Ask The Experts: Money Matters

By Mike Miles

Searching for a retirement calculator

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Q. I am having a hard time finding a retirement calculator for a federal retiree that can help me determine if my current retirement income (from 30 years under CSRS), plus my investments, will be sufficient for me and my wife. Most calculators assume one is still working, contributing to a 401(k) etc., and they want to sell you their investments products. Could you direct me to a calculator (if one exist) for a retired federal employee that allows one to input his yearly retirement benefit plus having allowances for adding inputs for investments with future returns so that I can determine if I will have sufficient funds to last me well into retirement.

A. There are calculators that will figure your annuity income, but there is no calculator that can tell you if your invested assets will meet your needs. Too much depends upon how your assets are managed along the way and other factors beyond the reach of a simple calculator.

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Rollover of TSP withdrawals to a Roth IRA

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Q: My 2010 “annual” required minimum distribution from my Thrift Savings Plan will be approximately $8,500 (about $710 per month). My “monthly” withdrawals will be $2,000.00. If I roll over to a Roth IRA that part of my withdrawal that exceeds my required minimum distribution, can I start deposits to my IRA of $1,290 in January and each month after that, or do I have to wait until May, at which time my entire “annual” required minimum distribution will be met before I can make deposits to my Roth IRA?

A: The limits are annual limits, so what matters is that at the end of the year, the numbers work out within those that apply.

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Catch-up contributions plus traditional IRA

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Q: After contributing $22,000, including age 50 catch-up contributions, in
calendar year 2009, may I also contribute $6,000 to a traditional (nondeductable) IRA, which includes the standard $5,000 plus $1,000 age 50 catch-up?

A: Your participation in the Thrift Savings Plan should not prohibit you from making the maximum nondeductible contributions to a traditional IRA in 2009.

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Updated: Voluntary contribution transfer to TSP?

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Q: I regret that I can’t remember where, but I read that legislation or an amendment was being considered that would allow Voluntary Contribution Program funds to be transferred at retirement to a Thrift Savings Plan account. If this is the case, would there be a cap on what could be transferred?

A: Currently, you may direct that the interest portion of your VC account be transferred to your TSP account, but not the principal. I can’t predict what may or may not be permitted in the future, or what limits might apply.

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Conversion of voluntary contribution to Roth IRA

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Q: I will be retiring on Jan. 1. I recently contributed $50,000 to my Voluntary Contribution account. This is my first contribution to this account, and upon retirement I would like to transfer the entire balance directly to a Roth IRA. I have an existing Traditional IRA (never taxed and balance of approximately $65,000) and a Thrift Savings Plan account of approximately $245,000. My goal is to transfer the entire amount of my voluntary contibution directly to an existing Roth IRA upon retirement. My thought is that the only tax I would owe on this conversion would be the few hundred dollars I earned in interest on the Voluntary Contribution account.

My questions are: Will the Office of Personnel Management permit the direct transfer from a Voluntary Contrtibution account in a Roth IRA? And, if so, is my assumption correct that the only taxes I would owe would be the few hundred dollars in earning on this account (since I will not be co-mingling this money with either my Traditional IRA or TSP account)?

A: The OPM will permit you to roll or transfer your withdrawal to any account you designate, except that the contributions portion may be rolled directly into a TSP account, since the TSP will not accept post-tax dollars.

While I can’t comment on how much tax you will actually owe, you will have to aggregate your Traditional IRA balances for purposes of determining the taxability of your conversion. This means that your conversion amount will be deemed to include a portion of your untaxed IRA balance that is proportionate to the share of the aggregate IRA balance you’ve converted.

For example, if you covert $50,000 from a VC account and you have a pre-tax $50,000 Traditional IRA balance at the time, $25,000 of your converted amount will be deemed to be a coversion of pre-tax money and subject to tax. After the conversion, your Traditional IRA will then be deemed to have a tax basis of $25,000, so you will ultimately be able to withdraw that money without tax later.

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TSP article clarification

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Q: In the article titled, “Make most of your TSP for 2010 retirement savings,” it is indicated that the maximum contribution for 2010 is $16,500. However, I thought the amount was lowered to $16,000 for 2010. Please clarify.

A: On Dec. 1, the Thrift Savings Plan confirmed that the 2010 limit will be $16,500.

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Make most of your TSP for 2010 retirement savings

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This is my last Money Matters column for 2009, so I’ll take the opportunity to remind those of you who are still active federal employees to carefully plan your retirement savings contributions for the coming year.

Unless there is a compelling reason to do otherwise, I strongly recommend you first direct your retirement savings contributions into your Thrift Savings Plan account — before you contribute to any other accounts. You should contribute the maximum allowed to your TSP account — which in 2010 is $16,500 if you are under age 50, or $22,000 if age 50 or older — before you contribute to a traditional IRA, Roth IRA, mutual fund, bank, brokerage, deferred annuity, cash-value life insurance or any other type of investment account for retirement savings.

No other investment vehicle is likely to provide you with a comparable retirement savings solution. This is true for all participants, but particularly so for those covered by the Federal Employees Retirement System. FERS employees’ primary investment objective should be to obtain the full 5 percent match in contributions from their employer.

Aside from the free money FERS employees get through employer contributions, the TSP offers a package of advantages unmatched by alternative investments:

* Tax deferral. The TSP allows you to do something that you should generally strive to do — avoid paying tax bills now in favor of paying them later. Contrary to all of the incompetent, misleading “analysis” encouraging you to do the opposite — think of the Roth IRA conversion propaganda — deferring taxes on current income and its growth is the smart choice for most people.

* Low cost. Investing isn’t free. As a prudent investor, you either contribute your time and effort to manage your investment portfolio or you pay someone else. In the case of the TSP, professionals do most of the work for you, and they do it well and for next to nothing.

* Superior rates of return. The TSP’s low costs likely translate into rates of return that are superior to those for higher-cost alternatives with similar risk characteristics.

* The G Fund. The TSP’s G Fund offers an unmatched combination of relatively high return and low risk. If you can find a better stable value investment, I’d like to hear about it. That doesn’t mean you should allocate most or all of your account balance there, but it does provide a unique and valuable investment option.

* True diversification. The TSP’s five core funds provide efficient and effective internal diversification, both on their own and when used together through an appropriate asset allocation scheme. Producing the return you need with the minimum possible risk should be your primary goal as the manager of your TSP pension fund.

* Simplicity. The TSP’s simplicity — just five core index funds — is a key advantage over many alternatives. Don’t let this simplicity fool you, however. By combining those five funds in the right ways, and managing their allocation properly, you can cover the range of risk and return available from the investment markets and tailor your account to meet nearly any need. Don’t be fooled into believing that complexity brings superior results.

* Convenience. The TSP is easier to track and manage than comparable alternatives.

* Flexibility. The TSP allows you to continue to invest and manage your money for life, if you choose, or to withdraw your money to buy an annuity, invest elsewhere or spend as you please once you retire. In-service withdrawals are also allowed under certain circumstances, and you’ll have penalty-free access to your money if you separate from service during or after the year in which you reach age 55 — a break that an IRA doesn’t offer.

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Avoiding TSP withdrawal penalties

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Q: I am a postal worker for 23-plus years of service. I am 45 years old. Is there a way to withdraw all my Thrift Savings Plan funds without penalties? If I can do this, I can bring down my mortgage and not be in a foreclosure situation. I do remember that President Obama, in his campaigning days, promised we could withdraw from our retirement funds. What happened to that?

A: As an active employee, you would only be able to withdraw funds from your TSP account under the financial hardship allowance. Your withdrawal will be subject to penalty, however, unless you can qualify for a disability or other exception. The rules involved in 1. accessing your TSP as an active employee, and 2. avoiding the early withdrawal penalty are complicated and should be carefully reviewed before proceeding. You’ll find what you need to know at http://www.tsp.gov.

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Rolling over VC account

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Q: I plan on retiring in 2010 under the Civil Service Retirement System. I have recently opened a voluntary contribution (VC) account but only have put $25 into the VC account. I plan on putting a large amount of money in the VC account once I retire and then roll over only the after-tax contributions in the VC account into a Roth IRA. Will conversion of the VC account into a Roth IRA require that I aggregate my other IRA balances for the purpose of figuring out the taxable amount of this conversion?

A: This is really a question for a CPA, but as I understand it, IRA aggregation will be required.

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