Ask The Experts: Money Matters

By Mike Miles

Donating annual leave

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Q. I recently donated annual leave for a fellow postal worker who has been injured.  Is the value of this donation tax deductible?

A. This is really a question for your tax preparer or a CPA, but I doubt that it would be deductible since it has not yet been taxed as income.

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Returning to federal service

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Q. I worked for the government for three  years a long time ago and returned recently. I will be eligible to retire at age 62 in about three years.  I plan to work until 67, if possible. Should I roll over the 401k funds that I have collected into the FERS system?  What are the advantages and disadvantages?

A. The TSP offers what is, in the opinion of many independent experts, the best retirement investment vehicle available anywhere. It offers low cost, ample diversification options, convenient management and the unique G Fund. I generally recommend that my clients move as much of their IRA and 401k money into the TSP as they can, and leave it there as long as possible.

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Early retirement

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Q. My activity is offering voluntary separation incentive payments/voluntary early retirement.  I am 56 years old, have 22 years in service under FERS.  Do I get the 5 percent penalty if I accept the offer?  Am I allowed to withdraw monthly on my TSP?

A. Since you will retire during or after the calendar year in which you reached age 55, you will have access to your TSP account without the early withdrawal penalty.

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TSP money

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Q. If I withdraw $20,000 from my TSP account at retirement, are taxes taken from the amount or do I just have to claim it as income that year?

A. Twenty percent withholding is mandatory and you must claim the withdrawal as income on your tax return for that year.

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Ideas that can boost your retirement income

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Of all the rules of thumb for living, none are more misunderstood, or more dangerous, than those aimed at retirement financing. Take, for example, the widely quoted — and too often used — rule that you will be comfortable with, and should plan to live on, about 70 percent of your preretirement income in retirement.

For some of us, that will be plenty; for others, not nearly enough. Using advice tailored to an “average” employee is risky. In my professional experience, I’ve seen a bias in favor of maintaining, or even increasing, standards of living in retirement.

Chances are that you’re not the average person, so why condemn yourself to live like one? If you’re many years from retirement, the following tactics will help you to do what few have done — retire on 100 percent of your pre-retirement income. If you’re close to, or in, retirement, your options to increase your standard of living are limited, but some of these ideas may still work for you:

Apply discipline. Maintain the discipline to “work the plan.” I can’t tell you how many times I’ve seen headlines, or even water-cooler chats, adversely affect an investor’s decision making. If the plan was built on the assumption that you will maintain a certain asset allocation in your Thrift Savings Plan over a specified time by rebalancing it to that allocation once per year, then doing exactly that is the prudent, disciplined thing to do.

Estimate your pension income. Knowing how much you, and your spouse or partner, can expect from Social Security and pension income in each year of retirement is critical to knowing how much you’ll need from savings and investments to replace all of your pre-retirement income.

Develop a savings target. Working backwards from your withdrawal needs in retirement will enable you to determine how much money you’ll need to have accumulated when you begin retirement. The answer will depend upon a number of factors, including how the money will be managed in retirement, the duration of your retirement, tax and inflation rates, and the pattern of withdrawals you’ll need from year to year. Depending on your unique factors, the amount you’ll need to save will probably fall between 15 and 100 times the average annual amount you expect to withdraw. This huge range is a reason why rules of thumb won’t work.

Save enough. Once you have determined your savings target, you can figure out how much you’ll need to save each year to meet your needs. Again, the answer will depend on your circumstances and how you manage your investment decisions. Want to save less? You can plan to work longer, or invest more aggressively, or leave less behind, for example. If you’re not sure how much you need to save, making the maximum contribution to your TSP account each year is a good idea.

Manage your investments prudently. In most cases, your ability to retire on 100 percent of your preretirement income will depend on how your savings and investments are managed along the way. Proper asset allocation, diversification, rebalancing discipline, cost control and risk reduction are essential to maximizing the probabilities of achieving your retirement goals. The TSP allows, even promotes, these objectives. Follow these objectives in any other accounts that will be instrumental in funding your retirement.

Insure. Savings and management discipline can be rendered useless if you face a large unexpected expense. Have appropriate health, disability, liability, property, life and long-term care insurance at all times.

Adjust your retirement point. It may be necessary to plan to continue to generate some income after you have officially retired, to make sure that you can enjoy the retirement standard of living you want. Increasing your pension by working even one or two more years can make a big difference. If you have accumulated savings and investments that are at least five times your desired retirement income stream, you can probably retire on 100 percent of your pre-retirement income if you delay your retirement past age 65. And, no, that’s not a rule of thumb — just an educated guess.

 

Inheritance money

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Q. I’ll be receiving a check this week or next from an inheritance.  I’m not maxed out on my TSP and haven’t sent any catch-up money in this year either.  I was wondering if I could send 100 percent of my pay for the last couple of pay periods this year to TSP to get as much in there before the end of the year as possible?  Then next year I’ll start putting in the maximum along with catch-up.

A. Your TSP contributions must come from payroll deferral or, you may transfer eligible money into your TSP account from an IRA or other Qualified Retirement Plan.

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TSP catch-up

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Q. I see that 2012 will have 27 pay periods. In current and previous years I divide the maximum allowable TSP and catch-up contributions by 26 to calculate my payroll deductions. Is the process the same in 2012, but divide by 27?  Or should I stick with 26 pay periods because 2012 will run to Jan. 12, 2013 and so pay period 27 will be in both tax years 2012 and 2013?

A. Pay and reporting schedules are agency-specific, so you’ll have to ask your payroll or HR officer this question.

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Retirement buyout

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Q.  I am a CSRS/FERS offset employee with 31 years and I have been offered the  VERA/VISP.  I would like to know how my retirement would be calculated for a VERA/VISP and how will it affect my retirement.  How do I find out what the numbers will look like for a retirement check before I decide to take the buyout?  I also have been depositing the max in my TSP account and I see that the government is not required to match it. Is it the agency you work for that decides if the government matches the TSP or not?

Mike Miles:

A. Employer contributions to the TSP, including matching, are only made – and must be made – under FERS. This is not an agency decision.

Reg Jones:

A. To estimate what your annuity would be, use the formulas for each retirement system:

 

* FERS: 0.01 x your three highest consecutive years of average salary (your high-3) x all years and full months of FERS service

 

* CSRS: 0.015 x your high-3 x 5 years of CSRS service, plus

 

* 0.0175 x your high-3 x 5 years of CSRS service, plus

 

* 0.02 x your high-3 x all remaining years and full months of CSRS service

 

Unused sick leave that doesn’t exceed the amount you had to your credit when you transferred to FERS, will be added to your CSRS service. If you retire before 2013, half of any remaining hours will be added to your FERS service. In both cases, hours that don’t add up to a month (approximately 174 hours) will be dropped.

 

As a FERS employee, if you retire before age 62, you will be entitled to the special retirement supplement, which is approximately the amount of Social Security benefit earned while you were a FERS employee. Here’s the formula: Social Security benefit estimate provided by the Social Security Administration x total years of FERS service rounded up to the next higher year divided by 40.

The basic rules on the amount of a Voluntary Separation Incentive Payment are as follows: An amount equal to the severance pay you would be entitled to, without an adjustment for any previous payments made or an amount determined by the head of your agency, not to exceed $25,000. Only you agency can tell you if you’d be eligible for a VSIP and, if so, in what amount.

 

 

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Disbursement at retirement

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Q.  I am 58 years old, in FERS, and plan to retire in two months. I am going to roll over my TSP into an IRA and take a large disbursement to pay some bills and get set up. I understand, at retirement, that this one-time disbursement will not be subject to the 10 percent early withdrawal penalty.

However, I have an outstanding loan balance with my TSP. I wanted to use part of my disbursement to pay this loan off, but have been told by TSP it will be considered another disbursement — but it will not be subject to the 10 percent penalty, either. So, it looks like I will be taking three disbursements at retirement: 1) TSP loan repayment; 2) for my personal use; 3) remainder rollover into an approved IRA. Where do I stand in regards to the 10 percent penalty with these disbursements?

A.  Since you are retiring during or following the calendar year when you reached age 55, your TSP withdrawals will be exempt from the early withdrawal penalty. Note that withdrawals from an IRA will not enjoy this exemption until you reach age 59 1/2.

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Withdraw TSP fund without penalty

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Q. I am taking VIRA/VSIP and am age 53. I have 26 years time in service and my minimum retirement age with 30 years of service is in 2015 at age 57.  When can I access my TSP funds without being subject to the 10 percent withdrawal penalty?

1. Most literature indicates that if you retire early in the year 55 or later, you can withdraw immediately without penalty.

2. The TSP board (I called twice already) says only 59½.

3. The FERS handbook states you can withdraw without penalty at MRA with 30 years (my case 57).

I would think that an early out would qualify me for immediate withdrawal.

A. Your service time and reason for retirement have nothing to do with the IRS early withdrawal penalty. Since you are retiring before the year in which you will reach age 55, you will be subject to the early withdrawal penalty until you reach age 59 1/2 unless you qualify for one of the exceptions listed on page 4 of the notice at https://www.tsp.gov/PDF/formspubs/octax92-32.pdf.

 

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