Ask The Experts: Money Matters

By Mike Miles

Penalties for withdrawals

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Q: If I retire at the age of 50 (21.25 years of service), I have a question concerning TSP. If I choose the life expectancy withdrawal at that time, from what I gather it is penalty free. In the year I turn 55, can I switch to the monthly payment withdrawal, and would that too be penalty-free?

A: You’re talking about avoiding the early withdrawal penalty by using a series of Substantially Equal Periodic Payments (SEPP), which must continue for five years, or until you reach age 59 1/2, whichever is longer. You will find a SEPP calculator and additional information at Bankrate.com (http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx)

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Rolling over funds

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Q: I am resigning from a not-for-profit and wish to roll over my
403(b) savings into another retirement savings plan. Would
it be better to roll over to the FERS or into a self-directed IRA?
What are the advantages and disadvantages of both alternatives?
Is either one “un-doable” later if I change careers again?

A: You can’t roll over your 403b account into FERS, but you can transfer it into a TSP account, if you have one. You can later roll your TSP balance into an IRA or another eligible employer sponsored plan if you like, but I’m not sure why you would want to do that.

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Management compensation

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Q: How much do we (TSP participants) pay the CEO and top managers for the TSP? Are they civilians, private contractors or government workers?

A: Visit www.frtib.gov for info about TSP management.

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TSP withdrawal

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Q: I have been awarded 100 percent permanent and total disability from the VA. I would like to take an early full withdrawal of my TSP. I have seen a comment that a waiver for the 10 percent penalty would be exempt, does the 20 percent early withdraw still apply?

A: I assume that you are asking whether, or not, mandatory tax withholding will apply to a full, lump-sum withdrawal of your TSP balance. I believe that you will be subject to mandatory 20 percent withholding from the withdrawn amount, but there may be an exception in your case. You can learn more by reading the booklet available online at https://www.tsp.gov/PDF/formspubs/octax92-32.pdf.

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Deadline approaching

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Q: If President Obama and Congress fail to meet on the Aug. 2 deadline concerning the debt ceiling issue, how could this affect my TSP? Also, would It be advisable to move all of my money into the G fund, assuming that they don’t reach an agreement? Is this the safest place for my investment to be during this time?

A: Yes, any significant economic event has the potential to negatively affect your TSP balance. The G Fund is the safest TSP option when it comes to risk of loss of principal.

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Transferring TSP funds

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Q: With all the recent craziness going on in Washington on whether or not to raise the national debt ceiling or face a national financial disaster? Is it wise to do an inter-fund transfer of all your TSP assets into G fund while this whole mess gets sorted out? Or should I leave the funds alone.

A: What you do should be part of an overall strategy. What’s best for one approach may be wrong for another approach. It’s like asking whether you should turn your car left or right. It depends upon where you’re going, when you need to get there, the car you’re driving, resources at your disposal, and most importantly who’s driving and how they will manage the journey in the future. I would only trust specific investment advice from someone willing to take responsibility for the outcomes produced by that advice. For what it’s worth, I am not advising my clients to abandon their long-term investment strategies at this point. But, I’m also responsible for dealing with the consequences of that advice.

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Withdrawing funds

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Q: I stopped work in March of 2009. I applied for OWCP. OWCP had paid for two back surgeries in 1989 and 1991 as well as continues to pay for ongoing treatment. I was denied OWCP so I applied for disability retirement which was approved. I am still on interim retirement pay. I withdraw some funds from my TSP to cover me for the time period between OWCP and retirement. I now need to withdraw more for medical reasons. Since I am medically disabled from my federal position as well as medically retired, what is the best way to withdraw my FERS TSP moneys?

A: You may take a full withdrawal as a lump sum, as monthly payments either based on your life expectancy or as fixed payments which you may adjust once each year, or as a life annuity. There is not universally “best” way to withdraw the money. You’ll need to decide which way is best for you.

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TSP and default

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Q: I saw my TSP drop by $100,ooo in 2008. I’d like to be ahead here if a default does happen. In an earlier post you said there would be no change in the G fund, but if the bond rating is downgraded, how could that be correct? That would impact immensely on the G fund’s value. What other options do we have to safeguard what we’ve amassed?

A: It could be, and is true. You did not see your G fund investment drop in value in 2008. Changes in the market value of government bonds DO NOT affect the value of your G fund investment. The G fund is not a direct investment in U.S. bonds and bears no risk to principal. The G fund is the safest place for your TSP money.

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TSP and Roth

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Q: I want to rollover as much of my TSP account as possible into my existing Roth IRA account when I retire in 2013.  I have NO NEED for my TSP account to supplement my income during retirement and want to leave as much of it as possible to heirs.
Problem:  Because the account may have as much as 700K in it at that time, the income tax due on a “one time” distribution of all or most of that amount would severely reduce the net value of the transfer.
Questions:
1.  Can I directly transfer all or any portion of the RMD to the Roth account?  I believe the answer to this question is “no.”  If not, please clarify.
2.  If the RMD cannot be deposited to the Roth, can I make other monthly deposits to the Roth from my TSP?  Am I limited in any manner (time, amount, frequency) regarding deposits to the Roth from TSP?  I believe I read somewhere that monthly withdrawals in excess of RMD from TSP were limited to only ten years.  This doesn’t make sense.
3.  At the this my estate planning goal is to transfer all or most of my TSP to the Roth over a 20 year period following my 71st birthday. Because of the income tax problem, my strategy is to do this by monthly withdrawals over a 20-year period.  I plan to make a substantial (100K) one-time transfer from the TSP to the Roth in the two years after I retire and then monthly deposits to the Roth in subsequent years.  The two years following my retirement will be lower-income years for me because I will be 68 and 69 in those years and am delaying drawing my Social Security until age 70.  My income will rise substantially after age 70 because of SS and RMD.

A: You can’t transfer your RMD to a Roth IRA account in order to circumvent the Roth IRA contribution limits. You may convert distributions from your TSP to your Roth IRA, subject to the IRS conversion rules. The TSP limits the way in which you may withdraw your money after you retire. You may initiate monthly distributions and change the amount of those distributions once per year. Depending upon how you withdraw your money, you may be subject to tax withholding. If  you’re not sure how to proceed, you should engage a CPA to guide you and to prepare your tax returns during the years in which you make the conversions.

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Aggressive return

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Q: I want to retire early. I have little in TSP savings, no private savings, and debt. I’m eligible for early out in about 11 years. I would like to be ready at that time. It doesn’t mean I will go, but I want to have the option. I am contributing 6 percent of my pay in order to receive the matching funds. What would you recommend I invest in for an aggressive return? Once I pay off my car I plan to increase my contribution. This will not be until 2014, which would give me about eight more years of investment.

A: The most aggressive asset allocation used in the L Funds, which is a reasonable source for efficient asset allocation models is: 44 percent C Fund, 19 percent S Fund, 27 percent I Fund, 3 percent G Fund and 7 percent F Fund.

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