Ask The Experts: Money Matters

By Mike Miles

Early TSP withdrawal

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Q: If I retire from the Postal Service this next year, can I draw monthly payments from my TSP account before I am 59 1/2 without penalty?

A: Yes, if you: 1. Retired during or after the year in which you reached age 55; or 2. Take them as series of Substantially Equal Periodic Payments under IRS rules; or 3. Meet one of the other exceptions to the penalty outlined in the notice you’ll find at www.tsp.gov/forms/octax92-32.pdf

— Mike Miles

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TSP monthly withdrawals

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Q: I just retired under the early out option from the U.S. Postal Service, and want to start regular monthly withdrawals from the Thrift Savings Plan, until the MetLife annuity index rate goes up somewhat. Can I, at that point, change from monthly payments to an immediate annuity option, without any kind of penalty? I am 52 years of age.

A: Yes.

— Mike Miles

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TSP taxable distribution

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Q: There is a possibility that I may have to accept the early out with the U.S. Postal Service. If I do, can I make a loan from my Thrift Savings Plan before I retire? Will I be able to continue to pay it back monthly even though I am retired from the USPS? Or will I have to pay the complete amount back before I retire? Are there any penalties for this? Do I have the choice of not paying it back, and if I choose not to, will I be charged penalties as if I withdrew that amount?

A: You may take a loan from your TSP account before you retire, but you must pay it back when you separate from service or it will subsequently be declared a taxable distribution. This distribution will be treated like any other distribution for the year in which it is declared — subject to taxation and the early distribution penalty, if applicable, if not rolled over.

— Mike Miles

TSP required distribution

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Q: My husband is 67 years old. He mentioned recently that he thinks he would like to work another five years before retiring from the federal government. I have a question regarding his Thrift Savings Plan. I have read the questions on the TSP Web site, and it sounds to me that as long as he has not separated from federal service, he is not required to take any distributions from TSP. Am I reading that correctly? If not, how is his TSP affected if he continues to work past the age of 70½? Can he still contribute to TSP? Is he required to take a distribution from his TSP while he is still contributing?

A: You are correct. He is not required to take distributions from his TSP account and may continue to contribute as long as he continues to work.

— Mike Miles

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TSP distribution

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Q: I’m planning to retire this calendar year and want to leave my Thrift Savings Plan as is. Will I be able to take TSP distributions at will, or am I only allowed to take a one-time distribution (roll-over)?

A: You’re only allowed to take a partial distribution one time. You may also elect a full distribution in the form of adjustable monthly payments and a final single payment, however.

— Mike Miles

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TSP rollovers

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Q: I have an IRA from a previous employer that is not performing too well. The Thrift Savings Plan seems to be rebounding rather nicely over the past several months. Should I move the IRA into the TSP? Can this be done without any penalties?

A: The TSP is a better investment environment than any retail IRA account I have ever seen, and I generally recommend that eligible investors move their IRA money into the TSP whenever possible. You are eligible if your IRA account contains no after-tax money — money from non-deductible contributions. Check with your IRA custodian to determine what, if anything, they will charge for liquidating your account.

— Mike Miles

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TSP and 401(k)

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Q: If after I retire, I want to combine my Thrift Savings Plan and a 401(k) that I have, can I do this? Even if I create a 401(k) after I retire and then, several year later, want to combine these? Can I pull the 401(k) into TSP?

A: Yes, yes and yes.

— Mike Miles

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Long-term care

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Q: Could you elaborate on a couple of statements you made in your “Mistakes to Avoid” column that appeared in the July 13 issue of Federal Times? At mistake No. 2, “not having enough insurance,” you said “Once you are retired, long-term care insurance is a prudent thing to consider.” Many feds signed up for the federal long-term care insurance program when it first became available years ago. Are you saying that most of us workers don’t need to get long-term care coverage until we’re actually retired? You stated “Many people follow this rule of thumb: ‘It’s generally safe to base your withdrawals in retirement on 4 percent of the starting investment balance, and adjust this dollar amount by the amount of inflation each year.’ But they don’t seem to realize this rule is only reliable if the portfolio stays heavily invested in equities over their lifetime.” Most likely the reason your clients don’t understand this is that no one (well, far as I know) has ever said the withdrawal amount is influenced by the type of assets in the account. Could you say more about how the account’s assets may influence how much can be withdrawn? Would someone withdrawing from an all G Fund Thrift Savings Plan account be able to safely withdraw 4 percent for example, the same as someone who had 100 percent in the C Fund, versus someone who had all their funds in one of the Lifecycle accounts? Or would each of them need to have a different rate of withdrawal strategy due to their accounts having way different allocations (and we’re assuming all other factors, such as account balance, age withdrawals begin, etc., are the same)? For those of us who don’t plan to remain heavily invested in equities in retirement, how should we go about determining what’s a “safe” rate of withdrawal?

A: You can stack LTC insurance on top of your disability coverage (disability retirement or insurance) if you want to, but I usually don’t recommend it until you’re near retirement. Ultimately, the decision should be based upon your particular circumstances. The withdrawal rate that can be supported should be determined — estimated, actually — based on a number of factors including the amount of money to be invested, the investment strategy or strategies to be employed, and the size, duration and timing of the withdrawals. There is not simple formula and the analysis can be quite complex, including the need for estimating probabilities to various future events. The way the money is invested definitely affects the maximum withdrawal rate. Whether a particular TSP investment strategy will support a given withdrawal rate depends upon how long the withdrawals must last. This is all the responsibility of a pension fund manager, which your employer assumed you would become or hire when it put management of the TSP in your hands!

— Mike Miles

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