Putting TSP Withdrawal Decisions in Context

On separation for retirement or other reasons, you will have several options for dealing with your Thrift Savings Plan account. You can withdraw it as a lump sum, in equal monthly payments, as an annuity, or in a combination of those. That decision typically need not be made until after the year you turn age 70 1/2. A basic, but largely overlooked, factor inherent in the choices presented is whether or not you want to continue doing business with the TSP.

If you designate a total withdrawal under either the lump sum or annuity options, you no longer will be a TSP investor (partial withdrawals are allowed except for those who took an in-service age-based withdrawal). If you choose an annuity, the money is turned over to the annuity provider and any questions or problems you have will be handled by them. Similarly, if you take a lump sum, any issues regarding the money will be the responsibility of whatever investment provider you use.

This could be a consideration if you like the way the TSP does business with you, in terms of its responsiveness to questions, availability of information, administrative expenses and so on. You might not get the same level of service elsewhere. You also might not be able to structure your withdrawal in the same way elsewhere.

On the other hand, you might get superior service and more attractive options elsewhere. The TSP’s investment choices are limited, when compared with similar retirement savings plans, and although the TSP has the authority to offer a wider range of choice there is no sign that it intends to do so.

While you could take out your TSP account as a lump sum and then buy an annuity with it yourself from some private provider, you likely wouldn’t get as good a deal as you would purchasing it directly through the TSP program. You might not get the full range of features available with a TSP annuity, and the payments likely would be lower because of sales commissions and other up-front charges. And taking a lump sum to buy an annuity elsewhere could have tax consequences that would severely limit the amount you have to work with.

On the other hand, if you find the TSP too limiting in terms of investment and withdrawal choices, you may well want to move your money out of it, for example by having the money transferred to an individual retirement account. Before you do that, note that the TSP imposes very low administrative fees for managing your account—only half or less of the fees common among mutual funds and other types of investments. And with the TSP, you also have the security of knowing you’re in a program that is subject to regular and rigorous scrutiny by Congress and regulatory agencies.