Ask The Experts: Money Matters

By Mike Miles

TSP withdrawal will be in fixed payments

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Q: Let’s see if I’ve got this right. If I request monthly withdrawals from my Thrift Savings Plan account and change the amount each year, I’ll be able to receive a monthly check for life and still be able to build my principal, which I can pass on to my children or grandchildren. Does TSP have such a plan as this? What option is it and how does it work? If I need some emergency money, would I be able to make a withdrawal from my principal?

A: You may request a full withdrawal as fixed monthly payments. You set the amount and you may change the amount each year. Once you begin the full withdrawal in this way, any subsequent lump-sum withdrawal must be the final withdrawal of any remaining balance.

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Benefits stand on their own

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Q: Will I get full Social Security and a full Federal Employees Retirement System annuity when I retire at 66? And when I invest my Thrift Savings Plan, will that affect how much I receive from Social Security?

A: I can’t say whether you’ll get a “full” FERS annuity, but none of these benefits, on their own, will affect the others.

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Converting IRAs tax free?

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Q: This is regarding the following question and answer — Q. If I have a traditional IRA worth $100,000 with a basis (post-tax contributions) of $20,000; can I roll over $80,000 to the Thrift Savings Plan and the other convert the other $20,000 to a Roth? Would these two actions result in a tax-free transaction? A. Yes, a special rule allows for this to be done. — is this your final answer? Please tell us what the special rule is. And if this is the final answer, can a retiree do this? I would contribute my pre-tax earnings in my traditional IRA to TSP and then I would roll the basis to the Roth.

A: You’ll find the information you’re looking for on Page 23 of IRS Publication 590. If you’re not sure about how to proceed, you should consult a tax adviser about your specific situation.

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IRA rule doesn’t apply to TSP

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Q: My husband and I want to convert all or a portion of our traditional IRAs to Roth IRAs in 2010. Our contributions have been nondeductible and our IRA accounts are about double the investments we have made (value versus basis). So, we will be paying tax on the earnings.  Then I thought about our Thrift Savings Plan accounts. Are these considered IRAs for the purposes of this conversion opportunity? I read that the IRS will consider all IRAs; you can’t pick and choose among or within our IRA regarding the conversion, but I certainly would not want to have to deal with my TSP in this equation.

A: No. Your TSP is an employer-sponsored retirement plan and not included in the aggregation rule that applies to IRAs.

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Federal long-term care plan should be top option

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The Federal Long-Term Care Insurance Program increased premiums for its automatic compound inflation option as much as 25 percent last year, a move that angered many participants. But, in my view, the program just became more attractive, compared with retail alternatives, and should be considered the benchmark when comparing long-term care insurance.

That’s because John Hancock has announced that it will seek rate increases that average about 40 percent on many of its retail long-term care policies.

That’s a surprising number since John Hancock’s policies were never widely known for being relatively cheap. In fact, years ago, I identified John Hancock as one of the premier providers of long-term care insurance based on a screening system that paid particular attention to the company’s willingness to charge enough for the risk it accepts in writing the insurance.

Relatively cheap premiums are a warning sign that a company may be underpricing its policies to win business, only to have to raise premiums to more reasonable levels later. John Hancock was one of a handful of companies that appeared the least likely to require large future rate increases.

But, from my original list, the largest and apparently most stable long-term care insurance providers have raised rates, sold off their business or otherwise made themselves less desirable as insurers. John Hancock was the last to fall.

This event is important, not only for its effect on John Hancock policy holders, but for the warning it provides for long-term care insurance customers, in general. That includes customers of the federal program, which is run by John Hancock.

The Office of Personnel Management said there will be no changes in 2011 in premiums in the federal program.

Long-term care insurance is designed to provide reimbursement for expenses incurred as the result of disability, usually in old age. The cost of custodial care — nonmedical help with the activities of daily life, like dressing or bathing — can be devastating. This kind of care can cost $50,000 or more a year in many parts of the U.S.

During the last 10 years or so, attention to this risk and to long-term care insurance has exploded. Insurance companies have poured money into marketing campaigns. Legislators have proposed, and in some cases, passed legislation to encourage the purchase of insurance. And in 2001, the Office of Personnel Management established the federal program to make long-term care insurance readily available to most federal workers, annuitants and their families.

Long-term care insurance is typically sold with a level premium — a premium that is set when you buy the policy and that is intended to remain the same for as long as you keep the coverage in force. Future premiums are not guaranteed, however. For many retirees, increasing premiums will mean that the insurance is more likely to become unaffordable, and allowed to lapse, just as the insurance is needed most.

John Hancock says greater-than-expected usage is one of the primary drivers behind its proposed increase. It must receive permission from state regulators before it can raise premiums on existing policy holders. The company is unlikely to get everything it is asking for, but higher rates are clearly coming for retail policyholders.

Those who hold long-term care insurance policies, or those who consider buying them — from any source — should take this news as a wake-up call, and factor substantial rate increases into their plans. If a policy won’t be easily affordable at twice the price, you should consider reducing coverage to be affordable, or dropping the insurance altogether. It is still possible today to manage long-term care without private insurance. Don’t forget that Medicaid will provide you with care, if it is otherwise unavailable or unaffordable to you.

The Federal Long-Term Care Insurance Program’s competitive pricing and benefits, combined with OPM’s advocacy for the interests of its constituents, make the program the best choice for many federal employees and annuitants. It should be the starting point for your long-term care insurance shopping and comparison.

TSP annuity vs. monthly payments

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Q: Is it possible to set up monthly payments from your Thrift Savings Plan account and then later have the TSP use part of your funds to purchase an annuity while continuing those payments? Or must both withdrawals be set up at the same time?

A: It is not possible to take a partial withdrawal for a TSP annuity while continuing monthly payments.

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TSP annuity process

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Q: I will be retiring, hopefully, at age 56. I have been investing in the Thrift Savings Plan since 1987, contributing the maximum amount allowed (15 percent). At age 56, can I set up an annuity with TSP requesting a small amount each month and still receive interest on the amount left in my account?

A: Yes, as long as you haven’t already taken a partial withdrawal. Use a partial withdrawal to purchase the annuity and leave the rest in your account until you need it.

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USPS retirement and leave rollover

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Q: I plan to retire from the U.S. Postal Service on Dec. 31. Any word on the proposal to roll over terminal annual leave into the Thrift Savings Plan?

A: Not that I’ve heard.

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TSP payout schedule

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Q: Let’s see if I’ve got this right: If I request monthly withdrawals from my Thrift Savings Plan account and change the amount each year, I’ll be able to receive a monthly check for life and still be able to build my principal, which I can pass on to my children or grandkids. Does TSP have such a plan? What option is it and how does it work? If I need some emergency money, would I be able to make a withdrawal from my principal?

A: You may request a full withdrawal as fixed monthly payments. You set the amount, and you may change the amount each year. Once you begin the full withdrawal in this way, any subsequent lump-sum withdrawal must be the final withdrawal of any remaining balance.

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Competing annuities, benefits

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Q: Will I get full Social Security and a “full” Federal Employees Retirement System annuity when I retire at age 66? And when I invest my Thrift Savings Plan money, will that affect how much I receive from Social Security?

A: I can’t say whether you’ll get a “full” FERS annuity, but none of these benefits, on their own, will affect the others.

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