The TSP is a vital piece of the retirement plan for FERS retirees, but are you familiar with the intricacies of the TSP? Can you answer such questions as, “when can I access my TSP?” “What is the importance of Roth TSP?” “What will be the tax burden on my TSP funds when I retire?” The answers to these questions and many more are addressed in November’s book of the month, The Thrift Savings Plan Demystified.
The Thrift Savings Plan Demystified offers practical tips and easy-to-understand explanations of the Thrift Savings Plan. TSP is a key element of the retirement picture for federal retirees and therefore should not be overlooked. The choices you make today, especially with your TSP, have permanent effects on your income in retirement. The Thrift Savings Plan Demystified is an excellent tool that clarifies how the TSP works, addresses when you can access your funds, and explains the importance of a Roth TSP.
ARE YOU CONSIDERING CONVERTING YOUR TSP INTO AN ANNUITY?
One option FERS retirees have is to convert their TSP into an annuity, thereby gaining an income stream throughout retirement. Does this make since for you? The Thrift Savings Plan Demystified addresses that question below.
Converting your TSP into an immediate annuity with a fixed payment made to the annuitant for the term of the contract is a possibility. However, immediate annuities are the least commonly used option due to the complexity and inflexibility of the annuity choices.
In the simplest of terms, choosing an immediate annuity means exchanging your lump sum for an income stream. There are pros and cons involved with this.
The positive aspect of taking an annuity is that you secure a guaranteed income stream for yourself and possibly your spouse for as long as one of you lives. In simple terms, you are buying a sense of safety from the provider.
The downside of buying an immediate annuity is that you typically do not get increases that can keep pace with inflation. Also, if you annuitize the traditional TSP, you will pay tax on every withdrawal forever.
Be careful in making such a selection. You lose all control as you battle your two enemies in retirement: taxes and inflation.
HOW WILL YOU USE THE TSP?
FERS retirees generally receive both a FERS pension and Social Security benefit. These two income streams can often cover the daily costs of living such as house payments, bills, etc. In some cases, this leaves federal retirees with a large sum of money in their TSP that they don’t have to use to meet daily expenses. In this case, I sometimes see federal retirees use the TSP not as an income stream, but as a lifestyle supplement. This may be to purchase a new car, go on trips, spend on grandchildren, or cover medical expenses. What will you use your TSP for?”