Beware the Quirks of the TSP in retirement
The TSP (Thrift Savings Plan) is a retirement savings and investment plan for Federal employees. It offers the kind of retirement plan that private corporations offer with 401(k) plans.
Here is a little information about he investment options in the TSP.
The TSP funds are not the typical mutual fund even though the C, F, I, and S index funds are similar to mutual fund offerings.
The C Fund is designed to match the performance of the S&P 500
The F Fund’s investment objective is to match the performance of the Barclays Capital U.S. Aggregate Bond Index, a broad index representing the U.S. bond market.
The I Fund’s investment objective is to match the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index.
The Small Cap S Fund’s objective is to match the performance of the Dow Jones U.S. Completion Total Stock Market Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index.
The G Fund is invested in nonmarketable U.S. Treasury securities that are guaranteed by the U.S. Government and the G Fund will not lose money.
One advantage of the TSP is that the expenses of the funds are very low. However, if you plan to keep your money in the TSP after you retire you need to understand your options because there are traps for the unwary.
The irrevocable annuity option.
This option provides you with a monthly income. You can choose an income for yourself or a beneficiary – such as your spouse – that lasts your lifetime or the lifetime of the beneficiary. The payments stop at death. Once your annuity starts, you cannot change your mind.
Limited withdrawal options.
You can’t take money out of your TSP whenever you want. When it comes to taking money out you have two options.
- One time only partial withdrawal. You have a one-time chance to take a specific dollar amount from your account before taking a full withdrawal.
- Full withdrawal. You can choose between a combination of lump-sum, monthly payments or a Met-Life annuity.
Limited Monthly Payment Changes
If you take monthly payments from your TSP as part of your full withdrawal option you can change the amount you receive once a year, during the “annual change period” but it takes effect the next calendar year. If you choose this option, make sure that you know how much you will need for the coming year.
Proportionate distribution of funds
When you take money out of your TSP you have no choice over which fund is liquidated to meet your income needs. It comes out in proportion to which your money is invested. This means you can’t manage your TSP and decide which of the funds you will access to get your distribution.
If you want to give yourself greater flexibility once you retire you have the option of rolling the TSP assets into a rollover IRA without incurring any income tax.