The Thrift Savings Plan (TSP) offers many benefits but flexibility of withdrawals is not one of them. Retirees often experience changes in their income needs. Individual Retirement Accounts (IRA) offer more flexibility for withdrawing funds and may be a better choice. Federal retirees can take advantage of that flexibility by transferring investments from the TSP to an IRA.
Retirees have four ways to withdraw funds from retirement accounts: automatic monthly payments, partial withdrawals, full withdrawals, or fixed annuities. IRAs offer significant advantages for retirees making monthly or partial withdrawals.
Partial Withdrawals
Many retirees, even those already receiving monthly payments, like to make occasional partial withdrawals. They may use the money for vacations, gifts to grandchildren, home repairs, emergency medical expenses or other reasons.
The TSP allows only one partial withdrawal during a lifetime; the second partial withdrawal closes the account. But IRAs allow as many partial withdrawals as you want, even multiple times during the same year.
Automatic Monthly Payments
Automatic monthly withdrawals are offered by both the TSP and IRAs. However,
- The TSP permits only one change each year in the monthly withdrawal amount. An IRA allows changes as often as you like.
- If you start and then stop monthly withdrawals, even many years after the first withdrawal, the TSP account will close. With IRAs, you can start and stop as often as you want.
There are many reasons you might want to change the monthly withdrawal amount or stop it entirely. Perhaps you --
- Paid off a mortgage
- Want to use monthly withdrawals to fund your retirement so you can postpone drawing Social Security benefits until the age of 70. Once Social Security payments start, you may no longer need the monthly TSP withdrawal.
- Have recovered after a period when you needed to pay for long-term care.
From Which Fund?
The TSP requires that both monthly and partial withdrawals be taken proportionately from your TSP funds. For example, if your TSP account is 33.3 percent in the C fund, 33.3 percent in the S fund, and 33.3 percent in the I fund, withdrawal come from each of those three funds in the same proportions.
This is not necessarily the best strategy. Many financial planners believe withdrawals should be based on current market conditions. If international stocks have suffered a major decline but U.S. stocks are at all-time highs, it can make sense for withdrawals to come from U.S. stock funds only. If the situation is reversed, withdrawals could be made from the international stock fund. Remember: Buy low and sell high.
Investment Management
The TSP offers no investment advice or support. But funds transferred into an IRA can be managed directly by an investment manager – and that can be a wise move.
TSP participants who manage their own investments may lose far more money than they would ever pay an investment advisor. They may invest in the wrong funds (long-term investments in the G fund, for example) or move into or out of funds at the wrong time.
Investment Choices and Expenses
Investment opportunities are much more plentiful in an IRA than in the TSP. For example, the TSP doesn’t include the following categories: International small and mid-cap stocks, emerging markets, international bonds, high-yield bonds and real estate.
On the other hand, the G Fund exists only in the TSP; there is no equivalent in an IRA. Fixed annuities are available in both the TSP and IRAs.
True, expenses for the TSP -- account fees, trading costs and fund management fees -- are lower but the savings are usually exaggerated.
Example: Fund management fees are lower for the TSP. But, when compared to the fees of mutual funds that invest in the same indexes, the average savings is less than one-tenth of a percent per year.
Your investment needs change when you retire. The TSP may no longer be your wisest investment choice.
Notes:
This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.
Any information provided in this presentation has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.
Keep in mind that:
- Past performance is no guarantee of future performance;
- Investments involve the risk of loss of principal and earnings;
- ETFs, mutual funds, including money market funds, etc. are not guaranteed in any way by the US Government, the FDIC, a bank or anyone else.
- “Average annual return” evens out variations in the actual year-to-year returns.
- ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
- None of the information provided by Arthur Stein is necessarily relevant to anyone’s particular situation. Situations differ among individuals and you should not assume that these generalizations or information apply to you.
- Investments mentioned may not be suitable for all investors.
Arthur Stein Financial, LLC is registered with the states of MD, DC and VA. It is not registered with, nor is it required to be registered with, the Securities and Exchange Commission.