Ask The Experts: Money Matters

By Mike Miles

TSP payout vs. annuity

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Q. Knowing that everything is a personal situation decision. I’ve gotten advice to take a TSP monthly payout versus the annuity or lump sum. What are the advantages of this action.

A. The advantage versus the lump-sum payout is that the monthly withdrawals will allow you to continue to invest the balance in the TSP until it is withdrawn. The advantage versus the annuity is that you retain control of the assets.

 

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TSP

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Q. Is there a difference for reported income from a Thrift Savings Plan withdrawal versus a TSP annuity payment? In your Q&A, the TSP withdrawal is said to be reported as income while the TSP annuity is not reported as income. Why?

A. Distributions from your TSP account and payments from a TSP annuity are both considered taxable income.

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Direct rollover of IRA

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Q. I am in the process of transferring my IRA account from my bank to my Thrift Savings Plan account. The majority of my IRA is from old 401k rollovers from previous jobs (pretax). However, there were a few years when I made contributions to my IRA with after-tax money through my broker. I’ve had my IRA for years now and have no idea how much or what portion of it is after-tax money as my broker has made many trades over the years. How can I determine exactly how much of my IRA is pr-tax and how much is after-tax so I know what’s eligible to transfer into my TSP? Furthermore, how would TSP know what’s pretax or after-tax if I just decided to transfer the whole amount over?

A. When you made nondeductible contributions to your IRA, you were supposed to file a IRS Form 8606 with the return. The IRS will assume that everything in your IRA is pretax unless you can prove otherwise through your past tax returns. As long as you are willing to declare all of the money pretax, the TSP will accept it, and I doubt that the IRS will object to you paying tax on the money twice.

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IRA contributions

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Q. I contribute the maximum amount to my Thrift Savings Plan each year. Can I also contribute the maximum amount to a traditional IRA? Are there any prohibitions to me doing this? Is there a limit to tax deferring compensation? What I am considering doing, if possible, is to contribute to a traditional IRA for a number of years, then roll it over into my TSP if that could possibly provide a better benefit, such as when it comes time to purchase an annuity.

A. If only it were that easy! There are limits, and the amount you can contribute to an IRA (including the amount of that contribution that can be deducted) depends upon your Adjusted Gross Income and your tax filing status. See IRS Publication 590 for the rules. Also, keep in mind that an IRA containing nondeductible contributions can’t be transferred into the TSP.

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TSP withdrawal

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Q. I am trying to decide whether to withdraw from my TSP account or take out a loan to purchase rental property. I am no longer employed with the federal government and I am 55 years old. What would your advice be?

A. I won’t give you advice since I’m not familiar with your circumstances, goals and preferences. Also, you should avoid taking advice from someone who’s not responsible for the outcome it produces. I will give you some things to consider in deciding what to do, though. If you separated from federal service before the calendar year in which you reached age 55, you’ll have to contend with the early withdrawal penalty. You should also carefully consider whether, or not, the rental property will better support your retirement income needs that than your TSP investment. If the cash flow from the real estate investment will cover the payments for a loan, I’d tend to favor that option. If it won’t, you may want to reconsider the idea, altogether.

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TSP life annuity

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Q. I am 50 years old and have 32 years of government service. If I defer my retirement until I am 56 years old, can I receive payments from my Thrift Savings Plan account through a life annuity. Also could I get another job and still receive the life annuity payments?

A. Once you’ve separated from federal service, you may use your TSP assets to buy a life annuity at any time. Your annuity payments will continue regardless of your employment status, once they have begun.

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Rolling over into TSP

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Q. I had a 401(k) plan with my previous employer. I rolled over into an account with Fidelity after I left and haven’t added any money to it since. Can I roll it over again to my current Thrift Savings Plan account? What form would I need to use?

A. You may transfer the assets into the TSP as long as the account contains no after-tax dollars — that is, money you contributed after it was taxed. Visit www.tsp.gov for more information and use form TSP-60 to request the transfer.

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Early retirement and annuity

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Q. I am under the Federal Employees Retirement System.  I am 49 with 21 years of service. I am being told there will be a Voluntary Early Retirement Authority/Voluntary Separation Incentive Pay offered this fall and next spring. I will turn 50 during the VERA/VSIP timeline. If I take the VERA, will my government annuity be reduced by 5 percent per year? Will I be able to receive both my government annuity and my Thrift Savings Plan annuity as soon as I leave service? Is there a penalty in taking the TSP annuity now? Will I qualify to get the Social Security supplement when I reach my minimum retirement age of 56?

A. You may use your TSP assets to purchase a life annuity when you retire, and there will be not early withdrawal penalty for doing so.

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Less than interest

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Q. I would like to withdraw monthly payments from my Thrift Savings Plan that are less than the monthly interest might be. Is this possible?

A. Yes, but you’ll have to pick the dollar amount.

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Hardship and a house

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Q. I did a hardship to take care of my mother who had become ill, taking a pay cut on the way, and leaving behind the house I bought in 2005. After a year and a half on the market, the house I used to live in has become a short sale. The bank wants $25,000 in cash, which I don’t have at the moment. The bank also wants to see my Thrift Savings Plan account. I know they cannot levy against it, but I assume they want me to, in order to make up some of the difference. I would like to retire in 3½ years, but I would have to delay that if I take out a loan.  What should I do?

A. You should do everything you can to meet your obligations, including delaying your retirement.

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