What is the best way to receive money for living expenses in retirement, while having to pay the least tax?

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I am 64 yo and have a TSP account. I continue to work for a Texas state agency under a different retirement plan. I want to begin taking withdrawals on my TSP account as soon as there would be most advantagous for me tax-wise. In other words what is the best way to receive money for living expenses and that having to pay the least tax? Should I buy an annuity? Rollover to a Roth IRA? Your advice would help me out alot. Thanks George

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Answers (1)

Answers (1)


What a great question!  While I can't answer it with certainty for you personally, I will give you a few things to consider.  I also recommend speaking with your financial and/or tax advisor to discuss this in more detail.  You can always call USAA financial advisors to discuss this more as well. 


When you think about withdrawing money from your TSP account, the good news is that since you are over 59.5 years old, you can withdraw and not pay any early withdrawal penalty.  You will pay taxes at your current tax rate on all Traditional TSP contributions that are withdrawn.  Moving money to a Roth would probably not be the best idea.  The advantage of the Roth is to have the money grow over time to be withdrawn tax-free.  Since you need to withdraw the money right now, you will not have time for it to grow.  


I suggest analyzing how much and how frequently you will need the money.    

  • If you only need to withdraw every now and then, annuitizing your TSP account would probably not be the best option since you will receive income monthly, even if you don't need it.   
  • If you have a specific, non-changing amount of income you need each month, then annuitizing can be an easy way to fulfill that need.  It can also be more secure because it carries the guarantee of the company that has annuitized the money.  USAA believes that essential living expenses should be covered by a guaranteed income, stream such as a pension or an annuity. 


Finally, it is important to know that soon, TSP withdrawal options will change.  At the moment, they are fairly restrictive but will become more friendly.  Below is a summary of the changes.


On November 17, 2017, the President signed the Thrift Savings Plan (TSP) Modernization Act of 2017 into law.  This law, which must be enacted by November 17, 2019, provides greater flexibility for TSP participants to distribute assets from their TSP accounts for retirement needs and provides more Required Minimum Distribution flexibility for TSP owners over age 70.5. The following are some key items and how they will change.

  • Partial withdrawal while in service past age 59.5
    • Current: The TSP participant can take a partial withdrawal only one time either “in service” or “post-separation.” 
    • New: No limit
  • Post-separation partial withdrawal
    • Current: The TSP participant can take a partial withdrawal only one time either “in service” or “post-separation.”
    • New: No limit
  • Withdrawal of funds
    • Current: Can only change once per year during annual change period. That change goes into effect on Jan. 1st of the following year.  However, you have the choice of three withdrawal methods and once you make your choice, changes are limited;
      • Single payment (full withdrawal)
      • Monthly payments spread out over time based on a specific dollar amount or life expectancy.
      • Life Annuity 
    • New: Can change as desired
  • TSP options past age 70.5
    • Current: TSP funds remaining in TSP past 70.5 without a withdrawal provision selected are automatically placed in ‘G” fund and “forfeited to TSP.”  This means that you forfeit any gains and must select a withdrawal method to get your money back.
    • New: Funds can remain in TSP past 70.5, account owners are no longer required to make a post-separation withdraw the year they turn 70.5. IRS RMD provisions do still apply.

I hope this has given you some topics to think about as you consider using your TSP in retirement.  Again, I do recommend reaching out to USAA financial advisors as they can create a comprehensive plan to help you plan the best way to draw down your assets in retirement.


Have a wonderful day!!