Take Your Thrift Savings Plan with You
The Thrift Savings Plan (TSP) gives those who serve in the military or work for the federal government the opportunity to save for retirement every payday. When your service ends, you'll need to decide what to do with the money you've saved in the TSP. Ensure your money continues working for you in the future by being informed.
Three Options
When your service ends, you'll have three primary choices for your TSP:
§ Withdraw it. For most people, this is a counterproductive option. If you withdraw your money and deposit it in your checking account, you'll face taxes — and possibly a penalty tax — if you're under 59½ years old. Most people are better off letting their money continue to grow.
§ Leave it in the TSP. While the government will let you keep your TSP account, you won't be able to add any more money to it. If you don't withdraw the full balance by age 70½, the government automatically converts your entire balance into a lifetime income annuity.
§ Take it with you. To obtain the greatest flexibility while preserving important tax benefits, you can complete a tax-free transfer — called a rollover — to a traditional Individual Retirement Account (IRA).
Turning Your TSP into Guaranteed Income
There are two ways to transform your TSP account into an income that's guaranteed to last your entire lifetime.
The first option is to take an annuity from the Thrift Savings Plan. The second option is to roll over your money to a guaranteed income annuity.
A personal annuity may provide you with more choices about how you structure your income — and could even provide higher income — than the TSP annuity program. Before selecting a TSP annuity, compare its payout rate with what's available from private insurers. As you do, be sure to consider only those companies that are given the highest financial ratings by independent rating agencies.
Don't Get Caught in the Loan Trap
If you've borrowed money from your TSP account, you must repay it when you leave federal service. If you don't, the outstanding loan balance and interest will be considered a taxable distribution. You'll also face penalty taxes if you're under 59½. To avoid this tax trap, make sure you repay your loan well before your service ends.
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posted 1/26/2010