Thrift Savings Plan Withdrawal Option: Life Annuity
A life annuity provides monthly payments for as long as you are alive . If you elect an annuity with survivor benefits, it will provide payments as long as you (or your joint annuitant) are alive.
A life annuity is one of your options for withdrawing your Thrift Savings Plan (TSP) account after you separate from service. If you want a guaranteed stream of payments for as long as you (or your joint annuitant) are alive, an annuity may be the right choice. You can use your entire account balance to purchase a life annuity, or you can use a portion of your account balance to purchase an annuity and choose a different withdrawal option or options to withdraw the rest.
Amount of Your Life Annuity
The factors that affect the amount of your monthly annuity payments include:
- the annuity option you choose
- your age when your annuity is purchased (and the age of your spouse or other joint
- annuitant if you choose a joint annuity) *
- the amount used to purchase your annuity
- the "interest rate index" when your annuity is purchased
If you choose a life annuity and you have either a traditional (non-Roth) balance or a Roth balance (but not both) in your TSP account, you must have at least $3,500 in your account at the time your annuity is purchased. If you are using only a portion of your account for an annuity, the percentage you choose when request¬ing your withdrawal must equal $3,500 or more of your vested account balance.
Note: A life annuity purchased with money from your TSP account is not the "basic annuity" that you will receive as a result of your retirement coverage under FERS or CSRS, or the retired pay that members of the uni¬formed services receive . If you have questions about your eligibility for the basic annuity or uniformed services retired pay, contact your agency or service.
Life Annuity Options
The TSP, through its annuity provider, offers the following types of annuity options:
- single life annuity -- with level or increasing payments
- joint life annuity with your spouse -- with level or increasing payments
- joint life annuity with someone other than your spouse -- with level payments
These annuities are described below, followed by a description of several additional annuity features that you can consider. All of the annuities and their features are also summarized in the chart (near the end of this article). You may only choose one type of annuity.
Single Life and Joint Life Annuities
Single life annuity -- An annuity that provides monthly payments only to you as long as you live.
Joint life annuity -- An annuity that provides monthly payments to you while you and the person with whom you choose to share your annuity (your "joint annui¬tant") are alive . (In most cases, the joint annuitant is the participant's spouse.) When you or your joint annuitant dies, monthly annuity payments will be made to the survivor for his or her lifetime. The amount of the payment while you and your joint annuitant are alive and the amount of the payment to the survivor depend on whether you choose a 100% or a 50% survivor annuity.
If you choose an annuity that provides for a joint annui¬tant other than your spouse, the joint annuitant must be either a former spouse or someone with an insurable interest in you. This means that the person is financially dependent on you and could reasonably expect to derive financial benefit from your continued life. Blood relatives or adopted relatives (but not relatives by marriage) who are closer than first cousins are presumed to have an insurable interest in you.
If the person you name as your joint annuitant does not have a presumed insurable interest in you, you must submit an affidavit (i .e ., a certification signed before a notary public) from someone with personal knowledge that the named person has an insurable interest in you. The certifier must know the relationship between you and the joint annuitant and must state why he or she believes that your joint annuitant might reasonably expect to benefit financially from your continued life.
Two types of joint annuities are available:
100% survivor annuity. The amount of the month¬ly annuity payment to the survivor is the same as the annuity payment made while both you and your joint annuitant are alive. However, the amount of the monthly payment that you receive while you are both alive is generally less than it would be if you had selected the 50% survivor annuity.
50% survivor annuity. The amount of the monthly annuity to the survivor -- whether the survivor is you or your joint annuitant -- is cut in half (that is, cut to 50%) of the annuity payment made while both you and your joint annuitant are alive.
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% survivor benefit . The only exception is for a former spouse to whom all or a portion of your TSP account is payable under a retirement benefits court order.
Level and Increasing Payment Annuities
Once you have chosen either a single life or a joint life annuity, you must decide whether you want to receive level or increasing payments.
Level payments. The amount of the monthly annuity payment remains the same from year to year. Thus, with a single life annuity, you receive the same monthly payment for as long as you live. With a joint life annuity, you receive the same monthly payment for as long as you and your joint annuitant are alive. The monthly payment to the survivor will depend on whether you have chosen a 100% survivor annuity or a 50% survivor annuity, but it will remain at the same level for the life of the survivor.
Increasing payments. The amount of the monthly annuity payment can change each year on the anniversary date of the first payment. The amount of the change is based on the change in inflation, as measured by the consumer price index. Increases cannot exceed 3% per year, but monthly annuity payments cannot decrease. When annuity payments start, they are smaller than they would have been if you had selected level payments, but they may increase each year. Increasing payments can be combined with either the single life annuity or the joint life annuity with spouse. You cannot choose increasing payments when the joint annuitant is not your spouse.
Additional Annuity Features That Allow for Beneficiaries
There are two additional annuity features available: the cash refund feature and the 10-year certain feature. Under certain circumstances, these features will provide payments to your named beneficiary(ies). When you choose one of these features, your monthly payments will be less than they would have been if you had chosen an annuity without either of these features.
Cash refund. If you (and your joint annuitant, if ap¬plicable) die before the amount used to purchase your annuity has been paid out, the remaining amount will be paid to your beneficiary(ies) in a lump sum . This feature can be combined with either a single life or a joint life annuity, and with level or increasing payments .
Ten-year certain. If you die before receiving annuity payments for a 10-year period, payments will continue to your beneficiary for the rest of the 10-year period. If you live beyond the 10-year period, you will continue to receive payments, but no payments will be made to a beneficiary when you die. This feature can be combined with a single life annuity with either level or increasing payments. It cannot be combined with a joint life annuity.
The table below summarizes the life annuity options and features.
Choosing Among the Annuity Options
The value of the total expected payments under all of the annuity options is comparable, but the amounts of each monthly payment that you receive -- and the provision for continuing payments to a survivor or beneficiary--are different. For example, a monthly annuity payment under a single life annuity will generally be more than the monthly payment under a joint life annuity. This is because payments continue under the joint life annuity after the death of one of the joint annuitants until the survivor dies. For each annuity feature that you choose, the expected monthly annuity payment to you will decrease.
Estimating monthly annuity payments.
If you are interested in purchasing a life annuity, visit the Planning & Tools section of the TSP website (http://www.tsp.gov). You will find additional information and a retirement calculator (https://www.tsp.gov/planningtools/retirementcalculator/retirementCalculator.shtml) to help you with your decision and to estimate your annuity payments. The exact amount of your monthly annuity payment cannot be determined until the date of purchase, as opposed to the date the money is withdrawn from your account.
How Your Annuity Is Taxed
For FERS or CSRS TSP accounts. If you have a traditional (non-Roth) balance in your TSP account, the taxes on those contributions (and the earnings) are deferred until the money is paid to you. Therefore, the TSP annuity payments comprised of traditional (non-Roth) amounts will be taxed as ordinary income in the years when you receive them.
If you have a Roth balance in your TSP account, those contributions were made after tax . The TSP annuity payments comprised of Roth contributions will not be taxed. Whether the Roth earnings portion of any annuity payment is taxed depends on whether that particular payment meets the IRS rules for qualified earnings.**
Note: Your annuity payments are not subject to the IRS early withdrawal penalty, even if you are under age 55 when they begin.
Posted: 07/24/2014. Sources: TSPBK02 (3/2014)
* For life annuity purposes, age is defined in whole years; months are not considered in the annuity calculation.
** Roth earnings become qualified (i.e., paid tax-free) when the following 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 591/2 or have a permanent disability or in the case of your death. Note: The TSP cannot certify to the IRS that you meet the Internal Revenue Code's definition of a disability when your taxes are reported. Therefore, you must provide the justification to the IRS when you file your taxes.