Ask The Experts: Money Matters

By Mike Miles

TSP-penalty basics

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Q: I am a federal firefighter under the Civil Service Retirement System who will be eligible to retire next year with 28 years of service at age 50. When can I start withdrawing funds from my Thrift Savings Plan without getting penalized?

A: If you receive a TSP distribution before you reach age 59 1/2, in addition to the regular income tax, you may have to pay an early withdrawal penalty tax equal to 10 percent of any portion of the distribution not transferred or rolled over. The additional 10 percent tax generally does not apply to payments that are: paid after you separate from service during or after the year you reach age 55; annuity payments; automatic enrollment refunds; made as a result of total and permanent disability; made because of death; made from a beneficiary participant account; made in a year you have deductible medical expenses that exceed 7.5 percent of your adjusted gross income; ordered by a domestic relations court; or paid as substantially equal payments over your life expectancy.
 
A special note for members of the uniformed services: The penalty tax does not apply to any portion of a TSP distribution (including a loan) which represents tax-exempt contributions from pay earned in a combat zone. Relief from the 10 percent early withdrawal penalty is available to eligible reservists called to duty for more than 179 days. The reservist must have been activated after Sept. 11, 2001 and must have received his TSP distribution between the date of the order or call and the close of the active-duty period. The reservist may also be eligible to repay the distribution to an individual retirement account (not the TSP). Participants should consult with their tax advisers, legal assistance officers or the IRS regarding this relief.

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TSP payouts after disability retirement

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Q: I am 53 years old, and I was a U.S. Postal Service employee with 20 years of service under the Federal Employees Retirement System. I took disability retirement from the USPS in March after suffering injuries in Iraq as a reservist. If I take a full withdrawal from my Thrift Savings Plan account, will I pay a penalty to TSP, and at what percentage? How much will I have to pay in taxes? Will the USPS match my TSP balance? And how long must my money stay in a TSP account before I can make a full withdrawal without a penalty?

A: For the rules covering withdrawal taxes and withholding, see the TSP notice here. The TSP does not levy penalties against withdrawals; that’s a matter for the IRS. Whether you may withdraw your funds without penalty will depend upon the way in which you take the withdrawal and the extent of your disability.

While I’m not an expert on USPS-specific benefits, I don’t know why they would double, or otherwise increase, your TSP balance beyond what has already been contributed to your account. Because you are separated from service, your vested TSP balance is available to be withdrawn immediately.

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CPAP and flex spending

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Q: If I buy a battery pack for a CPAP machine, will it be covered under my flexible spending account?

A: CPAP devices and supplies (which would include batteries) are eligible for reimbursement from an FSA.

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Rolling TSP funds into a Roth IRA

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Q: Can money in my Thrift Savings Plan account be rolled over into a Roth IRA, and if yes, what are the rules and when can it be done?

A: Yes, certain TSP distributions are eligible to be transferred or rolled over to a Roth IRA. The TSP notice available here will introduce you the rules and limitations.

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Taxes on a TSP lump-sum payout

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Q: I recently retired from the federal government. If I take my money out of the Thrift Savings Plan in a lump sum, will I have to pay Social Security and Medicare taxes?

A: No.

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Moving funds into TSP

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Q: I am under the Federal Employees Retirement System and have money in the Thrift Savings Plan. I returned to government service after 16 years in the private sector (I was under the Civil Service Retirement System from 1975 to 1987 but was placed in FERS in 2004 when I returned). I have retirement accounts outside TSP, but I find TSP to be easy to manage. I have considered transferring my other 401(k) accounts into TSP, but I have also heard concerns that Congress may target TSP as a source of “revenue.” I will be considering retirement in the next seven to 10 years and would like to manage my funds from one place. Are you aware of any negatives I should consider?

A: The rumor you’ve heard also applies to private-sector retirement plans and individual retirement accounts. I don’t think that it’s worth worrying about at this point. The TSP is the best place to save for retirement, and I encourage you to transfer you outside balances into it whenever possible.

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Social Security and TSP benefit qualification

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Q: I will begin my first federal job soon. I turned 60 about one month ago. Must I work until age 65 to be eligible to receive Social Security or Thrift Savings Plan payments? I will have approximately four years and nine months of creditable service.

A: Not necessarily. Your eligibility for drawing Social Security benefits based on your own record will depend upon your age and your history of contributing to the program, among other factors. You should visit www.ssa.gov for details. The rules for contributing to and withdrawing from the TSP are available at www.tsp.gov. In neither case is age 65 a “magic number.”

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Bond yields and the G Fund

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Q: As the government treasury bond yields go up, does the Thrift Savings Plan’s G Fund share price increase? The opposite would be true of the F Fund, since share prices would be affected in a negative way with rising interests rates.

A: While there are times when the daily return for the G Fund is negative, the monthly and annual change in the G Fund’s share price is always positive.

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TSP and turning 70

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Q: I’m turning 70 in February, I contribute the maximum to my Thrift Savings Plan, and I plan to work for a few more years. Am I allowed to continue contributing to my TSP in 2011, or will I be penalized with my taxes because I will be turning 70 1/2 in August? Also, will I be matched for my contributions? 

A: Your eligibility to continue participating in the TSP, including any matching, will continue until you separate from federal service.

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TSP withdrawal rules

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Q: I retired Nov. 30 from the Foreign Service at age 60 and have a substantial sum in my Thrift Savings Plan. I would like to make a partial withdrawal in the near future to give me cash to renovate my house. In the future, when I decide to make a complete withdrawal, it looks like I could do a combination of a second lump-sum payout and a series of monthly payments. Am I reading the rules wrong? Can I indeed make this second lump-sum withdrawal?

A: Not unless the lump-sum withdrawal is the terminal withdrawal at the end of the the series of monthly payments. You could initiate monthly payments and then decide to end them later, culminating in a final lump-sum withdrawal. Otherwise, you can’t take a second partial withdrawal.

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