TSP Annuity vs. IRA Rollover: What Federal Employees Should Understand
A TSP life annuity and a rollover to an IRA answer different retirement questions. Compare income, access, costs, taxes, and survivor choices before deciding.
By Lovie Leach-Yarborough • 8 MIN READ
The first question is what you need your TSP to do.
For many federal employees, the Thrift Savings Plan is a large part of retirement savings. As retirement approaches, the choice may seem to be between buying a TSP life annuity and moving the entire account to an IRA. Those are not the only possible paths. You may be able to leave money in the TSP, use eligible withdrawals, buy an annuity with part of an eligible balance, or directly roll over eligible amounts.
Begin with the job the money needs to perform: provide predictable income, remain accessible for changing expenses, support survivors, stay invested for growth, or some combination. That answer matters more than a blanket preference for one account or product.
What does a TSP life annuity provide?
With a TSP life annuity, you use all or part of an eligible TSP balance to purchase a contract through the TSP's annuity provider. Payment options can affect income for a spouse or other beneficiary and what, if anything, may be paid after death. Review the current TSP materials and illustrations for the exact options and amounts available to you.
The payment stream may address the risk of outliving the portion used for the purchase. But once a life annuity purchase is completed, the assets used for it are no longer a balance you can invest, withdraw, or later roll over from the TSP. The annuity choice has lasting consequences; confirm the contract's terms before committing.
What does an IRA rollover do—and what does it not do?
A direct rollover of eligible traditional TSP money to a traditional IRA generally preserves tax deferral at the time of the move. It is a transfer of retirement assets, not a purchase of guaranteed lifetime income. Income from the IRA would depend on the investments, withdrawals, and any products later selected. Roth and tax-exempt balances have separate rules that should be checked carefully.
An IRA may offer a wider selection of investments and different account services. It may also add advisory fees, investment expenses, or other costs. None of those features automatically makes a rollover better than retaining assets in the TSP. Compare the full costs and services in writing.
Compare more than the monthly number.
Put the options side by side. How much income is guaranteed, and by whom? Can payments change with inflation? What remains accessible for a large expense? What could a spouse or other beneficiary receive? What happens if you die soon after payments begin? How would taxes be handled?
Also compare TSP investment costs with the proposed IRA's account, advisory, investment, and product costs. If an outside annuity is suggested, ask about surrender periods, commissions, optional riders, insurer claims-paying ability, and the difference between guaranteed values and projections.
A decision need not always be all or nothing.
Depending on eligibility and account balances, a retiree may use more than one strategy: for example, retaining some money in the TSP, directly rolling over an eligible portion, or allocating part of an eligible balance to an annuity. The mix should reflect pension and Social Security income, cash reserves, family needs, risk tolerance, and the desire to leave assets to others.
Required minimum distributions, early-withdrawal rules, plan restrictions, and the treatment of traditional versus Roth money can affect a choice. Coordinate the mechanics with TSP and a qualified tax professional before acting.
Questions to bring to your decision.
What income is already covered by FERS and Social Security? How much additional income must be dependable? How much of the TSP should remain available for the unexpected? What would the proposed annuity pay under different survivor options? What is the total cost of an IRA or outside product compared with keeping assets in the TSP?
The answer may be a TSP annuity, an IRA rollover, retaining TSP assets, or a combination. A thoughtful comparison should make the tradeoffs visible and document why the selected approach fits your own retirement and legacy priorities.