savings Plan Life Annuity is managed by MetLife Insurance Co, which has been running the TSP annuity program since its inception.

TSP Life Annuity Eligibility: According to the TSP website: 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 – Single and Joint

There is no one-size-fits-all annuity, even with the options available to TSP participants. There are many options you can choose when deciding how to purchase your annuity. And as you might imagine, the options you choose will affect your monthly payout. Let’s look at the annuity options available to you through the Thrift Savings Plan:

A Single Life Annuity covers only the individual. When the person who buys the annuity passes away, the payments stop.

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

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

  • 50% Survivor Annuity. The 50% Survivor Annuity option pays out half the original monthly payment after either person passes away, 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 a joint life annuity with the 50 percent survivor benefit. 
  • 100% Survivor Annuity. The 100% Survivor Annuity pays out the same amount of money each month after one of the members dies, regardless of whether the annuitant or the joint annuitant dies first. The 100% Survivor Annuity typically pays less per month than the 50% Survivor Annuity.

TSP Life Annuity Payment Options

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

  • Level payments are a fixed monthly payment that doesn’t take inflation into account. If your payment is $1,000 a month in year one, it will remain that way until the annuity has run its course.
  • Increasing Payments can increase with the Consumer Price Index (CPI). However, annual increases are capped at 3%, regardless of how much the CPI increases in any given year. On the flip side, your annuity will never decrease. (Deflation is very rare, so chances are good your annuity will increase in value in most years, even if it is only a small increase). Increases are assessed each year on the anniversary of your first annuity payment. So if your annuity starts at $500 a month, it will never go lower than that amount, and each year it can compound to a higher monthly payment.

When choosing between these two options, it’s important to note that the Level Payment Option usually starts out at a higher monthly payment than the Increasing Payments Option. But the Increasing Payments option has the opportunity to grow larger over time. You will have to run some numbers and look at other factors to determine which is the better solution for you. Note: The Increasing Payments option is not available to joint annuitants that aren’t a spouse; only the Level Payments option is available.

Annuity Features for Beneficiaries

The What-if? factor often plagues people when they are considering an annuity. You may say to yourself, “What if I die before the annuity has paid out much money? I would have been better off not buying it and leaving my money in a different investment!”

That is a rational thought, and you wouldn’t be alone thinking it. The TSP Annuity allows annuitants to name a beneficiary or beneficiaries on their TSP Withdrawal form. There are two options available, the Cash Refund Option and the Ten-Year Certain Option.

  • Cash Refund Option. 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 your annuity has been paid out, the remaining amount will be paid to your beneficiary, or beneficiaries, in a lump sum. You can add this feature if you purchase a single life or a joint life annuity, and with level or increasing payments.
  • Ten-Year Certain Option. This option ensures you get at least 10 year’s worth of value out of your investment. If you die before receiving annuity payments for a 10-year period, your monthly annuity payments will continue to your named beneficiary, or beneficiaries, until the 10-year period is met. If you live beyond the 10-year period, you will continue to receive payments, but no annuity payments will be made to your beneficiaries when you die. You can add the ten-year certain feature if you purchase a single life annuity with either level or increasing payments. You cannot choose this option if you purchase a joint life annuity.

These options are designed to reduce the risk of the annuitant. But it comes with a price: the monthly annuity payments are usually lower when you select either of these options compared to not selecting them.

Taxes on Your TSP Annuity

Taxes are a huge part of retirement planning. The type of TSP account you have will often dictate how your taxes work.

  • Traditional TSP Account: Annuity payments from a Traditional TSP plan is taxed the same way you would tax withdrawals from a Traditional IRA or Traditional 401k plan: the income is taxed as ordinary when it is withdrawn.
  • Roth TSP Account: Annuity payments from Roth TSP contributions are not taxed, because the contributions that were made to that account were made with money that had already been taxed. The annuity payments from Roth TSP earnings are not taxed if they are qualified earnings, which occur when two conditions have been met: 1) 5 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 TSP Contributions: If you have tax-exempt money in the traditional balance of your uniformed services TSP account, and you choose to purchase an annuity, the annuity provider will calculate the amount of tax-exempt contributions that will be paid as part of the traditional portion of your annuity payment and will inform you of this amount. The tax-exempt portion of your payments will be spread out based on your life expectancy (and that of your joint annuitant, if applicable). (source)

Factors that Affect the Amount of Your TSP Annuity

There are many factors that affect how much money you will receive from your annuity purchase. Some of the more important factors include:

  • The amount of money you use to purchase the annuity. (How much of your TSP are you using to purchase the annuity?)
  • The type of annuity you select. (Single Life, Joint Life?)
  • Your age at the time of purchase (and the age of your joint annuitant if you choose that option).
  • The interest rate index when your annuity is purchased.
  • Additional features of the annuity.

The Thrift Savings Plan website offers a Retirement Income Calculator to help you understand how much money you might receive when you purchase an annuity.

Pros and Cons of TSP Life Annuities

Annuities aren’t perfect investments. Here are some basic pros and cons, depending on your situation.

Benefits of a Life Annuity:

  • Lifetime payments without the stress of dealing with the stock markets or the fear of running out of money.
  • Ability to create a budget based on the amount of money you expect to receive each month from your annuity.
  • Option to purchase a joint annuity which will make a monthly payment to your survivor in the event you die first.
  • Option to purchase inflation protection to offset future inflation and protect the purchasing power of your annuity payments.

Disadvantages of a Life Annuity:

  • Annuities are permanent. You can’t change your annuity once it has been purchased.
  • Purchasing power of life annuity will decrease over time if you choose a fixed monthly payment over a payment with inflation protection.
  • Participants are unable to make large lump sum withdrawals against the principal, which is something they can do with other retirement plans.
  • An annuity may not be necessary if the retiree has a military or government pension, in addition to Social Security or other income streams.

Considerations Before Buying a TSP Life Annuity

How you handle your retirement will likely be one of the largest financial decisions you will make. It is strongly recommended that you speak with a retirement specialist or financial planner before purchasing a life annuity. You will need to consider several factors including:

  • Your current and expected retirement income from pensions, Social Security, investments, businesses, employment, etc.
  • Your age, health, and life expectancy
  • Your need for immediate monthly cash flow, versus the ability to live off your current income.
  • Retirement goals
  • Your desire to leave money to your descendents
  • And more.

Keep in mind that once you buy a life annuity, it can’t be undone. It also doesn’t have to be an all or nothing proposition. You can purchase an annuity with a portion of the funds in your TSP; you don’t have to use 100% of the funds. So take your time with the decision. It may be the biggest financial decision you ever make.

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    Good information. I am turning 70 in January 2018. Do I have to buy an annuity or how much do I have to take out of my TSP for monthly payments?

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