Ask The Experts: Money Matters

By Mike Miles

TSP withdrawals at age 55

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Q: I am currently in a Civil Service Retirement System 6C designated law enforcement officer position. Aside from my CSRS retirement benefits, of which I will reach the maximum annuity of 80 percent at the end of this year, I have also contributed to the Thrift Savings Plan. I am not planning on relying on my TSP funds to supplement my retirement.

I know there are ways to avoid the 10 percent tax penalty for early withdrawals before turning 55 years old (taking the money in a monthly annuity, etc.). I would like to take all of my TSP out and pay any taxes owed but avoid the penalty. The TSP booklet says as long as I retire “in the year I turn 55,” I am not subject to the penalty. So, if I retire in January (2011 is the year in which I turn 55) but do not actually turn 55 until September 2011, I am not subject to the 10 percent tax penalty. Am I interpreting this correctly?

A: There has been some debate over this issue. It is my understanding that you would not be subject to the early withdrawal penalty at any time during 2011, but you should consult a qualified tax adviser, someone who will actually prepare and defend your return, before proceeding.

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In-service TSP withdrawal

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Q: Can I transfer funds outside federal Thrift Savings Plan system? I would like to invest in some stocks in private sector. I am still working under the old federal retirement system; I will be 63 in June and have 35 years of service. Are there any penalties?

A: You may take one age-based in-service withdrawal and roll it over to any Individual Retirement Account, without penalty. Use Form TSP-75, which, along with detailed instructions, is available at www.tsp.gov.

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TSP and early retirement, redux

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Q: Your response to an earlier question on Voluntary Early Retirement Authority/Voluntary Separation Incentive Payments puzzles me. If a federal employee is eligible for a retirement annuity under the Federal Employees Retirement System despite the fact they are taking an VERA/VSIP, why would there be a penalty for “early” withdrawal of TSP?

A: I think that I clearly stated a fact (“There is nothing in your question that will exempt you from the early withdrawal penalty.”) that answers your question.

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TSP contribution limits

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Q: I like to make plans for my savings and would like to know whether the contribution limits will be increasing for the Thrift Savings Plan and the TSP Catch-up contribution plan for 2011 and 2012.

A: The limits are indexed to inflation, and we won’t know whether they’ll be increasing until the inflation figures are in.

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TSP and early retirement

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Q: I plan to take the Voluntary Early Retirement Authority/Voluntary Separation Incentive Payments at my organization. Because I will be 50 years old when I retire, I am entitled to the entire balance in my Thrift Savings Plan account; since I am retiring, does the penalty still apply?

A: There is nothing in your question that will exempt you from the early
withdrawal penalty.

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Rollover and Roth IRAs

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Q: I have accumulated nontaxable (according to the Office of Personnel Management) retirement deductions that will be refunded to me shortly. I would like to roll this entire refund into a Roth Individual Retirement Account, but the “rollover information” letter they sent me is unclear. It states that I am permitted to roll over certain benefits into an IRA, but there is no mention of a Roth IRA. It also says that I can roll over the nontaxable amount into an IRA, but that I need to track the taxable and nontaxable ammounts.

Because the entire amount is nontaxable, can I roll it over to a Roth IRA?

A: You should be able to, but check with a qualified tax preparer before proceeding.

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TSP transfer rules

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Q: I am close to retirement in the Civil Service Retirement System and will transfer my Thrift Savings Plan investments from the C and S Funds to the G Fund to be safe. My question is in the transfer of funds: Is it the amount of shares that is transferred from one fund to another, or is the value of the fund used to purchase shares in another fund?

For example: the S Fund with 2,000 shares at $19 a share is worth $38,000. The G Fund is worth $13.50 a share. Will the 2,000 shares transferred to the G Fund be worth $27,000 ($13.50 each)? Will the $38,000 buy me about 2,814 shares in the G Fund? I understand that I cannot continue to contribute to TSP after retirement. The answer will help me decide whether to roll over the money, convert it to an annuity or not touch it until I turn 70 1/2. If I leave the amount in TSP, will I be able to continue transfers even though I am not contributing?

A: Interfund transfers are completed in dollar amounts, which is the only way it can be done because the various fund shares have different prices. You may continue to manage your account and complete interfund transfers for as long as the account contains assets.

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Deferred annuity

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Q: I plan on taking a deferred retirement at age 54 with 32 years of federal service in May 2012. I have been in the Federal Employees Health Benefits program since 1985. My wife plans taking a job in the federal government prior to me taking the deferred retirement. When she is hired, the plan is for me to transfer to her FEHB.

When I reach age 56 in May 2014, how will the deferred retirement impact the three parts of the Federal Employees Retirement System (basic retirement with high-3, etc.; supplement, which should be 32/40 x what I receive in Social Security at age 62; and Thrift Savings Plan), as well as my FEHB and my sick-leave reimbursement (current projection at 1,400 hours)?

A: Your deferred annuity will have no direct effect on your TSP account. Because you will have separated from service before the year in which you reach age 55, you will be subject to early withdrawal penalty rules until you reach age 59 1/2. You could avoid this restriction if wait to separate until Jan. 1, 2013.

(Read more about this question on the Federal Times Ask The Experts: Federal Retirement blog.)

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Rules for early TSP withdrawals

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Q: I am a 44-year-old Federal Employees Retirement System employee. I have a financial planner who wants to explore withdrawing part of my Thrift Savings Plan and rolling it into a Roth individual retirement account to take advantage of the two-year payout of taxes. I told the financial planner we only have two options for TSP withdrawals: One is for hardship, and the other applies if you are more than 59 1/2 years old.

Because I do not meet either requirement, it appears to me that I cannot make an in-service withdrawal. Are there other options for in-service withdrawals? The financial planner says he is working with a 54-year-old postal worker and his TSP allows for an in-service withdrawal and conversion to a Roth IRA. I have always been under the impression the TSP was governed by one set of rules. Does each agency have different rules governing withdrawals?

I am wondering if perhaps the postal worker is with the Civil Service Retirement System. Would a CSRS employee be allowed to make an in-service withdrawal in this situation?

A: I’m not aware on any special exception to the rules for in-service withdrawals. By the way, make sure that you carefully consider the motives of your “planner” for recommending such a move. Does he stand to gain from it? I generally advise against it.

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Hardship withdrawals

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Q: During the Obama campaign, there was talk of allowing up to $10,000 penalty-free 401(k)/Thrift Savings Plan withdrawals for hardship purposes. Have you heard whether this has been passed into law yet?

A: It is my understanding that penalty-free hardship withdrawals are permitted under certain circumstances. You should start with IRS Publication 590 or consult a qualified tax adviser for details. I recommend using someone who would be responsible for preparing your return for the year of the withdrawal.

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