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Annuity option when withdrawal from 401(a) thrift savings plan. Is this a distribution?


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The federal Thrift Savings Plan allows retirees to direct the TSP to purchase an annuity from an insurance company (either the entire or partial balance of the participant) when participant retires.  IRS pub 721 says the participant is not taxed until the annuity payments are paid to the participant.  What IRS section allows the transfer of the purchased annuity from the TSP to the insurance company to be considered a nontaxable event?  Is the annuity considered part of the TSP plan even though the insurance company is now in charge of the payments and issues the tax documents each year?     Most plans require direct transfers or rollovers to remain tax free.  

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17 hours ago, Maryalice said:

What IRS section allows the transfer of the purchased annuity from the TSP to the insurance company to be considered a nontaxable event?

No idea...401 I suppose.

 

17 hours ago, Maryalice said:

Is the annuity considered part of the TSP plan even though the insurance company is now in charge of the payments and issues the tax documents each year?

No.  I'm not familiar with the TSP plan reporting but I can tell you that regular 5500 reporting would show this on Schedule H, Expenses line e (2) To insurance carriers for the provision of benefits.

Ed Snyder

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I once (like 30 years ago) researched the issue for an ERISA-covered DB plan and concluded the source of the rule in that context was an old, c. 1960's or '70's Revenue Ruling.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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  • 5 weeks later...

Maryalice;

The TSP has designated the Metropolitan Life Insurance Company to be its annuity provider.  The initial premium is a tax-free rollover from the TSP to Metropolitan Life.  The annuity is not part of the plan because the same annuity contract is available to all of us.

Of Note:    The rates  used by Metropolitan is substantially less than those used by the Federal Employees Retirement System (FERS) which provides the Defined Benefit component to the FERS-TSP package.  As an example;  the FERS uses a rate of 0.09728 for a 65 year old while Metropolitan Life uses a rate of 0.0624.

Q.:  Why isn't the FERS the designated annuity provide for the TSP?

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Probably because the FERS plan is self-insured and the Met policy is, by definition, not.  You also probably have administrative loads on the Met policy that are much lower than FERS allows. In short, comparing a retail product to a massive federal program is a fools errand.

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8 hours ago, Mike Preston said:

Probably because the FERS plan is self-insured and the Met policy is, by definition, not.  You also probably have administrative loads on the Met policy that are much lower than FERS allows. In short, comparing a retail product to a massive federal program is a fools errand.

The Annuity Contract Provider for the NYC-TRS 403(b) plan is the TRS;  a DB plan.  It's unfortunate that the TSP does not have the same relationship with its DB component;  the Federal Employees Retirement System. 

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On 2/25/2021 at 6:12 AM, joel said:

The Annuity Contract Provider for the NYC-TRS 403(b) plan is the TRS;  a DB plan.  It's unfortunate that the TSP does not have the same relationship with its DB component;  the Federal Employees Retirement System. 

The State of NJ administers a supplemental 403(b) plan labeled the Supplemental Annuity Collective Trust.  The annuity payout option is offered via the NJ Division of Pensions.  

Again, it is unfortunate that the federal government would have their retiring employees buy a retail priced annuity with its much lower annuity income rates.  Have the unions fell asleep at the wheel?

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