What to do with US defined contribution retirement account?

dunroving

Having recently retired/stopped working at age 60, I'm now stepping back and reviewing my finances and planning for the next 20 years. I have ca. $97k in TIAA-CREF, a US defined contribution scheme, from years I worked in the US. It is invested quite broadly across various (mostly US, with some global) bond and equity funds.

$20k is locked into TIAA Traditional, yielding interest-only payments of 4% that are transferred to my UK bank account. The 4% consists of a fixed guaranteed 3% plus an annual bonus decided by the Trustees. Over the past 10 years, this has averaged in the region of an additional 1%. Scheme rules prevent me from accessing the $20k currently in TIA Traditional until I am age 71. I'm trying to decide what to do with the remaining $77k and would appreciate any opinions. My options are as follows:

1) Move all/part to TIAA Traditional and take ca. 4% interest-only payments until at the latest age 71, at which point I have to take minimum distributions (RMDs) which in practice will likely mean taking out a Transfer Payout Annuity (TPA), specifically this will disburse the money in 10 equal sized payments over 9 years, up to my 80th birthday. Although the $22k must stay there until age 71, I could start a TPA on the $77k at any time [Advantages: Guaranteed source of income at a guaranteed 3% rate plus annual bonuses, albeit not inflation-linked; preservation of capital. Disadvantages: Not inflation-linked; locked in for up to 10 years, and subsequently TPA can only be drip-fed back over 9 years; uncertainty of exchange rate when I eventually withdraw in 10 years and over the intervening years - so the interest may drop in value if the £ strengthens considerably]

2) Cash out and bring all/part to the UK, taking advantage of the current good $/£ exchange rate, and invest in ISAs and SIPP (up to the £3.6k limit, or above if I take on part-time work). [Advantages: Current good exchange rate, greater certainty/familiarity with UK-based investments; greater control because not locked in for 10 years like TIAA Traditional. Disadvantages: Possible tax hit, though I would drip-feed over 1-3 years to stay below 40% threshold; "finality" of the decision (i.e., once it's out of the US, I can't go back, plus there is nothing in the UK AFAIK that gives the deal that TIAA Traditional gives of "3% guaranteed plus annual bonus" interest.

3) Leave all/part where it is to continue growing and make a decision at a later date. [Advantages: Flexibility to gather more information. Disadvantages: Uncertainty about stock market and exchange rate, so that if I decide in a year or two to start bringing over, at that time the exchange rate or stock market may be unfavourable]

Background details:
a) I have a defined benefit pension from the job I just left, that will cover most basic living expenses;
b) Have and enough capital (in S&S ISAs and SIPP, plus wadge of TFLS and voluntary severance cash) to pay off the mortgage whenever I want (currently only 1.09% interest, so no rush);
c) Capital above also enough to keep me going until my UK state pension kicks in at age 66. At that point, I will have enough guaranteed income to definitely fund my very modest lifestyle.

Hopefully that is enough background info to answer the most typical questions. Any opinions appreciated!

bostonerimus

I don't see the need to move from TIAA-CREF. Their fees are ok and you are getting tax deferred growth and have a choice of good funds. Maybe if the withdrawal process is a pain because of taxation, but other wise I'd be tempted to leave it in the US and average out the exchange rate with annual drawdown amounts.

4% from fixed income with a 3% guarantee and the possibility of more when interest rates go up is pretty good, but you will be locked in if you decide to contribute more. Look at your overall asset allocation and see how TIAA-Traditional fits in. IMHO it's a good deal in retirement if you can plan the withdrawals and income streams and if you turn it into a lifetime annuity you'll get a far better payout rate than with a UK based annuity.
You can use the tools on their site to get an estimate. I have a small TIAA-Traditional amount left over from an old employer's 403b and the payout rate on a single life annuity starting at age 56 and assuming 3% return (ie the lowest) is 7%, but if you have other sufficient guaranteed income you might like to stay in equity funds.

So work out your asset allocation and use that as your guide.

dunroving

Thanks - even in this global community, I am still taken by surprise that someone on a UK forum has experience with TIAA-CREF. I guess considering the number of expats working in US universities, I really shouldn't be surprised at all.

bostonerimus wrote: »

I don't see the need to move from TIAA-CREF. Their fees are ok and you are getting tax deferred growth and have a choice of good funds. Maybe if the withdrawal process is a pain because of taxation, but other wise I'd be tempted to leave it in the US and average out the exchange rate with annual drawdown amounts.

Yes I have had considerable "tax pain", mainly with TIAA-CREF (and other institutions, from what I have read) defaulting to 30% withholding, despite the dual taxation treaty and a W8-BEN being submitted. I have had to wait for up to 18 months to get the 30% withholding returned in the past (because you have to wait until the following tax year to submit 1040-NR, and even then TIAA doesn't supply the necessary forms until May, and then living overseas adds months to the processing of payment). I have sorted it out so that now TIAA is trained, at least in my case, to request refunding of the 30% withheld amount within a few days, rather than me submitting a tax return to the IRS the following year. Even still, I just worry that this may change if my "pet person" leaves TIAA-CREF, or some other change in procedures takes me back to square one. Interestingly, they don't tax the interest-only payments.

bostonerimus wrote: »

4% from fixed income with a 3% guarantee and the possibility of more when interest rates go up is pretty good, but you will be locked in if you decide to contribute more. Look at your overall asset allocation and see how TIAA-Traditional fits in. IMHO it's a good deal in retirement if you can plan the withdrawals and income streams and if you turn it into a lifetime annuity you'll get a far better payout rate than with a UK based annuity.

I look at the 4% yield (with 3% guaranteed) in comparison to current savings account interest rates and yes, it looks very good. I see it a bit like a "relatively fixed-term, good variable rate" savings account, in that there is a time commitment (like a fixed rate account here), but the rate gets better if interest rates go up, and there is the option to start withdrawing at any point. The downside/inflexibility is that I can only withdraw capital at a rate of approx. 10% of capital per annum, and once I start (via TPA), I am locked in to have to withdraw 10% per annum until it's gone (so I can't halt withdrawals, or speed them up/increase the withdrawal amount). My TIAA funds constitute about 35% of my capital (or will do, after my mortgage is paid off and I move house), so if I move it all to TIAA Traditional, I'd then effectively have 35% of my total holdings in cash/fixed interest in the US, plus about a 5%-10% cash holding here as/if I need to drip-feed cash by liquidating my S&S/bond holdings here in the UK.

bostonerimus wrote: »

You can use the tools on their site to get an estimate. I have a small TIAA-Traditional amount left over from an old employer's 403b and the payout rate on a single life annuity starting at age 56 and assuming 3% return (ie the lowest) is 7%, but if you have other sufficient guaranteed income you might like to stay in equity funds.

So work out your asset allocation and use that as your guide.

Here is where my understanding of the term "annuity" as applied to the US market is sketchy. Here (UK) I look at annuities a bit like insurance - you hand over your capital in return for some sort of lifetime promise, and if you croak the next day, tough luck. In the US, it seems that TIAA-CREF annuities aren't quite like that. For example, you said assuming a 3% return (I presume you mean if you stay invested until you take the annuity?), an annuity starting at age 56 will yield 7%, which is where my head goes :huh:, as a lot of the illustrations I get from Tennessee and North Carolina for annuities seem almost to be phased withdrawal schemes (i.e., they often talk about running out of money before you run out of life).

Overall, annuities aren't great in my situation. No kids or dependents to benefit from survivor benefits if I croak early, and males in my family do tend to croak early (due to bad genes, not bad behaviour). I'll already have guaranteed income at age 66 from my occupational pension (as mentioned in my OP), US Social Security (small-ish amount; plan to start withdrawing early at age 62), and UK State Pension (about 70% of the full amount; I can't make up any lost years). That's one reason why I favour TIAA Traditional, as it's a semi-guaranteed income (3% or above), with preservation of capital.

I'm maybe thinking about going with a halfway-house plan - move some of the $77k to TIAA Traditional, to add to the $20k already there, and move the rest here. Again, I shouldn't be bothered with having S&S funds in the US, and certainly I have a decent level of flexibility (though the NC plan does restrict which funds I can invest in), but there is something about the "certainty" of having my investments here in the UK that appeals, both in terms of knowing I have a historically decent exchange rate at the moment and not having to engage in tedious phone calls with TIAA reps who quite frankly sometimes seem to struggle with getting their heads around my UK-based situation.

Anyway, thanks for your thoughts, they have helped me move on in my thinking. :money:

phillw

dunroving wrote: »

Overall, annuities aren't great in my situation. No kids or dependents to benefit from survivor benefits if I croak early,

You don't fancy using it as a chat up line "Hello darling, take a look at my pension"?

I don't know how common it is these days, but I'm sure my gran re-married because of that.

dunroving

phillw wrote: »

You don't fancy using it as a chat up line "Hello darling, take a look at my pension"?

I don't know how common it is these days, but I'm sure my gran re-married because of that.

Well, in all seriousness, I'd consider it if I knew I was on my way out, if only to help out someone else. I do have a small number of old friends who are single/divorced.... it seems such a shame for surviving spouse benefits to go to waste.

EdSwippet

dunroving wrote: »

Yes I have had considerable "tax pain", ...

Whatever you decide, you should probably put off taking any action you cannot readily reverse at least until Congress has decided on what, if anything, comes out of the current attempt at "tax reform".

In particular, Republicans Overseas are pushing hard for inclusion of a form of 'territorial tax for individuals'. If this materialises it would apparently break existing tax treaties -- Republicans Overseas uses the term 'removal of treaty benefits' -- and require US non-resident aliens to pay full US income and capital gains taxes on all US source income.

The chance of this being included in reform looks remote, not least because of its baroque construction, its insanity regarding current treaties, and the likelihood that it would hugely repel inward investment into the US by non-resident aliens. And all of reform may itself be doubtful. But it seems we live in uncertain times where anything is currently possible, perhaps even this overt nonsense, so who knows.

Just one more thing to worry about there, then! The broader point, of course, is that anything you leave in the US can be adversely affected by either US or UK tax law changes, whereas anything you remove from the US and bring to the UK can then only be messed up by the UK.

bostonerimus

dunroving wrote: »

Here is where my understanding of the term "annuity" as applied to the US market is sketchy. Here (UK) I look at annuities a bit like insurance - you hand over your capital in return for some sort of lifetime promise, and if you croak the next day, tough luck. In the US, it seems that TIAA-CREF annuities aren't quite like that. For example, you said assuming a 3% return (I presume you mean if you stay invested until you take the annuity?), an annuity starting at age 56 will yield 7%, which is where my head goes :huh:, as a lot of the illustrations I get from Tennessee and North Carolina for annuities seem almost to be phased withdrawal schemes (i.e., they often talk about running out of money before you run out of life).

ITAA Traditional is an annuity....but it is not a life time income annuity. With TIAA-Traditional they guarantee you a minimum of 3% interest and add bonus interest on top depending on prevailing rates. To guarantee this you have to lock the money up for 10 years, but as you say you can access it through a TPA by withdrawing 10% of it over 10 years......so you still have access to all your capital.

Overall, annuities aren't great in my situation. No kids or dependents to benefit from survivor benefits if I croak early, and males in my family do tend to croak early (due to bad genes, not bad behaviour). I'll already have guaranteed income at age 66 from my occupational pension (as mentioned in my OP), US Social Security (small-ish amount; plan to start withdrawing early at age 62), and UK State Pension (about 70% of the full amount; I can't make up any lost years). That's one reason why I favour TIAA Traditional, as it's a semi-guaranteed income (3% or above), with preservation of capital.

With TIAA-Traditional you have the option to just stick as you are and get a guaranteed 3% (almost certainly 4% or more now), access to capital over 10 years and if you die the balance will pass to your heirs. My example was taking the option of using the TIAA-Traditional balance to buy a TIAA Lifetime Income annuity. They do the projections using 3% annual return ie the guaranteed minimum, but the amount can actually be higher in years where the interest rate is higher. The 7% payout rate that TIAA quoted me for a lifetime annuity is using 3% and it's far better than most life time annuities.

I'm maybe thinking about going with a halfway-house plan - move some of the $77k to TIAA Traditional, to add to the $20k already there, and move the rest here. Again, I shouldn't be bothered with having S&S funds in the US, and certainly I have a decent level of flexibility (though the NC plan does restrict which funds I can invest in), but there is something about the "certainty" of having my investments here in the UK that appeals, both in terms of knowing I have a historically decent exchange rate at the moment and not having to engage in tedious phone calls with TIAA reps who quite frankly sometimes seem to struggle with getting their heads around my UK-based situation.

Anyway, thanks for your thoughts, they have helped me move on in my thinking. :money:

Being comfortable with your investments is key. I like the idea of using TIAA-Traditional as a foundation. Lots of people would love to have a basically certain 4% return and access to capital. Money from pensions, SP and then 65% in stocks and 35% in TIAA -Traditional delivering 4% sounds like a very solid plan to me. I'm in a similar boat with pensions and SP coming. I'm 25% fixed income and 75% stocks. I've had a small balance in TIAA-Traditional for over 30 years and I plan to leave it ticking away...over those years it's returned around 6% annual average, which is amazing without risking any capital.

dunroving

EdSwippet wrote: »

Whatever you decide, you should probably put off taking any action you cannot readily reverse at least until Congress has decided on what, if anything, comes out of the current attempt at "tax reform".

In particular, Republicans Overseas are pushing hard for inclusion of a form of 'territorial tax for individuals'. If this materialises it would apparently break existing tax treaties -- Republicans Overseas uses the term 'removal of treaty benefits' -- and require US non-resident aliens to pay full US income and capital gains taxes on all US source income.

The chance of this being included in reform looks remote, not least because of its baroque construction, its insanity regarding current treaties, and the likelihood that it would hugely repel inward investment into the US by non-resident aliens. And all of reform may itself be doubtful. But it seems we live in uncertain times where anything is currently possible, perhaps even this overt nonsense, so who knows.

Just one more thing to worry about there, then! The broader point, of course, is that anything you leave in the US can be adversely affected by either US or UK tax law changes, whereas anything you remove from the US and bring to the UK can then only be messed up by the UK.

Although, like you, I don't see major changes to the dual taxation situation any time soon, it is the uncertainties of having my investments, and withdrawals, US-based that is a major driver to bringing at least some of my TIAA-CREF holdings over here. (In fact, I already moved over about $35k during the period 2016-2017, to subsidise being able to stuff money into my workplace pension and other UK-based investments).

Putting into TIAA Traditional overcomes concerns about any US stock market volatility, but the $/£ exchange rate is an unknown that would affect the monthly interest and the value of the remaining capital whenever I decide to liquidate and start bringing over. Currently, $97k is worth £75k at $1.30, but if it shifts to the more historic $1.60, then it drops by £15k to £60k, and at $1.80 it's down by £21k, to £54k ... that's quite a drop (almost 30%).

I think these risks are something I can live with if the amount was less than the current amount - $97k currently represents about 22%-32% of my total capital holdings, depending on what house I end up in during retirement (I'll be moving home next year, and house prices up here in Scotland are much lower than where I'll be moving to). Think maybe I need to move some more over to the UK and then decide what to do with what's left in the US.

dunroving

bostonerimus wrote: »

ITAA Traditional is an annuity....but it is not a life time income annuity. With TIAA-Traditional they guarantee you a minimum of 3% interest and add bonus interest on top depending on prevailing rates. To guarantee this you have to lock the money up for 10 years, but as you say you can access it through a TPA by withdrawing 10% of it over 10 years......so you still have access to all your capital.

With TIAA-Traditional you have the option to just stick as you are and get a guaranteed 3% (almost certainly 4% or more now), access to capital over 10 years and if you die the balance will pass to your heirs. My example was taking the option of using the TIAA-Traditional balance to buy a TIAA Lifetime Income annuity. They do the projections using 3% annual return ie the guaranteed minimum, but the amount can actually be higher in years where the interest rate is higher. The 7% payout rate that TIAA quoted me for a lifetime annuity is using 3% and it's far better than most life time annuities.

Being comfortable with your investments is key. I like the idea of using TIAA-Traditional as a foundation. Lots of people would love to have a basically certain 4% return and access to capital. Money from pensions, SP and then 65% in stocks and 35% in TIAA -Traditional delivering 4% sounds like a very solid plan to me. I'm in a similar boat with pensions and SP coming. I'm 25% fixed income and 75% stocks. I've had a small balance in TIAA-Traditional for over 30 years and I plan to leave it ticking away...over those years it's returned around 6% annual average, which is amazing without risking any capital.

Thanks again, I now understand what you were meaning re: the 7% "lifetime annuity" - the projections that TN and NC sent me now make sense!

Presumably, unless this had a guaranteed term component , the capital disappears once you are defunct. I noticed that the rates for a 10-year minimum guarantee period were really not much lower than for a regular lifetime annuity.

Your last paragraph helps a lot. If the guarantee included a guaranteed exchange rate, I'd have no reluctance at all. However, as per my most recent post (above), the thought of having 22%-32% of my income-generating capital in a currency that, based on historic levels, is more likely to devalue over the next 10-20 years than go up/stay level is a bit too uncertain for me. I think I will likely hedge my bets a bit by bringing over more of my TIAA-CREF holdings while the exchange rate is so low. I'll then either move the remainder into TIAA Traditional (more than likely), or just leave it in mutual funds for the moment.

Thanks again. My F&F glaze over the minute I try to talk about this stuff, so it's helpful to bounce thoughts off people on MSE now and then.

bostonerimus

dunroving wrote: »

Presumably, unless this had a guaranteed term component , the capital disappears once you are defunct. I noticed that the rates for a 10-year minimum guarantee period were really not much lower than for a regular lifetime annuity.

If you stay with TIAA-Traditional as you are now then any remaining capital in the account will pass to your heirs. If you buy the "single life time income annuity" then the capital is gone and nothing will pass to your heirs.

dunroving

bostonerimus wrote: »

If you stay with TIAA-Traditional as you are now then any remaining capital in the account will pass to your heirs. If you buy the "single life time income annuity" then the capital is gone and nothing will pass to your heirs.

I don't have heirs as such (no wife, ex-wife, or squids), but I have named beneficiaries. I would likely not go down the route of a lifetime annuity, but if I did, I'd go with the 10-year guaranteed, in the hope that if I croaked early, at least someone would get something and if I don't croak early I'll have a lifetime guarantee.

Always interesting to me how different US and UK finances can be - different types of annuities, and different mortgage products, for example.

More than likely though, I'll go with TIAA Traditional for all or part of my holdings and then do the 9-year TPA "thing". Increasingly likely I'll bring some of it over during the next 6 months and put the remainder into TIAA Traditional, I think.