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The Incredible Versatility of a Thrift Savings Plan

May 20, 2016 12:40:04 PM
Author: Scott Hanson

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What interesting things can a pre-retiree do with a well-funded Thrift Savings Plan?

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Read Full Transcript:

Scott: Darryl, you're with Hanson McClain.

Darryl: Hanson McClain, how are you doing boys?

Scott: Excellent. How are you doing, sir?

Darryl: Well, good. I had a new question for you. Okay, I'm eligible to retire, but I have to retire in two years.

Scott: Why do you have to retire?

Darryl: I'm part of a government program. I have to retire. And my annuity is going to give me $5,000 a month. That's after federal tax and my healthcare's paid. And I have about $600,000 in a TSP.

Scott: Okay, Thrift Savings Plan for the rest of the listeners.

Darryl: Yes, 401K, whatever you want to call it. When I leave, I have one year to move it. What I want to do is keep my annuity going, which I'll always get. But then, somehow I'd like to maybe live off the interest, not spend it down so much, supplement my annuity because I have to move it. What do I do?

Scott: Wait. Let me ask a couple of questions, how old are you now?

Darryl: Fifty-three.

Scott: So you'll be 55 when you retire. And are you a federal employee?

Darryl: Yes.

Scott: Okay. I'm not aware that you have to move your Thrift Savings Plan in any time period at all.

Pat: I don't think you do.

Scott: Where are you getting that information?

Darryl: Well, I always thought I had one year to move it.

Scott: No.

Darryl: Yeah but I don't want to leave it. Leaving it there, it's okay now while I'm a federal employee because I'm contributing. But when I'm done, there's got to be a better way to move that money.

Scott: Darryl?

Pat: Maybe, maybe not.

Scott: So this is a great question. It's pretty specific to Darryl, but it's an example of how convoluted these rules are with different plans. The problem with the Thrift Savings Plan is that there are very limited choices, very, very limited choices. The good thing about it is it's relatively low cost.

Pat: Very low cost.

Scott: Very low cost. So here's something that I would consider, if you were sitting in my office, and you were retired today. If you're over age 55 in the year in which you separated from service, there is no penalty taking money out of a 401K, 403B, or Thrift Savings Plan. As long as you're 55 or older in the year in which you separate from service.

Darryl: Right.

Scott: So what I would do is I'd say...well, Darryl, how much income? So if we've got $600,000, let's say we're going to take a 4 percent distribution, or $24,000 a year, $2,000 a month. And we say, "Okay, Darryl. Let's take $2,000 a month to help supplement that income." I would figure out you've got four and a half years at $24,000 a year.

Pat: Before you're 59 and a half.

Scott: Before you're 59 and a half. I'd leave a hundred in, let's say $120,000, in that Thrift Savings Plan, and I would take that distribution out of there. I'd take the remaining $480,000 and I'd move it to an IRA and I would invest it. Now, what's the upside? The upside is we're going to get larger investment selections and we're going to get more choices. What's the downside? The money in the IRA is going to be more expensive to manage than it is in the Thrift Savings Plan. What's the upside? The upside is if you use a firm like our own, you're going to get professional management as well as the knowledge and experience of navigating this situation that you just laid out to us.

Pat: And I'm going to throw one more thing out, Darryl. So there's this possibility that you will have some other employment in your future, right?

Scott: Which is why you don't...

Darryl: It's possible, but I would like to be where I don't have to work.

Scott: I understand. So if you figure, could an extra $2,000 a month meet your needs?

Darryl: Easily, easily.

Scott: Okay. All right. So if you had $600,000, let's say we use a 4 percent ballpark estimate, that's roughly $2,000 a month. So you're in a place financially where you could set it up so you have $2,000 a month come in to help supplement the rest of your income, you're financially secure. But I also want to add the flexibility to that, what if a couple of years from now, some opportunity presents itself where you can earn some money, do something engaging, work for a period of time? Well maybe you would have that year where you wouldn't take that money. And because it's coming out of the Thrift Savings plan, you can stop that any time you want.

Pat: There's other ways, called a series of substantially co-periodic payments. I would not recommend that, however.

Scott: Yeah, we could do it under a 72T. I would do it under a 72T if you're under age 55, but you'll be over age 55 when you retire. So it's easy. It's easy for us.