TSP annuity: how the Thrift Savings Plan life annuity works

A TSP annuity is a life annuity bought with money from your Thrift Savings Plan account after you leave federal or uniformed service. The TSP sends the amount you choose to an outside insurance company, its contracted annuity provider, and that company pays you a monthly income for the rest of your life, or for your life and a joint annuitant's. The purchase cannot be cancelled or changed once the money has left your account.

It is easy to confuse with two other things. It is not the FERS or CSRS "basic annuity", which is your federal pension, and it is not military retired pay. It is also not the same as TSP installment payments, which are withdrawals from an account you still own. This guide explains the options the TSP offers, the rules that limit them, how the payments are taxed and what you give up in exchange for the guarantee. It draws on the TSP's own fact sheet on annuities; rules can be updated, so check tsp.gov before acting. This is general education, not personal financial advice.

What a TSP annuity is and who can buy one

The life annuity is one of the post-employment distribution options, alongside partial distributions, a total distribution and installments. The broader set of choices is covered in the guide to TSP withdrawal rules. You can use all of your account or only part of it, and you can combine an annuity purchase with the other methods.

Mechanically it works like a single premium immediate annuity: one payment in, a stream of monthly payments out, starting roughly a month after purchase according to the TSP. Two features set it apart from an annuity bought privately:

• No commission. The TSP states that you pay no commissions when you buy an annuity through the plan.
• A fixed menu. You choose from the options the TSP has negotiated with its provider. You cannot shop the purchase among insurers unless you first move the money out of the TSP, for example by rolling it to an IRA.

Once the purchase is made, the annuity is no longer part of your TSP account. Your contract is with the annuity provider, and questions about payments go to that company, not the TSP.

The minimum purchase and the traditional and Roth balances

The TSP sets a minimum annuity purchase of $3,500. The detail people miss is that the minimum applies separately to your traditional balance and your Roth balance.

If you ask for the purchase to come from both balances pro rata, meaning in the proportion each makes up of your account, each slice has to clear $3,500 on its own. The TSP fact sheet gives this example: an account holds $80,000 traditional and $20,000 Roth, and the participant requests a $10,000 annuity purchase. Pro rata, that is $8,000 traditional and $2,000 Roth. Because the Roth slice is under $3,500, the request is rejected.

If you use your whole account and only one balance reaches $3,500, the TSP offers the annuity only on the balance that qualifies.

The annuity options: single life, joint life, level or increasing

The TSP offers three basic types:

• a single life annuity, with level or increasing payments
• a joint life annuity with your spouse, with level or increasing payments
• a joint life annuity with someone other than your spouse, with level payments only

Single life pays only while you are alive. Joint life pays while either you or your joint annuitant is alive, and you choose what the survivor receives. With a 100% survivor annuity the payment does not change when one of you dies. With a 50% survivor annuity the payment is halved on the first death, whichever of you dies first. That last point differs from many pension survivor options, where the reduction applies only if the retiree dies first. The general mechanics are explained in the article on the joint and survivor annuity.

A joint annuitant who is not your spouse must be a former spouse or someone with an insurable interest in you, which the TSP describes as a person financially dependent on you. Close blood or adopted relatives are presumed to qualify; others need an affidavit. If a non-spouse joint annuitant is more than ten years younger than you, the TSP requires the 50% survivor option, with an exception for a former spouse covered by a retirement benefits court order.

Level payments stay the same for life. Increasing payments rise by 2% on each anniversary of the first payment, according to the TSP fact sheet. The starting payment is lower than the level equivalent, and the increase is a fixed step, not a link to actual inflation. In a year when prices rise faster than the step, the payment still loses purchasing power. The article on the inflation-adjusted annuity explains the difference between a fixed escalator and true indexation.

Cash refund and ten-year certain features

Two optional features provide something for a beneficiary. Each one reduces your monthly payment.

Cash refund. If you die, or you and your joint annuitant both die, before the provider has paid out as much as you paid in, the difference goes to your beneficiaries as a lump sum. The TSP's example: an annuity bought for $50,000 that has paid $40,000 at death leaves $10,000 for the beneficiary. Cash refund can be added to single life or joint life, with level or increasing payments.

Ten-year certain. If you die within ten years of the first payment, payments continue to your beneficiary for the rest of the ten years. If you live longer, payments continue for your life and nothing is left for a beneficiary. This feature is available only with a single life annuity.

Annuity type	Payment pattern	Features that can be added
Single life	Level or increasing	None, cash refund, or ten-year certain
Joint life with spouse (100% or 50% survivor)	Level or increasing	None or cash refund
Joint life with other survivor (100% or 50% survivor)	Level only	None or cash refund

You choose one combination per distribution request. The TSP notes that the value of total expected payments is comparable across the options. What changes is how that value is split between a higher payment to you now and protection for someone else later.

How the monthly payment is set

Four things determine the payment, according to the TSP:

1. the amount used to buy the annuity
2. your age at purchase, and your joint annuitant's age, counted in whole years
3. the option and features you choose
4. the TSP's "interest rate index" in the month the annuity is purchased

The interest rate index changes monthly and is published on tsp.gov along with its history. A higher index produces a higher payment for the same purchase amount. The rate that applies is the one in force when the provider actually receives the money, not when you submitted the request. The TSP warns that a request made near the end of a month may be priced at the following month's rate.

This page does not quote a payment per $100,000, because any figure would be out of date within weeks. The TSP Annuity Calculator on tsp.gov gives an estimate using the current index, and the exact amount is fixed only on the purchase date. To see how the same inputs behave in general, the site's annuity payout calculator lets you vary the rate and the age; its output is illustrative, not a quote.

Spouse rights you cannot skip

Federal law gives a married participant's spouse a say in an annuity election.

For a married FERS or uniformed services participant, the default is a joint life annuity with the spouse, level payments and a 50% survivor benefit. Choosing anything else, including a single life annuity or a 100% survivor annuity with increasing payments, requires the spouse to waive that entitlement in writing. The TSP's Distributions booklet sets out the procedure and the narrow exceptions.

For CSRS participants the rule is lighter: the TSP's rules provide for the spouse to be notified of the withdrawal election, and consent is not required. Confirm which rule applies to you in the Distributions booklet, since the outcome of a mistake here is a rejected request.

How TSP annuity payments are taxed

Buying the annuity is not itself a taxable event. Tax follows the payments.

• Traditional money. Payments funded by your traditional balance are taxed as ordinary income in the year you receive them.
• Roth money. The part of each payment that represents Roth contributions is not taxed. Whether the earnings part is taxed depends on whether that payment meets the IRS rules for qualified Roth earnings.
• Tax-exempt contributions. Uniformed services members may have contributions from combat zone pay. The provider calculates the tax-exempt part of each payment and spreads it over life expectancy.
• Early withdrawal penalty. The TSP states that annuity payments are not subject to the IRS early withdrawal penalty, whatever your age.

State income tax treatment varies. The TSP booklet "Tax Rules about TSP Payments" and IRS guidance on pension and annuity income are the references to use, and a tax professional can apply them to your return.

TSP annuity compared with installments

The choice most separated participants face is between buying the annuity and taking installments from the account.

	TSP life annuity	TSP installments
Who owns the money	The annuity provider	You, inside your TSP account
How long payments last	For life (and a survivor's life if joint)	Until the balance reaches zero
Can you change or stop it	No	Yes
Investment exposure	None after purchase	Remains invested in TSP funds
What is left at death	Nothing, unless joint life, cash refund or ten-year certain applies	Remaining balance goes to beneficiaries
Who bears the risk of a long life	The insurer	You

Neither is better in the abstract. The annuity removes the risk of outliving the money and the risk of poor markets, and it costs you access and flexibility. Installments keep both risks and both freedoms.

Points to weigh before you buy

• You may already hold lifetime income. A FERS or CSRS pension and Social Security are both life annuities in economic terms. The question is how much more guaranteed income your budget needs, not whether guarantees are good.
• Partial purchases are allowed. Annuitising a slice to cover fixed costs and leaving the rest in the TSP is permitted, subject to the minimum.
• The guarantee is the insurer's. After purchase, the promise is backed by the annuity provider and, within limits that vary by state, by state guaranty associations. It is not backed by the TSP or the federal government.
• The decision is final. The TSP says that once funds are disbursed you cannot cancel, switch options or change the joint annuitant. You can change the beneficiary with the provider.

Frequently asked questions

Can I cancel a TSP annuity after I buy it?

No. The TSP states that annuity purchases are irrevocable. Once the money has been sent to the provider you cannot cancel, change the option or replace the joint annuitant. Only the beneficiary designation can be updated, and that is done with the provider.

Is the TSP annuity the same as my FERS annuity?

No. The FERS basic annuity is your federal pension, calculated from your service and salary and paid by the government. A TSP annuity is an insurance contract bought with your own TSP savings from a private insurer. You can have the first without ever buying the second.

Does the TSP annuity increase with inflation?

Not directly. If you choose increasing payments, the TSP fact sheet says the payment rises by 2% on each anniversary. That is a fixed annual step. It may be more or less than actual inflation in any given year, and level-payment annuities do not increase at all.

Do I have to use my whole TSP balance?

No. You can buy an annuity with part of the account, provided the purchase meets the minimum on each balance used, and keep the remainder for installments or later distributions. Verify the current minimum on tsp.gov before you submit a request.