Understanding TSP Annuities

TSP annuities are a retirement distribution option available to those who have a Thrift Savings Plan. TSPs are available to some government employees and serve as a federal alternative to 401(k)s and other similar plans. Converting your TSP funds into an annuity creates monthly payments that are guaranteed to last the rest of your life.

Christian Simmons, writer and researcher for RetireGuide
  • Written by
    Christian Simmons

    Christian Simmons

    Financial Writer

    Christian Simmons is a writer for RetireGuide and a member of the Association for Financial Counseling & Planning Education (AFCPE®). He covers Medicare and important retirement topics. Christian is a former winner of a Florida Society of News Editors journalism contest and has written professionally since 2016.

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    Lamia Chowdhury
    Lamia Chowdhury, editor for RetireGuide.com

    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.

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  • Financially Reviewed By
    Toby Walters, CFA®
    Toby Walters, CFA

    Toby Walters, CFA®

    Chartered Financial Analyst and Paraplanner

    Toby Walters, CFA®, has over 25 years of financial research experience. With a knowledge and understanding of researching and analyzing financial data, he has developed a unique and experienced viewpoint on money matters. He has been a chartered financial analyst since 2003, and most recently a portfolio analyst and paraplanner.

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  • Published: March 22, 2023
  • Updated: April 26, 2023
  • 9 min read time
  • This page features 4 Cited Research Articles
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How to Cite RetireGuide.com's Article

APA Simmons, C. (2023, April 26). Understanding TSP Annuities. RetireGuide.com. Retrieved May 30, 2023, from https://www.retireguide.com/annuities/types/tsp-annuity/

MLA Simmons, Christian. "Understanding TSP Annuities." RetireGuide.com, 26 Apr 2023, https://www.retireguide.com/annuities/types/tsp-annuity/.

Chicago Simmons, Christian. "Understanding TSP Annuities." RetireGuide.com. Last modified April 26, 2023. https://www.retireguide.com/annuities/types/tsp-annuity/.

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Key Takeaways
  • TSP, or Thrift Savings Plan, is a retirement savings option similar to 401(k)s that are available to federal employees.
  • One distribution option for people with a TSP is to opt for a TSP annuity, which guarantees monthly payments that last for as long as you are alive.
  • TSP annuities come in a couple different forms and can include varying features. This includes single life and joint life options.
Although you can receive your Thrift Savings Plan (TSP) distributions in several ways after you retire, one way to receive them is through an annuity, providing you (and your beneficiary) with the security of guaranteed payments. These annuities may not be for everyone, so be careful to weigh the pros and cons of buying them. Once you purchase one, it’s no longer part of your retirement account and you can’t change or cancel it.
Toby Walters, CFA
Toby Walters Chartered Financial Analyst and Paraplanner

What Are TSP Annuities?

Converting your TSP into a life annuity is one of the options available to federal employees, and doing so will set up guaranteed monthly payments that last the rest of your life.

This can be an appealing option to those who are worried about burning through their savings or running out of money in retirement.

So, if you are looking for security and stability above all in retirement, then an annuity may make sense as a payout option for your plan.

According to a fact sheet from TSP.gov, when you opt for a life annuity, you essentially give up control of your money in exchange for set, guaranteed monthly payments.

It’s essentially a tradeoff, where you are relinquishing control in exchange for certainty.

How TSP Annuities Work

TSP annuities are straightforward and similar to other annuities. But there are several different variations available, and you will have to make a few choices.

First, you will have to choose which type of annuity to opt for: a single life annuity or joint life annuity.

TSP Annuity Options
Single Life
Only you receive payments from your annuity.
Joint Life
The annuity is tied to a joint annuitant as well, who can keep getting payments after you die.

In the single life setup, payments are provided directly to you for as long as you are alive. Once you die, the payments stop. In a joint life setup, you can select a joint annuitant (usually a spouse) who can benefit from the payments as well.

If you die before your spouse, the payments will continue and be distributed to them until they die.

The second thing to consider is whether you want to include a cash refund feature with your annuity. This option can provide more certainty for your beneficiaries by guaranteeing that any money left over from what you put into the annuity will be distributed to them when you die.

However, adding this option will lower the payments you receive while you are alive.
The other option available to you is setting up a 10-year certain period. If you opt for this protection, the payments from your annuity are available for 10 years regardless of when you die.

Say, for example, that you die five years after purchasing the annuity. The payments would then continue for another five years (the rest of the 10-year period) to your beneficiary.

Annuity Payouts and Payment Types

Who Should Consider Buying a TSP Annuity?

In order to buy a TSP annuity, you must be eligible for and have a TSP.

This option is available to federal employees. If your retirement plan is not a TSP, then you don’t have access to TSP annuities.

Opting for a TSP annuity can make sense for those who are interested in lifetime security above all and are willing to potentially accept smaller distributions in exchange for this protection.

The annuity will provide payments for as long as you are alive, even if you live to the point where your payments have exceeded the value of the money you used to purchase the annuity.

Because annuities continue to pay out as long as you are alive, the value of the investment is greatest for those who live long lives. So, your life expectancy and health are other factors to keep in mind when considering a TSP annuity.

If you already have serious health conditions or reasons to expect that you may not live deep into retirement, then opting for an annuity may not make as much sense.

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How To Purchase TSP Annuities

Purchasing an annuity works similarly to setting up other TSP installments and can be done so through your TSP account.

According to the TSP’s website, the annuity is purchased through a private vendor that is partnered with TSP. Funds are then sent to the vendor within five days of you requesting an annuity.

The minimum purchase amount is $3,500.

You will also have to choose the format of your payments. You can opt for level payments, where you receive the exact same amount each month throughout your life, or increasing payments, which start lower and increase steadily year over year.

Once your annuity is set up in the format of your choosing and with your selected features, it will begin its stream of guaranteed monthly payments.

Pros and Cons of TSP Annuities

It’s important to remember that annuities do not automatically make sense for everyone or every situation. Weighing your personal circumstances and what matters most to you when it comes to your retirement savings can help determine whether an annuity is a viable option for you.

There are both benefits and drawbacks to opting for a TSP annuity.

TSP Annuity Pros
  • Guaranteed income for life
  • Predictability of payments
  • Can provide for a spouse

The biggest pro of opting for a TSP annuity is its guaranteed payments. Having peace of mind in knowing that you will receive payments every month, no matter what, for as long as you are alive, can be very attractive to retirees.

Predictability of payments is enticing, too. Depending on the setup, the guaranteed payments can be steady and consistent. So, you don’t have to worry about irregular fluctuations in your income month to month.

If you opt for a joint life setup, then TSP annuities can provide for your spouse, as well. If your spouse is still alive, then the payments will continue to them.

But there are also drawbacks to be aware of when it comes to TSP annuities.

TSP Annuity Cons
  • High fees
  • Lack of access to funds
  • Less money for beneficiaries

Many annuities come with high purchasing fees when compared to other financial products, which is something to be aware of when considering a purchase.

And one of the biggest limitations of an annuity is lack of control of the funds. Once you have purchased an annuity, you have essentially given up control of the principal.

If you have a change of heart later in life and decide you want that lump sum back, it may be difficult or even impossible to get it.

Annuities can also leave less money for your beneficiaries than traditional installment setups. In the standard setup, the annuity vendor keeps the principal and payments cease once you die.

Keep in mind that options that do provide for your beneficiaries, like a 10-year period, can result in smaller monthly payments for you.

TSP Annuities vs. Other Retirement Options

According to an article from TSP.gov, annuities are far from the only way to receive your savings in retirement.

You can also opt for more traditional installment and distribution methods.

One option is a total distribution, where you completely pull all your savings out of your TSP and manage the lump sum yourself in retirement.

You can also set up regular installments from your account set to the timeframe of your choosing. This option can look similar to an annuity on the surface, where you are receiving predictable payments from your account. But the difference is that you are simply withdrawing from your existing funds. That money is finite and will eventually run out.

When you purchase an annuity, you do so with those funds in exchange for set payments. Annuity monthly payments may be smaller than distribution payments, but with the tradeoff that they last your whole life.

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Frequently Asked Questions About TSP Annuities

How are TSP annuity rates calculated?
Your TSP annuity rate is calculated based on several factors, including the type of annuity you choose, any features you opt to add onto it and how much money you are using to purchase the annuity.
Can you purchase a TSP annuity while still working?
You can make withdrawals from your TSP while you are still working, but you may not be able to purchase a TSP annuity if you have not yet retired.
Are there fees associated with TSP annuities?
Annuities tend to have higher fees associated with them than other financial products. You may face some fees when you purchase a TSP annuity.
Last Modified: April 26, 2023

4 Cited Research Articles

  1. Thrift Savings Plan. (2022, May). Annuities. Retrieved from https://www.tsp.gov/publications/tspfs24.pdf
  2. Thrift Savings Plan. (n.d.). About the Thrift Savings Plan. Retrieved from https://www.tsp.gov/about-the-thrift-savings-plan-tsp/
  3. Thrift Savings Plan. (n.d.). Withdrawals in Retirement. Retrieved from https://www.tsp.gov/withdrawals-in-retirement/
  4. U.S. Office of Personnel Management. (n.d.). Thrift Savings Plan. Retrieved from https://www.opm.gov/retirement-center/my-annuity-and-benefits/thrift-savings-plan/