Ask The Experts: Money Matters

By Mike Miles

TSP withdrawal

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Q: I will reach age 70 ½ on March 31, 2011.  I understand that I must begin withdrawal from my Thrift Savings Plan [and rounded over IRA] by January 2012.  I plan to continue to work in my present position for the federal government after January 2012 up until April 2013.

1. Am I required to begin to withdraw my combined TSP/IRA in January 2012, or may I delay withdrawing these funds until I stop working in April 2013?

2. What law, directive, statue says so?

3. If I am required to begin withdrawal in January 2012 but continue working until April 2013, must I still contribute to the TSP and will the government continue their matching contribution?

4. How will this affect my balance, withdrawal, etc if I continue to contribute while at the same time withdrawing funds?

5. May these two “funds” be combined or are there different rules for the government [TSP] and nongovernment [IRA] when it comes to minimum withdrawal age?

A: If you are still employed, you will not be required to begin distributions from your TSP account until you retire. You should transfer your IRA account balance into your TSP account prior to reaching age 70 1/2 to avoid the minimum withdrawal requirement while you continue to work. Besides, it’s likely to be the best place available for your retirement investment.

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Refunded income tax

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Q: I retired with a Federal Employees Retirement System Thrift Savings Plan account and am 60 years old. I would like to make a partial withdrawal and understand it will be taxed 20 percent by the federal government. At the end of the year, they will send a 1099 form to be used for federal income filing. I still have two children in college and am currently paying for that. Will I be able to recoup some of the income tax paid from my withdrawal if all works out on my federal tax form (education credits)? Or is this tax not considered “federal income tax paid” like it would be if I was still working?

A: The TSP witholding is a deposit made against your future tax liability. If you overpay, you will receive a refund after your tax return for the year has been filed.

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TSP website helpful

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Q: I have a question about withdrawing money from my Thrift Savings Plan account. I would like to know as many details as possible, to include penalties and how long it takes to receive my funds, as well as if I’m allowed to deposit a lump sum in the future to make up for what I took out.

A: You’ll find the information your looking for at http://www.tsp.gov.

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Transferring funds to CSRS

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Q: I am a federal employee with a fairly complicated work history. The Office of Personnel Management tells me that to obtain full credit for all of my time served, I owe approximately $60,000 in deposits and redeposits. It’s worth it to me to pay that amount, because it means the difference between 34 years of service and about 20 years of service if I were to retire now. I just turned 59 1/2.  What I would like to do is withdraw the money from my Thrift Savings Plan account and send it directly to OPM to pay off my redeposit account. According to IRS Publication 721, Civil Service Retirement System, Federal Employees Retirement System and Thrift Savings Plan are all considered qualified retirement plans; and a rollover is possible between two qualified retirement plans without any taxes owed on the money transferred at the time of the rollover. Do you see any problem with me transferring this money from TSP to CSRS as a rollover?  If not, do you know which office of OPM I should contact in order to have someone complete Section VI of the TSP withdrawal request (TSP-75) for me?

A: I don’t believe OPM will accept pre-tax money for CSRS service deposits.

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Spread TSP over its five funds

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Q: I’ve been in civil service for 4 1/2 years. I’ve been in Thrift Savings Plan for about 3 years. I have my TSP invested 100 percent in the I Fund. I intend to work maybe another 10 years. I was thinking about putting 35 percent in the S Fund, 35 percent in the C Fund and the rest in the I Fund. The percentages are not set in stone but I am thinking about investing in the S Fund and the C Fund. Any suggestions?

A: I can’t provide specific investment advice through this forum — it would be irresponsible of me to do so. In general, I recommend that every investor identify the investment allocaiton that meets their needs with a minimum of risk, and periodically — at least once per year — rebalance their account to the appropriate allocation. In most cases, the right allocation will include all five of the TSP’s five basic funds. I can tell you that your current allocation, and the one you’re suggesting, is inefficient and subjects you to more risk than you need to take to acheive the expected returns they produce.

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Analyzing TSP performance

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Q: I’ve been participating in the Thrift Savings Plan since the late 1990s and am trying to learn how much of my current balance is made up of contributions and how much is based on earnings. TSP will only provide the various contribution category totals (mine, agency matching and agency basic) with the associated earnings included. I would like the earnings broken out so I can see my account’s performance over the years. Is there a way to calculate this without going back through more than a decade of statements?

A: No.

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Retirement income needs different for everyone

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Q: I have always heard/read that to live at the same standard in retirement, you would need to have approximately 80 percent of your salary when
you retire. Although I think I know the answer to my question, I would like to hear your response. My question is: Is it the annual gross pay minus my TSP contribution that I take home to live on, or my annual gross pay before I take out the TSP contribution that one would use for the 80 percent calculation?  For example, I am over 50, so I take out the maximum $16,500 plus my maximum catch-up of $5,500, for a total of $22,000.  Say my annual adjusted basic pay is $80,000 — then would it be 80 percent of $80,000 ($64,000) or 80 percent of $80,000 minus $22,000 (TSP), which
would be 80 percent of $58,000 ($46,400) that you would recommend. I believe it would be the latter, as I am living off of my pay minus TSP.

A: Ignore that ridiculous rule. Rules of thumb don’t necessarily apply to you. Everyone’s case should be treated as unique. I have some clients who need 100 percent of their pre-retirement income, or more, to maintain their standard of living. If you are earning $80,000 per year gross, contributing $22,000 per year to the TSP, making no other savings contributions and borrowing no money to support your living expenses, then your pre-tax income need is currently $58,000 per year. If you’re paying 25 percent of that amount in taxes, then your standard of living is currently costing you about $43,500 per year. If you want to maintain this standard of living in retirement, you’ll need this amount coming in, after taxes, and adjusted for inflation each year after this year.

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Does using TSP to pay off loan exempt one from taxes?

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Q: First question: My wife and I are both in the Thrift Savings Plan, and we intend to retire in nine years. I heard somewhere that if I used my TSP funds to pay off my home loan and land loan that it will not be taxed. Is this true? I am under the GL scale and will have 31 years of federal service and four years of military service at age 57. My wife works for the Postal Service and will have 20-plus years of service at age 55. My second question is, if I decide not to withdraw from our TSP to pay off our loans, what is the best way to get the most out of my TSP? I don’t believe in nor trust the stock market, or any risky investments.

A: To your first question, that’s not true. To your second question, the only TSP fund not subject to fluctuations in value is the G Fund, so by process of elimination, that is your only option.

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Ponzi schemes, other scams target federal employees

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The recent revelation that 260 federal employees and annuitants and their families may have lost some $34 million to a crooked investment manager is a loud and clear wake-up call.

Wayne McLeod and his firm, Federal Employees Benefit Group, are accused by the Securities and Exchange Commission of defrauding a group of investors, many of them federal law enforcement personnel, in an apparent Ponzi scheme. According to the SEC McLeod admitted perpetrating the scheme to investigators before taking his own life.

While this story is shocking and sad, it is also instructive. I met McLeod at a seminar several years ago and found him interesting, professionally. Among other things, he aggressively encouraged federal employees to move money from their Thrift Savings Plan accounts into retail investment accounts, presumably ones that he or his associates managed or were compensated for selling — a strategy I strongly oppose. Back then, I did some digging to see who he was and why he might be motivated to give what I considered to be poor advice.

I found that McLeod and his business were basically selling insurance and investment products on behalf of others; there was no mention at that time of the in-house investment fund that is now the subject of investigation. I found no evidence in publicly available materials that would indicate that he was a criminal.

Not so long ago, the idea that an investment scam would be targeted at federal employees would have seemed far-fetched. The investment industry has more or less ignored federal workers and retirees since much of their wealth is often tied up in their annuities, and investment managers couldn’t get control of it to siphon off those fees they like so much. But, the confluence of a tough investment environment and a dramatic increase in the number of six-figure TSP account balances has caught the industry’s attention.

As attention turns to the federal employee market, there is bound to be an increase in the frequency of fraud to go along with it. So, it’s important to be skeptical and vigilant when it comes to considering where to invest your money. Here are the best ways to make sure that what you pay for is what you get:

• Keep as much of your retirement money as you can in the TSP for as long as possible. There is going to be increasing pressure to try to convince you that you’ll be better off moving your money, after you retire, to this or that IRA account. Don’t believe it. I haven’t seen an investment opportunity yet that will provide you with better risk-adjusted returns than the TSP. The person most likely to gain from an investment move is the one who sells it to you.

• Don’t confuse nice with honest. I’ve never heard of a Ponzi schemer whom people didn’t like — before they lost their money. Ponzi schemers, and salespeople, are successful because they’re nice. I can’t tell you how many people have come to me over the years with stories about the really nice investment adviser who lost their money. That was, in fact, my first investment experience, and I’ve never forgotten it.

• Everything in life involves risk. More return generally involves more risk. Any time someone promises you oversized returns with undersized risk, you should be wary. That doesn’t automatically mean that they’re trying to mislead you, but you should be on alert, and if in doubt, just walk away.

Law enforcement officers and TSP withdrawal

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Q: At the end of 2010, I’ll be retiring at the age of 50, with 23 years in federal law enforcement. I will need to take a withdrawal from my Thrift Savings Plan upon retirement. According to my agency, in order to prevent being assessed a 10 percent penalty for early withdrawal, I need to set up my TSP payments under the 72t rules (i.e. substantial equal periodic payments until after the age of 59½). However, according to IRS Publication 575, Pensions and Annuities, as I understand it, law enforcement officers are exempt from the 10 percent penalty for early withdrawal. My questions are:  Why do I need to set up my withdrawals under the 72t rules if I’m already exempt from the 10 percent penalty? Can’t I receive fixed monthly payments (not calculated on life expectancy) and still not have to pay the penalty?

A: Your LEO status does not exempt you from the early-withdrawal penalty. Similarly, an arbitrary fixed monthly payment will not exempt you. The payments must be calculated using one of the three methods allowed under 72t.

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