Accessing the TSP Without Penalties

1 1 Accessing the TSP Without Penalties The thrift savings plan (TSP) is similar to a 401(k) plan in that everything in the TSP is tax-deferred. Because it is tax-deferred, there are rules and restrictions if you retire before a specified age and withdraw money from your account prior to age 59 . The TSP is unique in that any Federal employee who retires in the calendar year in which they are 55 or later can access any and all money in their TSP account Without penalty. However, if you retire prior to the year in which you are age 55 there is a 10% early withdrawal penalty on all withdrawals prior to age 59 unless you withdraw funds based on actuarially projected life expectancy. There are two possible withdrawal methods: 1) substantial equal installments based on actuarially projected lifetime payments and 2) a true annuity. Both of these withdrawal options are available at any age with no early withdrawal Penalties .

2 However, there are differences: (1) SUBSTANTIALLY EQUAL INSTALLMENTS based on actuarially projected lifetime payments; this is not an annuity which guarantees you a specific dollar amount every month for your lifetime. Instead, this payment method is based on the concept that some of your principal is being paid to you with every payment. Therefore, ideally, you would receive the last money from your account in the month of your death. You did not run out of money nor did you die with money in your account. The ideal won t happen too often. There are actually three different methods under which your actuarially projected lifetime payments are made: (a) The Minimum Distribution Method is calculated the same way as required Minimum distributions when account owners reach their required beginning distribution date. This method will generally produce the lowest annual 72(t) payments since it is based on the longest life expectancy.

3 The required minimum distribution method consists of an account balance and a life expectancy (single life or uniform life or joint life and last survivor each using the age(s) attained in the year for which distributions are calculated.) The annual payment is predetermined for each year. This is the simplest of methods to calculate and allows account holders to take advantage of growth in their accounts and create larger payments in future years. However, a decline in the IRA balance will reduce future 72(t) distributions. (b) The Fixed Amortization Method consists of an account balance amortized over a specified number of years equal to life expectancy (single life or uniform life or joint life and last survivor) and a rate of interest that is not more than 120 percent of the Federal mid-term rate published in revenue rulings by the Internal Revenue Service. Once an annual distribution amount is calculated under this fixed method, the same dollar amount must be distributed in subsequent years.

4 This produces higher payments than the Minimum Distribution Method and gives some security in that the payments are fixed. But the calculation is complicated and there is the risk that the payments will not keep pace with inflation. (c) The Fixed Annuitization Method consists of an account balance, an annuity factor, and an annual payment. The age annuity factor is calculated based on the mortality table in Appendix B of Rev. Rul. 2002-62 and a rate of interest that is not more than 120 percent of the Federal mid-term rate published in revenue rulings by the Internal Revenue Service. Once an annual distribution amount is calculated under this fixed method, the same dollar amount must be distributed under this method in subsequent years. The revenue rulings that contain the Federal mid-term rates may be found at ,,id=98042, This method may at times provide the largest payments, depending on the size of the account and interest rates used.

5 And like the amortization method, the payments are fixed. It is, however, the most complicated method to use. The IRS s Annuity Factor table is not as easy to use as the life expectancy factors from IRS Publication 590. However, there are computer programs available that contain the actuarial table used for the Annuity Factor Method. Brentmark s Software Pension & Roth IRA Analyzer is one program that will do the calculations for you. 2 Other helpful sources are: While you are receiving payments, you are still managing your money, if you should die with money in your TSP account, the balance would be paid to your beneficiary or the standing order of precedent. More importantly, with this withdrawal method (known as 72T for the Section of the IRS Code) you must continue to receive the payment for the later of age 59 or 5 full years. If you stop the payments before the later, you will pay the 10% early distribution penalty on all money you have received.

6 (2) The TRUE ANNUITY guarantees a payment of at least the amount you received in the first annuity payment every month for your lifetime. If you elect the annuity you money is managed by an insurance company, at present Metropolitan Life. Once you have received the first payment, you cannot change options or cancel the annuity and, further, you are not managing your money. There are several options from which to choose: - Single Life - Joint and Survivor Spouse - Joint and Survivor Insurable Interest (a) Single Life Annuity guarantees an annuity payable to you during your lifetime. You can elect the Single Life Annuity with or Without COLA, with or Without the cash refund option, and with or Without a 10-year certain payout. The COLA is capped at 3% but is an important consideration the longer you live if your annuity is not adjusted for COLA, the less buying power it will have.

7 (For example, assume a $50 bill in 1957 bought $50 worth of goods and services, in 2007, due to inflation, it would buy $ worth of goods and services). The cash-back option is important because it assures that you or your beneficiary will receive at least the amount you had in the TSP when you purchased the annuity. This is an expensive option but guarantees that the value of your account will be paid to you or your beneficiary. Ten-year certain payout is a short-term guarantee. It guarantees that if you die within the first 10 years of the annuity, your payments will be continued for the balance of the 10 years to whomever you have named. If you receive payments for 10 or more years there will be no payments after your death. However, if you live to be 110, you would continue to receive payments. (b) Joint and Survivor Spouse Annuity requires that you elect either 50% or 100%. The key is that the 50% or 100% survivor s annuity would be paid to whomever outlived the other, ( , it is your TSP account, you elect joint and survivor spouse 50%, your spouse predeceases you, your TSP annuity will be 50% of what you were jointly receiving.)

8 You have the same COLA option on either joint and survivor spouse annuity as in the single life annuity. For joint and survivor spouse annuity, you do not have the 10-year certain payout; however, you do have the cash back option. (c) Joint and Insurable Interest Survivor s Annuity if you choose an annuity that provides for a joint annuitant other than your spouse, the joint annuitant must be either a former spouse or someone with an insurable interest to 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 ( , a certification signed before a notary public) from someone with personal knowledge that the named person has an insurable interest in you.

9 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 - 50% survivor annuity. The amount of the monthly annuity payment to the survivor whether the survivor is you or your joint annuitant is cut in half upon the death of either (that is, cut to 50 percent) of the annuity payment made while both you and your joint annuitant are alive. If you name an insurable interest joint annuitant who is more than 10 years younger than you, you must choose a joint life annuity with the 50 percent 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.