Ask The Experts: Money Matters

By Mike Miles

Will government back TSP funds?

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Q: If I purchase an annuity from MetLife with my Thrift Savings Plan funds and the company goes bankrupt, will the government back my money somehow? With the way financial institutions and large corporations are getting into financial dire straits, it just doesn’t seem safe to turn it over to anyone without some kind of government backing or guarantee.

A: There are state-run solvency pools which back up the guarantees of insurance companies, but their terms vary by state, so you should check with your state’s insurance regulators for details. It’s also possible that, if MetLife went bankrupt, your annuity would still be paid, either by MetLife or its successor. In the end, though, your only guarantee comes from MetLife.

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Medical condition has no bearing on TSP

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Q: Are there any special considerations in terms of penalty when withdrawing from my Thrift Savings Plan if I have a life-threatening condition such a severe aortic stenosis? I’m a 58-year-old Federal Employees Retirement System employee planning to retire on 2010 30 years of service.

A: Since you will be retiring during or after the year in which you reached age 55, you will have access to your TSP account assets without penalty.

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Forced into choosing TSP withdrawal options

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Q: I am no longer employed and have reached age 70½.  I received notice from the Thrift Savings Plan that I have to remove my money or start taking monthly payments, buy an annuity, or some combination of removing my money and buying an annuity. I know about the Required Minimum Distribution and was fully prepared to take that amount out. Am I not able to leave the remainder of my account intact after I take the Required Minimum Distribution? This is really a shock to me if I have to remove the money and pay taxes on it, or have to buy an annuity or take monthly payments out.

A: The problem is that the TSP’s rules only allow one partial withdrawal, so if you haven’t already used up that withdrawal, you’ll only be able to take your first RMD and then will have to take a full withdrawal for the second. Monthly payments are considered a full withdrawal. You could, if it’s still available, take your first RMD as a partial withdrawal, and then either start monthly withdrawals based on your life expectancy to minimize the RMD withdrawals each year. The fact that you’re taking the money monthly, rather in one lump sum each year should be no big deal. An alternative would be to roll over your TSP to a low-cost IRA and then withdraw money as you please.

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Annuity may be best choice

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Q: I retired in 2006 at the mandatory age of 57 under the Civil Service Retirement System/Federal Employees Retirement System. I am able to live comfortably on my monthly annuity and have not made any withdrawals from my Thrift Savings Plan account, which remains in the L2030 fund and now totals approximately $250,000. I would like to start withdrawing from the account in the next year or two to add to my quality of life, and not for living expenses. Does it make more sense to take monthly withdrawals rather than buying an annuity since I am not overly concerned about outliving my TSP account and I can live comfortably on my monthly annuity?

A: There is no one-size-fits-all answer to your question. Your choice will depend upon your specific goals and risk tolerance. Given the current interest rate environment, you would likely be locking in a relatively low payment by purchasing an annuity right now. That, combined with your stated indifference to a guarantee of lifetime income, makes it unlikely that an annuity will be a good choice for you, at least until interest and payout rates rise. Of course, without the annuity, you risk the consequences of mismanaging the money.

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What does each fund track?

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Q: So what you’re saying is, the S Fund falls under NASDAQ and the I Fund falls under the Dow? Am I understanding that correctly?

A: No. You’re confusing exchanges with indices. The C Fund tracks the S&P 500 and the S Fund tracks most of the rest of the domestic stock market.

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Moving money between TSP funds

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Q: I’ve just read your latest column, entitled “Odds Favor Gains in Market.” I have about $350,000 in my Thrift Savings Plan. Just before the major slide occurred in August 2008, I transferred all funds to the G Fund. I then shifted about 25 percent to the L2020 funds. I continued all new contributions in C, S and I Funds. I was lucky to the extent that I only lost about $20,000 due to the downturn. My problem was when to put the  funds, which now represent 67 percent of my funds, back into the other less conservative funds. Obviously, I kept deferring that question during the upturn in 2009. Can you give me any suggestions on what I should do?

A: As always, I suggest that you implement the lowest-risk asset allocation that will meet your needs and rebalance to it no more frequently than every three months and no less frequently than once per year. Absent the ability or willingness to go down this path, you can “make do” by implementing the beginning asset allocation for the L Fund that most closely matches your planning horizon (your life expectancy or the life expectancy of your dependents, whichever is longer) and rebalance to it once per year.

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Checking on TSP stocks

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Q: Is there any way for me to see what specific stocks my Thrift Savings Plan is invested in? I can see the general funds, but what about specific companies?

A: You’ll need to check the TSP Fund Fact Sheet for each fund for the description of the index on which the fund is based, and then research that index for a list of its components. For example, the C Fund tracks the performance of the Standard and Poor’s 500 Index, which is a proprietary, weighted collection of 500 stocks. By the way, there is no guarantee that the funds will actually be invested in all of the component stocks of the index.

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Moving SEP money into TSP

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Q: I sold a private business several years ago and entered federal service. I have a large part of my portfolio in a Simplified Employee Pension IRA. Can I move my SEP money into my Thrift Savings Plan?

A: Yes, as long it contains no after-tax money. Use form TSP-60.

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Continuing TSP contributions

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Q: If I retire from the Foreign Service this year at age 50, I would like to continue to save for the traditional retirement years (after age 70). What is the best way to do that?  Can I contribute to my Thrift Savings Plan for years to come via IRA transfers using form TSP-U-60? If so, are there constraints?

A: The best way to save will depend upon your circumstances and goals. There is no correct, one-size-fits-all answer. Under current rules, you may continue to move money into your TSP account from an IRA account, indefinitely, with no limit. Keep in mind that moving money from one account to another is not really the same as contributing new money to your portfolio, and, in most cases, it’s not as important where you save the money, as that you save it, somewhere.

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The S Fund and I Fund

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Q: I know the C Fund tracks the S&P 500, but what do the S Fund and I Fund fall under?

A: The S Fund tracks the Dow Jones U.S. Completion Total Stock Market Index, which covers all actively traded U.S. common stocks not included in the S&P 500 index. The I Fund tracks the Morgan Stanley Capital International EAFE Stock Index, which covers certain large company stocks from certain developed nations outside of the U.S. Simply, you can consider the S Fund to represent medium and small U.S. company stocks, and the I Fund to represent the stock of foreign developed nations.

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