Thrift Savings Plan (TSP) Annuity

The Thrift Savings Plan (TSP) is a defined contribution retirement plan offered by the United States government to civil service employees, including members of the uniformed services. It was established by the Federal Employees’ Retirement System Act of 1986, and the plan is administered by the Federal Retirement Thrift Investment Board.

The TSP offers federal employees the same savings and tax benefits that many private-sector employees receive with their 401(k) plans. As a defined contribution plan, the TSP is funded by employee payroll contributions and partial, matching contributions from the United States government. For select employees, the government will contribute an amount equal to 1 percent of base pay each period, regardless of the individual contribution amount.

Like a 401(k), the primary advantages of the TSP are tax-deductible contributions and tax-deferred growth, which means you don’t pay taxes on your earnings or contributions until you withdraw funds or start receiving payments. These features allow your account to grow much faster, which is important when it comes to building a financial portfolio that will last you throughout your retirement.

The TSP offers several funds to meet the various investment objectives and risk tolerance levels of its participants. All of the TSP funds are highly diversified (both high and low risk), professionally managed and low-cost.

As you might expect, TSP funds with the potential for higher returns also carry higher levels of risk, while funds with lower returns carry lower levels of risk. The lower risk options are better for conservative investors, while the higher risk options are more suitable for aggressive investors.

If you have a TSP account, you can invest in any of the previously mentioned funds in whatever proportions you desire. To simplify the decision process, the TSP platform also includes Lifecycle (L) funds, a free offering that gives you the ability to select a custom fund based on your planned retirement date. Once you select your retirement date, the administration of your investments happens automatically and the mix of stable, income-oriented bonds and growth-oriented stocks is adjusted dynamically as you age.

Generally speaking, you can start withdrawing funds from your TSP account at age 59 ½. If you withdraw before age 59 ½, you’ll likely be subject to a 10 percent early withdrawal penalty. Regardless, all withdrawals, commonly referred to as TSP installment payments, are taxable.

You can change the amount of your payments whenever you wish, and you can choose to stop the payments at any time. If desired, you also have the option to cash out your plan and take a single payment of your remaining account balance.

A TSP annuity is a life annuity contract purchased using funds from your TSP account.

The standard transaction transfers your money to MetLife, the sole annuity provider for the TSP, in exchange for a guaranteed stream of monthly payments for the rest of your life. One of the common types of annuities, this standard transaction is known as a single life annuity.

A joint life annuity is also available. This option guarantees a monthly payment to you and a spouse (or someone you designate other than a spouse) for the rest of your lives. Since a joint life payment stream covers two people and is likely to last longer than a single life stream, the amount of the payment is typically lower.

With a TSP annuity, if you die with money left in your annuity, MetLife will keep the remaining funds.

However, in qualifying circumstances, there are two optional features that provide some value to beneficiaries: a cash refund feature and a 10-year certain feature. If you choose either of these options, the monthly annuity payments you receive will automatically be reduced.

With the cash refund feature, unused annuity funds are paid to your beneficiaries when you die. You can add this feature to a single life annuity or a joint life annuity.

With the 10-year certain feature, if you die before you have received annuity payments for a 10-year period, payments will continue to your beneficiaries for the remainder of the 10-year period. You can add this feature to a single life annuity, but it cannot be used with a joint life annuity.

Beyond the choice of a single life annuity or a joint life arrangement, along with the optional choice of beneficiary features discussed above, various factors can impact the amount of your TSP annuity payment.

* The interest rate for annuities purchased  through the TSP in September 2022, for example, was 3.325%. Since 2002, the highest monthly rate was 5.750% (in August 2006), and the lowest was 1.209% (in July 2020).