If you have money in TIAA Traditional, you’ve probably wondered what your options are when it’s time to take your money out for retirement. Understanding your TIAA Traditional withdrawal options is one of the most important decisions you’ll make in your retirement planning journey. Yet, it’s also one of the most confusing aspects of TIAA retirement accounts.

What is TIAA Traditional?

It’s a fixed annuity that’s part of your 403(b) retirement account, specifically designed for employees of:

• Non-profit organizations
• Hospitals
• Universities
• Schools

Unlike variable investments that fluctuate with market performance, your TIAA traditional annuity provides stability through guaranteed minimum interest rates and participation in TIAA’s carefully managed general account.

Retirement planning decisions involving TIAA Traditional are particularly complex because it’s a unique product with specific rules and options. While this guide covers the four main payout choices available, it’s important to consider how these options align with your overall financial picture, including:

• Other income sources
• Other investments
• Retirement timing
• Risk tolerance
• Legacy goals.

Understanding Your TIAA Traditional Options

TIAA Traditional is different from the variable annuity options in your 403(b) account, such as CREF stock, CREF growth, or CREF bond. While those investments tie your returns to market performance, TIAA Traditional provides returns based on TIAA’s general account performance. This massive, conservatively managed portfolio includes traditional bonds, commercial real estate, agriculture, timber, and other stable investments that TIAA has been managing for over 150 years.

There are several types of TIAA traditional contracts, and each has different rules and interest rates. You might have older contracts from contributions made decades ago, or newer contracts from recent contributions. Some contracts are fully liquid (marked with an “S” for supplemental), while others have liquidity restrictions. Furthermore, there are even certain “Plan Rules” within your organization that might create additional complexity around the availability and liquidity of funds.  Understanding which type of contract you have and your plan’s rules is crucial for determining your available options.

Option 1: Required Minimum Distribution (RMD) or Minimum Distribution Option (MDO)

The first way to access your TIAA traditional funds is through the required minimum distribution option, also called the minimum distribution option by TIAA. This option becomes available when you reach the age when the IRS requires you to start taking distributions from your tax-deferred retirement accounts.  If you miss an RMD, you could be subject to a 25% penalty! 

The RMD age has changed over the years due to legislation. Previously set at 70.5, it was raised to 72 by the SECURE Act. RMD now stands at 73 or 75, depending on your birth year. If you were born in 1960 or later, your required minimum distribution age is 75.

How the Math Works

The IRS provides a life expectancy table that determines your distribution factor based on your age. For example, if you turn 75 in 2025, your life expectancy factor is 24.6. You divide your account balance by this factor to determine your required distribution amount.

Example

Let’s say you have $1 million in a TIAA traditional account. At age 75, you would divide $1 million by 24.6, resulting in a required distribution of approximately $40,650, or about 4% of your account balance. As you age, your life expectancy decreases, which means your required distributions increase. By age 90, with a life expectancy factor of 12.2, that same $1 million would require a distribution of nearly $82,000.

This creates what I like to call the “Tax Trap of 401ks and IRAs.” If you have substantial Social Security payments and perhaps a pension, and you don’t need these tax-deferred assets for current income, those increasing RMDs can push you into higher tax brackets and trigger additional costs like Medicare surcharges or IRMAA.

The advantage of this option is continued tax deferral while pulling out the minimum required by the IRS. Before reaching RMD age, you can let your account continue growing tax-deferred without being forced into any payout structure. You can also change to other options later if your needs evolve.

Option 2: Interest-Only Withdrawals

The second option allows you to withdraw only the interest your TIAA traditional account earns while leaving your principal intact. Each of your TIAA traditional accounts has an associated interest rate that depends on when you made the contributions and what type of contract you have.

Contributions made in the 1970s, 1980s, and 1990s typically carry much higher interest rates than contributions made after 2009, when interest rates dropped to near zero following the Great Recession. However, even recent TIAA traditional contributions often provide interest rates of 4% to 4.5% or higher, which compare favorably to traditional bond investments that have averaged less than 2% annually over the past 10-15 years.

The interest rates also vary by contract type. Contracts without an “S” designation (such as RA and GRA contracts) typically offer higher interest rates but come with liquidity restrictions. These are usually funded by employer contributions. Contracts with an “S” designation (SRA and GSRA contracts) are supplemental contracts funded primarily by your own contributions. They offer slightly lower interest rates but provide full liquidity.

Example

Using our $1 million example with a combined interest rate of 4.5%, your account would generate approximately $45,000 in annual interest. With the interest-only option, you could receive this $45,000 as income while preserving your $1 million principal balance. You can typically choose to receive these payments monthly, quarterly, semi-annually, or annually, depending on your cash flow needs.

This option works well if you need supplemental income but want to preserve your principal for future needs or to leave as a legacy. The interest payments from pre-tax 403b accounts are treated as taxable income in the year you receive them, just like any other distribution from a tax-deferred account. However, there are usually restrictions on how frequently you can start and stop these payments. You’ll want to confirm the specific rules for your contracts.

Option 3: Annuitization – Creating a Lifetime Income Stream

The third option, and what many experts consider the most underutilized, is annuitization. This means exchanging your account balance for a guaranteed income payment that will continue for as long as you live, or for as long as you and your spouse live if you choose a joint option.

When you annuitize your TIAA traditional account, you’re essentially trading your account balance for an income stream you can never outlive. The amount of income depends on several factors:

• Your age
• Your account balance
• The interest rates of your various contracts
• The payout option you select

Real Example

A 67-year-old client with various TIAA traditional contracts dating back decades received an illustration showing a single life payout rate of 8.81% with a 10-year guarantee period. This means that for every $100,000 annuitized, this client would receive $8,810 annually for life.

The 10-year guarantee provides protection if you die early in retirement. If you pass away within 10 years of starting the annuity, payments continue to your beneficiary for the remainder of the guarantee period. So, if you die after five years, your beneficiary receives payments for five more years.  But if you outlive the 10-year guarantee period, there is no death benefit.

You can also choose joint life options that continue payments as long as either you or your spouse is alive. These typically offer lower payout rates because they’re expected to pay out longer, but they provide valuable protection for surviving spouses.

Payout rates vary significantly depending on when you made your contributions. Older contracts often have much higher payout rates. I’ve seen TIAA Traditional payout rates as high as 10% per year on older contracts from the 80s and 90s. 

TIAA’s long history and conservative management approach allows them to offer competitive rates to existing participants.

It’s important to understand that annuitization is an irrevocable decision. Once you exchange your account balance for the income stream, you cannot change your mind or access the principal. Additionally, these annuities are generally designed to be fixed with no guarantee of increased payments over time. 

This brings inflation risk into play more so than other investments.  However, the high baseline guaranteed income can stack on top of Social Security and allow for your more aggressive investments to compound longer.  Many are surprised that this can result in a higher legacy amount despite the lack of a death benefit.

Option 4: Transfer, Rollover, or Liquidation

The fourth option is to move your money out of TIAA Traditional entirely. Your ability to do this depends on what type of contracts you have.

If your TIAA traditional is in supplemental contracts (SRA, GSRA, and RCP), you have full liquidity. You can

• Take the money out as a lump sum
• Roll it into your own IRA
• Transfer it to other investments within your 403(b) plan without restrictions.

However, if your money is in non-supplemental contracts (RA, GRA, or RC), you face liquidity restrictions because these contracts were funded primarily by employer contributions. For these illiquid contracts, you can use what’s called a Transfer Payout Annuity (TPA). A TPA provides your money in equal installments for a term determined by the type of contract.

• RA Contracts: 10 payments over nine years
• RC Contracts: 7 payments over 6 years
• GRA Contracts: 5 payments over 4 years

If you elect to receive these payments as cash, each payment is taxable income. If you roll the TPA payments to an IRA or other qualified account, there are no immediate tax consequences.  You’ll need to check with TIAA to understand the specific rules for your contracts.

Many people choose this option because they’re frustrated with TIAA Traditional’s complexity or because they want to consolidate and simplify their retirement accounts. However, this decision deserves careful consideration because you’re giving up some unique benefits that are difficult to replicate elsewhere.

The Most Overlooked Option: Why Annuitization Deserves Serious Consideration

After working with hundreds of TIAA participants over the years, one pattern became clear.

Most people immediately gravitate toward option four (getting their money out) without seriously considering annuitization. This happens for several understandable reasons.

First, annuities have developed a negative reputation in the financial industry. Much of this stems from how annuities are often sold in the marketplace. Some salespeople are taking advantage of seniors and retirees, focusing on their own commissions rather than clients’ needs. This has created widespread distrust of anything labeled as an “annuity.”

Second, TIAA Traditional is genuinely complex, and many people simply want to move their money to something they understand better. The various contract types, liquidity restrictions, and payout options can feel overwhelming.

However, this rush to liquidate often overlooks the significant value that TIAA Traditional can provide in a well-designed retirement plan. Consider these advantages:

Bond Alternative

Over the past 10-15 years, traditional bonds have provided returns of less than 2% annually while experiencing significant volatility. TIAA traditional accounts typically earn 4% to 4.5% or more annually and never decrease in value. They can serve as an excellent bond alternative, allowing you to be more aggressive with your other investments.

Guaranteed Income Foundation

The annuitization option provides a guaranteed income foundation that reduces pressure on your other investments. With a baseline income from Social Security and a TIAA traditional annuity, you can afford to take more risk with your remaining investments to capture potential upside.

Superior Payout Rates

The payout rates available through TIAA traditional annuitization often exceed what you can obtain by purchasing commercial annuities in today’s market. The 8.81% payout rate in our example would be very difficult to replicate elsewhere.

Longevity Insurance

If you expect longevity for you or your spouse, the annuity continues paying regardless of how long you live. TIAA reportedly has clients in their hundreds who are still receiving payments.

The key is not to annuitize everything, but to consider using TIAA Traditional as one component of a diversified retirement income strategy. You might annuitize a portion of your TIAA Traditional to create a guaranteed income floor, while keeping other assets liquid for emergencies and growth potential.

Making the Right Choice for Your Situation

Choosing among these four options requires careful consideration of your complete financial picture. Here are some key factors to evaluate:

Income Needs

How much income will you need from your retirement accounts? If you have substantial Social Security and pension income, you might prefer to let the TIAA traditional continue growing tax-deferred. If you need current income, the interest-only or annuitization options might be more appropriate.

Other Assets

What other liquid assets do you have available for emergencies? If most of your wealth is in retirement accounts, maintaining some liquidity is important. But if you have substantial taxable investments or other liquid assets, you might be more comfortable annuitizing a portion of your TIAA Traditional.

Risk Tolerance

How comfortable are you with market volatility in your other investments? If TIAA Traditional serves as your bond allocation, you might be able to invest more aggressively elsewhere.

Legacy Goals

Do you want to leave assets to heirs? Annuitization reduces the assets available for inheritance, whereas the other options preserve more of the principal.  With that said, if you do live a long time, the benefits of annuitization could allow for your growth assets to compound without selling at the wrong time.

Tax Considerations

How will each option affect your overall tax situation? Large RMDs might push you into higher tax brackets, while annuity payments provide predictable taxable income.

Health and Longevity

Your health status and family history of longevity should influence your decision. If you expect a long retirement, annuitization becomes more attractive.

Conclusion

Your TIAA traditional account represents a valuable and unique retirement asset that deserves careful consideration. While the complexity can be frustrating, understanding your four main options – RMD/MDO, interest-only, annuitization, and rollover/liquidation – helps you make an informed decision that aligns with your retirement goals.

The most important takeaway is not to rush into liquidating your TIAA traditional simply because it’s complex. The guaranteed annuity rate and lifetime income options available through TIAA Traditional are increasingly rare in today’s financial marketplace. These benefits, combined with TIAA’s 150+ years of experience and conservative management approach, make TIAA Traditional a potentially valuable component of your retirement income strategy.

Before making any decisions, consider how each option fits within your overall financial plan. Think about your income needs, risk tolerance, legacy goals, and tax situation. If you’re unsure, consider working with a fee-only financial planner who can provide objective guidance without trying to sell you additional products.

Remember, you don’t have to choose just one option or make all decisions at once. You might use different options for different portions of your TIAA Traditional balance, or adjust your approach as your needs evolve in retirement. The key is understanding your choices so you can make decisions that support your long-term financial security and retirement goals.

At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions. If you are looking to

• Maximize your retirement spending
• Minimize your lifetime tax bill
• Worry less about money

You can start by taking our Retirement Readiness Questionnaire on our website at www.imaginefinancialsecurity.com, so we can learn more about how we can help you on your journey to and through retirement.

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This is for general education purposes only and should not be considered as tax, legal, or investment advice.