TIAA Traditional (Retirement Choice - RC) interest-only option - questions

[hcs77135]

Hello all you TIAA mavens, I have a question about a TIAA Traditional RC contract that represents about 15% of our total assets.

The main retirement distribution options are: interest-only; lifetime annuity payments; and 84 months of systematic withdrawals (what TIAA calls the Transfer Annuity Payout in the RA contracts.)

I'm potentially looking to use it for two purposes: (1) to fill an income gap for the first 3 or so years of retirement (starting in 2030) before SS begins; and (2) set aside the bulk of the account (other than for required RMDs) to self-insure long-term care via the 84 month systematic withdrawal option (thus using stable value pre-tax dollars to self-fund tax-deductible LTC if needed; if not needed the account goes to our daughter). In between these two events would be mandatory RMDs (assuming that the need for LTC, if any, would be after RMDs had commenced.)

My specific questions are: In an RC contract (1) can you opt for the interest-only payments and then terminate them before RMDs start; and (2) are you eligible to commence the 84 month systematic withdrawal option down the road if you had chosen an interest-only option at some time in the past and then stopped it?

Put differently, interest-only option from say age 63-66; RMDs starting at age 75; then at age 85 (or whenever LTC is needed) initiate the 7 year systematic withdrawals? Possible? (I know I may end up having to call TIAA, but the last time I did that the person did not want to answer my questions and was pushing hard for the lifetime annuity option, which was not the reason for my call!)

Thank you!

[Sampan]

I believe you can do this though it is always best to contact TIAA for confirmation. Perhaps not all employer plans allow this option. An older TIAA document I have, before the RMD ages changed, says this:

Option #3:
Interest -Only
If you are between ages 55 and 69½, you can choose our Interest-Only Option, which allows you to receive as income the total interest that would
otherwise be credited to your TIAA Traditional balance. The Interest-Only Option offers you the flexibility to receive income without drawing down your principal, and you can switch to another income choice if your needs change later. It’s an ideal way to supplement your income during a transition to full retirement or if you are working part time.

This is from a document titled: MAKING THE MOST OF YOUR RETIREMENT HOW TO CHOOSE THE RIGHT INCOME OPTIONS FOR YOU

[Harmanic]

This is an especially good option for people wanting to do large Roth conversions, since interest only is going to be much smaller than the annuity options.

[JohnDoh]

I believe you can do this though it is always best to contact TIAA for confirmation. Perhaps not all employer plans allow this option. An older TIAA document I have, before the RMD ages changed, says this:

Option #3:
Interest -Only
If you are between ages 55 and 69½, you can choose our Interest-Only Option, which allows you to receive as income the total interest that would
otherwise be credited to your TIAA Traditional balance. The Interest-Only Option offers you the flexibility to receive income without drawing down your principal, and you can switch to another income choice if your needs change later. It’s an ideal way to supplement your income during a transition to full retirement or if you are working part time.

This is from a document titled: MAKING THE MOST OF YOUR RETIREMENT HOW TO CHOOSE THE RIGHT INCOME OPTIONS FOR YOU

My understanding, based on a fair bit of investigation, is that this is correct. The key "gottcha" to understand is that there is ONE THING YOU CAN'T DO: go back to the way it was "before". I.e. can't simply turn IPRO "off" or "terminate" it in OP's language. You CAN switch to an alternative PAYOUT method, of which there are two: annuitization and TPA.

At least that's my understanding.

[crefwatch]

I agree that you can't simply turn off IPRO. Note that it is not your responsibility to liquidate in preparation for RMD's. TIAA will use TIAA Traditional if you elect RMDs "proportionately" from ALL your holdings.

[Sampan]

My understanding, based on a fair bit of investigation, is that this is correct. The key "gottcha" to understand is that there is ONE THING YOU CAN'T DO: go back to the way it was "before". I.e. can't simply turn IPRO "off" or "terminate" it in OP's language. You CAN switch to an alternative PAYOUT method, of which there are two: annuitization and TPA.

I think there's just one more issue. You have to do interest only payments for at least one year before you can switch to the other options.

[JohnDoh]

My understanding, based on a fair bit of investigation, is that this is correct. The key "gottcha" to understand is that there is ONE THING YOU CAN'T DO: go back to the way it was "before". I.e. can't simply turn IPRO "off" or "terminate" it in OP's language. You CAN switch to an alternative PAYOUT method, of which there are two: annuitization and TPA.

I think there's just one more issue. You have to do interest only payments for at least one year before you can switch to the other options.

Yes, that's right. My bad. Sorry.

[hcs77135]

Thank you all. It sounds like it's possible to switch the Interest-Only option to another option, ie lifetime annuity, or the 84 month Transfer Payout Annuity, but not possible to simply turn off the Interest-Only option before RMDs begin and then do a Transfer Payout Annuity say 20 years later. If that's the case, my plan would be to use other assets to fund the bridge years before SS; then RMDs will need to be taken from the TIAA Traditional beginning at age 75, and then we can commence a Transfer Payout Annuity later, if and when needed, to fund tax-deductible long-term care. Appreciate all the responses!

[hcs77135]

Thank you all again. Perhaps there is one more option: Take an interest-only option before RMDs begin, then once RMDs begin continue to receive the greater of (i) the interest-only payments or (ii) required RMDs, without ever terminating the interest-only option, since that is not allowed; this would still preserve the ability to do a Transfer Annuity Payout later on to cover long-term care expenses. Does that sound right? Thanks!

[crefwatch]

Keep in mind that any annuitization can be for less than the total. You could simply TPA just enough to fund your bridge. Interest is earned during the payout. I think it is better to bridge with other than fixed income assets (to sell) at this age in life, however.

This is an unusual version of the common comment here that "living off the dividends" and "invading my sacred principal" are not actually different! (Ironica typeface) No insult meant, just the observation!

[Harmanic]

Thank you all again. Perhaps there is one more option: Take an interest-only option before RMDs begin, then once RMDs begin continue to receive the greater of (i) the interest-only payments or (ii) required RMDs, without ever terminating the interest-only option, since that is not allowed; this would still preserve the ability to do a Transfer Annuity Payout later on to cover long-term care expenses. Does that sound right? Thanks!

Most likely if you live long enough to need extended long term care, you would be better off taking the lifetime annuity and putting the proceeds into taxable account. This does two things, you get the loyalty bonus, which will increase the NPV substantially if you live past life expectancy, and it will give your saved assets a step up in basis on death for your beneficiaries if you end up not needing long term care. This seems far superior to a TPA.

[hcs77135]

Keep in mind that any annuitization can be for less than the total. You could simply TPA just enough to fund your bridge. Interest is earned during the payout. I think it is better to bridge with other than fixed income assets (to sell) at this age in life, however.

This is an unusual version of the common comment here that "living off the dividends" and "invading my sacred principal" are not actually different! (Ironica typeface) No insult meant, just the observation!

Thank you. I envision that most of the bridge (from 2030-2037), as well as paying taxes on significant Roth conversions, will be financed with sales of Total Stock Market in taxable, but I’m looking to create some buckets of reliable fixed income so to avoid sales during bear markets. No aversion to selling VTI, but want to protect against sequence of returns risk. Some TIAA component would be reassuring in another 2022 scenario.

[hcs77135]

Most likely if you live long enough to need extended long term care, you would be better off taking the lifetime annuity and putting the proceeds into taxable account. This does two things, you get the loyalty bonus, which will increase the NPV substantially if you live past life expectancy, and it will give your saved assets a step up in basis on death for your beneficiaries if you end up not needing long term care. This seems far superior to a TPA.

Thank you. I have considered this and I’d like to think about this more - I’m sure that’s true about NPV if you take the lifetime annuity at say age 62. My concerns are (1) I want to do substantial Roth conversions of non-TIAA between 2030-40 and the annuity would be so large that it would eat into perhaps 1/2 the space available for that, and not sure it makes sense to start an annuity in one’s mid 70s (lower NPV) and (2) long term care for 2 people in the NY metro area is easily $200-300k/year today, who knows what it will be in 2050s. If we’ve converted all non-TIAA pre-tax retirement into Roth, and if the lifetime annuity with no inflation adjustment covers only a small amount of the annual cost of LTC, then I’m pulling money out of Roth (or brokerage) to pay for tax-deductible health care — but if I use TIAA 84 month TPA to pay for tax-deductible LTC I can pay with pre-tax dollars that by my calculations will cover most if not all of the health costs. Of course I can’t know if/when/how long LTC is needed. In my scenario my daughter would mostly inherit Roth, and if TIAA weren’t used it would be her only taxable. I welcome challenges to this thinking!! I hear what you’re saying about a step-up in basis. In my plan there is very little left in taxable after Roth conversions. Thanks again.

[crefwatch]

I love Roth Conversions myself. Not to change the subject, don't forget IRMAA for two people, and possibly pushing eligible income into NIIT territory. Since both bonds and stocks went down for almost two years, our plan to keep at least two years of expenses in cash (... with surprising MM rates lately) has worked well. I realize not everyone has enough of a nest egg to do that, but there is also a Boglehead impetus to be "fully invested at all times."

[Harmanic]

Most likely if you live long enough to need extended long term care, you would be better off taking the lifetime annuity and putting the proceeds into taxable account. This does two things, you get the loyalty bonus, which will increase the NPV substantially if you live past life expectancy, and it will give your saved assets a step up in basis on death for your beneficiaries if you end up not needing long term care. This seems far superior to a TPA.

Thank you. I have considered this and I’d like to think about this more - I’m sure that’s true about NPV if you take the lifetime annuity at say age 62. My concerns are (1) I want to do substantial Roth conversions of non-TIAA between 2030-40 and the annuity would be so large that it would eat into perhaps 1/2 the space available for that, and not sure it makes sense to start an annuity in one’s mid 70s (lower NPV) and (2) long term care for 2 people in the NY metro area is easily $200-300k/year today, who knows what it will be in 2050s. If we’ve converted all non-TIAA pre-tax retirement into Roth, and if the lifetime annuity with no inflation adjustment covers only a small amount of the annual cost of LTC, then I’m pulling money out of Roth (or brokerage) to pay for tax-deductible health care — but if I use TIAA 84 month TPA to pay for tax-deductible LTC I can pay with pre-tax dollars that by my calculations will cover most if not all of the health costs. Of course I can’t know if/when/how long LTC is needed. In my scenario my daughter would mostly inherit Roth, and if TIAA weren’t used it would be her only taxable. I welcome challenges to this thinking!! I hear what you’re saying about a step-up in basis. In my plan there is very little left in taxable after Roth conversions. Thanks again.

That makes sense assuming that someone can execute your plan if you need LTC. I think the interest only option makes sense while you are doing Roth conversions, which will give you some time to think about it. Also, payout rates are always changing based on Loyalty, age, and interest rates. So today's calculations could be very different when you are done your Roth conversions.

[hcs77135]

Thanks everyone. I've decided to forego the interest-only option -- it would take too much space away from Roth conversions during the bridge years, and I can create cash/treasury buckets in taxable, and other 401k, to deal with sequence of returns risk during this period and have more flexibility in tax planning/from which accounts we pull each year. I've done more research and the best option is to keep the money growing, take mandatory RMDs at 75, and then, as some responders noted, convert to a joint and survivor lifetime annuity a few years later rather than do the 7 year Transfer Payout Annuity. The lifetime annuity deals with longevity risk in a way that the TPA cannot, and also because it has a 20 year guarantee, even if we claim the annuity much later in life and then both die, our daughter would receive the remaining payments. The total 20 year payout (or longer if we become centenarians) would be much greater than the 7 year TPA. Thank you all.

[Harmanic]

Thanks everyone. I've decided to forego the interest-only option -- it would take too much space away from Roth conversions during the bridge years, and I can create cash/treasury buckets in taxable, and other 401k, to deal with sequence of returns risk during this period and have more flexibility in tax planning/from which accounts we pull each year. I've done more research and the best option is to keep the money growing, take mandatory RMDs at 75, and then, as some responders noted, convert to a joint and survivor lifetime annuity a few years later rather than do the 7 year Transfer Payout Annuity. The lifetime annuity deals with longevity risk in a way that the TPA cannot, and also because it has a 20 year guarantee, even if we claim the annuity much later in life and then both die, our daughter would receive the remaining payments. The total 20 year payout (or longer if we become centenarians) would be much greater than the 7 year TPA. Thank you all.

I think that is a good plan. One thing I would note however is that the 20 year guarantee will get more expensive as you get older (think of them as a type of life insurance on your annuity). If you annuitize after age 75, you might want to consider a 10 year guarantee instead, or no guarantee. An annuity creates opportunities to focus more on the rest of your portfolio, which might be better suited for legacy purposes. When the time comes, you can compare quotes for the various guarantee options and then decide if they are worth it.