One of the options a Thrift Savings Plan participant may use to withdraw part or all of his or her account balance is a TSP guaranteed life annuity. An annuity can be a great choice or a terrible mistake, depending on your circumstances. Since purchasing an annuity is an irreversible decision, it is critical that you understand the consequences before you buy.

You can buy a TSP annuity at any time, while you’re still working using an age-based or financial hardship withdrawal, or after you leave service. Using your balance to purchase a life annuity avoids the 10 percent IRS tax penalty on early withdrawals.

The advantage of an annuity is that payments are guaranteed for life. The disadvantage: You relinquish any right to your investment. In other words, if you use your $100,000 TSP balance to buy an annuity, you may no longer access the remainder of that balance if an unforeseen need arises — the money has been spent on what is essentially an insurance premium.

A TSP annuity is not issued or administered by the TSP or its governing body, the Federal Retirement Thrift Investment Board. It is a private contract underwritten by a commercial insurance company, currently MetLife Inc. of New York. MetLife offers these annuity contracts to TSP participants under agreement with the thrift board. Once the annuity has begun, your customer relationship will be with the insurance company, not the TSP.

As a TSP participant, you may buy an annuity with payments guaranteed for your life, or for the life of a joint annuitant, if longer. The joint annuitant may be your spouse or another person with so-called insurable interest. The survivor benefit of the TSP annuity differs from those under Civil Service Retirement System and Federal Employees Retirement System annuities. The TSP annuity offers either a 100 percent or a 50 percent survivor benefit, and that benefit is paid to the surviving annuity holder — either the annuitant or joint annuitant. A pension annuity, on the other hand, pays the survivor benefit to named beneficiaries only when the retiree dies. TSP annuity payments end when the annuitants die, except in certain cases described below.

Since the funds used to purchase a TSP annuity were deposited pretax, 100 percent of each payment you receive will be taxable as ordinary income in the year you receive it. Again, this differs from a pension annuity on which there are some tax exclusions.

The amount of payment you receive, relative to the size of the premium you pay for the annuity, is fixed when you make the purchase. While you may choose to purchase increasing payments as an optional feature, the base payment amount is determined at the time of purchase and is related to market interest rates. Changes in interest rates will not affect the payment amount once the annuity is in place. Purchasing your annuity at a high interest rate will generally result in a larger payment relative to the premium.

In addition to the option for level payments or increasing payments, there are other choices. Annuities can be purchased with a cash refund feature, which is paid to a beneficiary if a balance remains in the account after the death of the annuitant or annuitants. Also, a so-called 10-year certain feature is available only on single life annuities and paid to a beneficiary if the annuitant dies before 10 years of payments are made.

Written by Mike Miles
For the Federal Times
Publication November 1, 2004