Using a TSP Life Annuity

This is the third of a series of five columns discussing the various Thrift Savings Plan (TSP) withdrawal options for separated TSP participants. Separated TSP participants include civilian federal employees and members of the Uniformed Services who have retired or left federal service or the Uniformed Services, respectively.

Also included in this category of a separated TSP participant is a “beneficiary” participant who is a spousal beneficiary of a deceased federal employee/retiree or a deceased Uniformed Services participant, and who establishes a TSP account in his or her name.

SEE ALSO:

• TSP Fixed Payment Option (Part 1)
• TSP Withdrawal Payments Based on Life Expectancy (Part 2)

This column will discuss the withdrawal option of a TSP life annuity. It should be emphasized that a TSP annuity (purchased from a federal employee’s or a Uniformed Service member’s TSP account) is not the basic annuity that a federal retiree receives under either the Civil Service Retirement System (CSRS) or the Federal Employee Retirement System (FERS), or the military retirement pay that retired Uniformed Service members receive.

Federal retirees or Uniformed Service retirees who have questions about their eligibility for the CSRS or FERS basic annuity or military retirement pay should contact their agency or service, respectively.

What is a TSP Life Annuity?

A TSP life annuity is not like a TSP account, an IRA, a certificate of deposit or a bank account. When a TSP participant purchases a life annuity, he or she relinquishes control of all or a portion of his or her TSP account in exchange for lifetime monthly payments from the TSP annuity provider. With the purchase of a TSP annuity, a TSP participant receives monthly payments no matter how long the TSP participant lives.

Amount of TSP Annuity Payments

The factors that affect the amount of a TSP participant’s monthly annuity payments include:

∙ The amount of the TSP account used to purchase the annuity.

∙ The TSP participant’s age when the annuity is purchased and the age of a spouse or other joint annuitant, if the TSP participant chooses a TSP joint annuity.

∙ The annuity options chosen, and

∙ The “interest rate index” when the annuity is purchased.

How to Purchase a TSP Annuity

The process for purchasing a TSP annuity is the same as for requesting TSP installment payments or requesting a total or partial distribution. A TSP participant needs to log into his or her “My Account” and use the tools that are available to help the participant choose, model and calculate annuity options.

The minimum purchase for a TSP annuity is $3,500. The $3,500 minimum applies separately to each TSP account balance, traditional and Roth. That is relevant if a TSP participant has both a traditional TSP and Roth TSP accounts and the participant chooses to have the money for the annuity purchase come from both accounts “pro rata.”

“Pro rata” means in the proportion that makes up the total balance. The pro rata purchase combined with the $3,500 minimum annuity purchase can create some situations that TSP participants need to be aware of, namely:

1. If a TSP participant is using his or her total combined (traditional and Roth) TSP account balance to purchase the annuity and one of the account balances is at least $3,500 but the other account balance is not, then the TSP will use only the account that meets the minimum amount. For example, if the traditional TSP account balance is more than $3,500 but the Roth TSP account balance is not, then the TSP will not withdraw anything from the Roth TSP account to purchase the annuity.

2. If a TSP participant is using a portion of his or her TSP accounts to purchase an annuity and either of the traditional or Roth TSP account balances is less than $3,500, then the option to purchase an annuity will not be available.

3. If the result of the pro rata calculation results in either the Roth TSP account portion or the traditional TSP account portion of the TSP annuity purchase is less than $3,500, then the option to purchase a TSP annuity will not occur.

The following example illustrates:

Jerry has a $80,000 balance in his traditional TSP and $20,000 balance in his Roth TSP. Jerry requests a TSP annuity purchase of $10,000. The TSP will calculate the withdrawal from Jerry’s TSP accounts as follows:

Traditional TSP account:
$80,000/$100,000 x $10,000 = $8,000

Roth TSP account:
$20,000/$100,000 x $10,000 = $2,000

Since the Roth TSP account amount is less than $3,500, the TSP will reject the $10,000 TSP annuity purchase request. Note that if Jerry requests that the $10,000 come from his traditional TSP account only, then the TSP will make the annuity purchase.

TSP Life Annuity Options

The TSP’s annuity provider offers the following types of annuity options:

∙ Single life annuity with level or increasing payments.

∙ Joint life annuity with a spouse with level or increasing payments, or

∙ Joint life annuity.

These annuities are described and explained below followed by a description of several additional annuity features. TSP participants can choose only one type of annuity per distribution request.

Single Life and Joint Life Annuity

∙ Single life annuity. An annuity that provides guaranteed monthly payments as long as the annuitant (the TSP participant who purchased the annuity) lives. At the death of the annuitant, payments cease, and the TSP annuity provider keeps any remaining funds in the annuity.

∙ Joint life annuity. An annuity that provides monthly payments to the TSP participant and the person with whom the TSP participant chooses to share the annuity (the “joint annuitant”). For most TSP participants, the joint annuitant is the TSP participant’s spouse.

When the TSP participant or the joint annuitant dies, monthly annuity payments will be made to the survivor for his or her lifetime. The amount of the payment while the TSP participant and joint annuitant are alive and the amount of the payment to the survivor depends on whether a 100% or a 50% survivor annuity is chosen by the TSP participant.

In choosing a joint annuity, the TSP participant will have to provide proof of the joint annuitant’s age. If a joint annuity is chosen and the designated joint annuity is someone other than a spouse, then the joint annuitant must be either a former spouse or someone who has an “insurable interest” in the TSP participant.

An “insurable interest” means that the individual is financially dependent on the TSP participant and could expect to derive financial benefit from the TSP participant’s life. Blood relatives or adopted relatives (but not relatives by marriage) who are closer in relationship than a first cousin is presumed to have an insurable interest in a TSP participant.

– 100% joint life survivor annuity. The amount of the monthly annuity payment to the survivor annuitant (the TSP participant or the joint annuitant) is the same as the monthly payment while both are alive. The larger the age difference between the TSP annuitant and the joint annuitant, the less will be the monthly payment.

The amount of the monthly payment that the TSP participant receives while both the TSP participant and joint annuitant are alive is also generally less than it would be had the TSP participant chosen a 50 percent survivor annuity, described below.

– 50% survivor annuity. The amount of the monthly annuity payment to the survivor, whether it is the TSP annuitant or the joint annuitant, is reduced to 50% of the monthly annuity payment while the TSP participant and the joint annuitant are alive. Note that if a TSP participant chooses a joint annuitant other than a spouse (an insurable interest) and the insurable interest is more than 10 years younger than the TSP participant, then a 50% survivor benefit must be selected.

The only exception is a joint life annuity with a former spouse to whom all or a portion of the original TSP participant’s account is payable under a retirement benefits court order.

With either a single life or a joint life annuity a TSP participant must decide whether to receive level or increasing payments which are explained:

∙ Level payments. The amount of the monthly annuity remains the same from year to year. With a single life annuity, the TSP participant receives the same monthly payment for as long as he or she lives. With a joint life annuity, the TSP participant receives the same monthly annuity for as long as the TSP participant and the joint annuitant are alive.

The monthly payment to the survivor annuitant will depend on whether the TSP participant has chosen a 100 percent survivor annuity or a 50 percent survivor annuity. However, the monthly payment will remain at the same amount for the life of the survivor.

∙ Increasing payments. The amount of the monthly annuity will increase by 2 percent on the anniversary date of the first payment. When annuity payments start, they are smaller compared to level payments. Increasing payments can be combined with either the single life annuity or the joint life annuity with a spouse. Increasing payments cannot be selected when the joint annuitant is not a spouse.

Additional TSP Annuity Features Available for TSP Beneficiaries

There are two additional annuity features available that are designed for TSP beneficiaries, namely: (1) the cash refund features; and (2) the 10-year certain feature. Under certain circumstances these features will provide payments to a TSP participant’s named beneficiaries.

Note that when either one of these features is chosen by a TSP participant, the TSP participant’s monthly payments will be less than they would have been had the TSP participant chosen an annuity without either of these features.

∙ Cash refund. If the TSP participant and joint annuitant (if a joint annuity was purchased) die before the amount paid by the TSP participant to purchase the annuity has been paid out, then any remaining amount of the TSP annuity will be paid to a designated beneficiary(ies).

For example, if a TSP participant purchases a TSP annuity for $100,000 and the TSP participant and joint annuitant (if a joint annuity was purchased) die after receiving only $80,000 in annuity payments, then a designated beneficiary (ies) will receive a payment of $20,000. The feature can be combined with either a single life annuity or a joint life annuity, and with level or increasing payments.

∙ Ten-year certain. If a TSP participant chooses a single life annuity with a 10-year certain period and dies before receiving payments for the 10-year period, then payments will continue to a designated beneficiary for the rest of the 10-year period.

If the TSP participant lives beyond the 10-year period, then the TSP participant will continue to receive payments, but no payments will be made to a beneficiary upon the death of the TSP participant. 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 TSP annuity options and features.

Summary of TSP Annuity Options and Features

Choosing Among the Annuity Options and Important Reminders

The value of the total expected payments under all of the annuity options is comparable but the amounts of each monthly payment that a TSP participant receives and the provisions for continuing payments to a survivor annuitant or a beneficiary, are different.

That is why it is important for a TSP participant to log into his or her “My Account” and use the tools that are available to calculate the estimated benefit amount while comparing the different options available with the annuities.

Some important reminders for TSP participants about choosing a TSP annuity:

∙ For a married TSP participant, Spouse’s Rights apply as discussed in the TSP booklet “Distributions.”

∙ Annuity purchases are irrevocable; a revocation or any changes to a purchased TSP annuity cannot be made once an annuity is purchased.

∙ It is best to compare different types of annuities to determine which one bests fits one’s specific income needs.

∙ Interest rates on TSP annuities change monthly; therefore, timing when purchasing a TSP annuity may be a factor in determining the amount of the TSP participant’s monthly annuity payment. A higher interest rate at the time of TSP annuity purchase could result in a higher monthly annuity payment.