Ask The Experts: Money Matters

By Mike Miles

VCP

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Q. I will be retiring this year under the Civil Service Retirement System at age 56 with 33.75 years of service. I read an article on the Voluntary Contribution Program. Can I roll my Thrift Savings Program into the VCP prior to retirement and then roll it into an Individual Retirement Account to save being taxed?

A. No. The VCP only accepts after-tax contributions. You may roll your VCP balance into an IRA or Roth IRA, however.

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Post-retirement TSP rollover

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Q. Can I roll my Thrift Savings Plan over to an Individual Retirement Account when I retire? I have at least four more years to go. I will be 57 with 30 years in. I am under the Federal Employees Retirement System.

I can’t believe I can’t touch my money unless I am 59.5. Why is it taking so long to get our retirement annuity? I will retire as a GS-6 Step 9.

A. Yes, you may roll your TSP money into an IRA after you retire.

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Buyout to TSP

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Q. Is it ever possible to roll your buyout dollars into your Thrift Savings Plan?  If so, how would that be done?

A. No.

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Buyout or keep working: You must weigh both ‘deals’

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Buyouts. Career feds anywhere near retirement eligibility can rival Indiana Jones in their determination, skill and daring in hunting this treasure.

But, in reality, buyout offers are more like “Let’s Make A Deal” than “Raiders of the Lost Ark.”

This game show is actually instructive in some of the fundamentals of probability and decision-making.

In playing the game, contestants face a series of decisions in which they must choose to keep or trade a “bird-in-the-hand” for another prize hidden behind a curtain or in a box — a “bird-in-the-bush.”

When you are offered the opportunity to retire with incentives, like cash, you are faced with this decision. Your bird-in-the-hand is your current retirement plan. For example, you might have worked out a plan to work three more years and then retire on your annuity and accumulated savings. Then, your employer comes along and offers you new options: birds-in-the-bush. Your task is to decide whether those birds-in-the-bush are worth more than the one you already have in your hand.

Obviously, if you were ready to retire anyway, retiring with an extra cash payment is a nice bonus. Retirement with an extra $17,000 — don’t forget that you’ll owe taxes on that $25,000 Voluntary Separation Incentive Payment — in your pocket is clearly worth more than the same retirement plan without the extra money.

However, it can be a much tougher decision, if accepting the buyout requires you to retire significantly earlier than you had otherwise planned.

I have conducted analyses and advised many federal employees considering early retirement over the years. Many of my clients are surprised to learn how much private-sector income from a post-retirement job is required to make up for the loss of federal retirement income that goes along with an earlier-than-planned retirement. In a recent case, we determined that it would take a 25 percent increase in pay over nine years to recover the retirement standard of living lost by leaving federal service five years early.

In my experience, people tend to let emotion drive the decision. Maybe they want to leave their job, so they focus on finding arguments that support this decision — a kind of “shoot now, ask questions later” approach. This approach brings with it bias in favor of accepting the buyout. The bias makes an incentive payment seem larger and the sacrifices smaller than they really are. Couple this emotional bias with a dearth of the analysis needed to support informed decision-making, and you wind up with decisions that seem good today, but mean disaster down the road.

Remember that retiring early is trading one plan for another. If you’ve done it right, your current retirement plan will support a standard of living that you find attractive. In deciding whether to trade this plan for another, you need to consider how the new plan will affect that standard of living. Leaving early may improve your standard of living for the next few years, while you enjoy a different job or not working at all, but what about the effects in 10, 20 or 30 years?

The primary price for retiring early is usually a reduction in annuity income. Whether you’re covered by the Federal Employees Retirement System or Civil Service Retirement System, a federal annuity is hard to beat, and you should be reluctant to give up each and every dollar of it. Based on my experience, it takes at least $16 in properly managed investment assets to replace each annuity income dollar. This means that the $25,000 buyout you receive, after you pay about $8,000 in taxes, can only be expected to replace, at most, about $1,000 per year in inflation-adjusted, annuity income.

There are situations where taking an early out, with or without a buyout, makes sense. There are no reliable rules of thumb for making this decision, however, and my advice is that, unless you are ready to retire without the incentives, you should decline the offer unless and until a thorough and competent analysis proves it to be in your best interests.

FERS, TSP and retirement

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Q. I have 26 years of Defense Department service with a target of six years to go before retiring. The Federal Employees Retirement System isn’t doing very well with the Thrift Savings Plan Offset. Because of a failing market, I have missed my TSP target by a large sum. Does the government have any plans to assist the FERS employees looking to retire with a failed TSP? Most FERS employees are having to work past their target because they can’t afford to retire. The Civil Service Retirement System is much better. Combining FERS, TSP and Social Security, we still fall short compared to CSRS retirements.

A. No. They put the responsibility for managing your TSP account prudently in your hands.

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401(k) rollover

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Q.  I am currently employed with 10 years service accrued in the Federal Employee Retirement System. If I were separated/left federal employment for the private sector, would I be allowed to roll over the entire contents of my 401(k) account (acquired via my new employment) into my Thrift Savings Plan? Similarly, if I were to retire from federal employment, would I be allowed to roll over the entire contents of any 401(k) account(s) (acquired as a result of any previous private-sector employment) into my TSP?

A. As long as you maintain your TSP account, whether employed, separated or retired from federal service, you may transfer eligible balances into your TSP account; 401(k) account assets consisting of only pretax money would be eligible from transfer.

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Contributions after retirement

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Q. I retired in 2007 and am in the Civil Service Retirement System. Am I permitted to continue to contribute monthly to my Thrift Savings Program? May I roll over the entire contents of my Individual Retirement Account into TSP?  Can I then make monthly contributions into TSP from my checking account?

A. You may not contribute to the TSP after you retire, but you may transfer eligible IRA balances into the TSP at any time. To be eligible, the IRA must contain only pretax money.

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TSP rollover

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Q. I am considering taking an early retirement offer. If I were to have another financial institution purchase an annuity that is offering a better interest rate than what MetLife is offering through the Thrift Savings Plan and do so directly so that it would not be deposited to a personal checking or savings account, would it be exempt from tax penalties because I am under 59½, even though it would be taxed as regular income through the payments from the annuity provider as it would if TSP purchased the annuity for me?

A. Yes. You may roll TSP money over to an IRA where it can be used to purchase an annuity (a qualified annuity) without penalty.

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IRA nightmare

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Q. I am a retired federal worker. I am in the Federal Employees Retirement System, a Thrift Savings Program participant, and, because I am over 70½ years old, I have been taking my Required Minimum Distribution in the form of monthly payments based on my life expectancy. I also have a traditional Individual Retirement Account with my local bank. I also have a Roth IRA at this bank.

I want to consolidate some of my funds and increase my monthly payments by transferring my traditional IRA to my TSP account. I was told by the bank that the time for making changes was in the 10 days following the maturity date of the traditional IRA. The traditional IRA matured Dec. 14. On Dec. 15, I took a TSP-60 form, which I had filled out with the appropriate information, to my local bank, together with the TSP instructions for transfer. The local bank vice president filled out the bottom of the form, copied all the documents, and sent them on to the bank’s IRA division. She also gave me a copy. Then a nightmare began, which has not yet ended.

I was very busy before Christmas, and we were away over the Christmas holiday, so it wasn’t until we came back that I checked my TSP account balance, expecting to see the amount of the traditional IRA added to it. It was not.

On Dec. 30, I went back to my local bank to find out what had happened. I saw the vice president. She called the IRA division, and was told that they required a notarized signature, because the IRA was over $25,000. I remonstrated that the TSP required no such thing, but the IRA division said no, it was the IRA division that required the signature. The bank vice president then notarized my signature on the copy of the TSP-60, added the value of the traditional IRA — $35,000.67 — in the appropriate blank, and also noted the account number of the traditional IRA on the form. (The IRA division had been thinking of sending my *Roth* IRA to the TSP!) She then sent it all back to the IRA division.

Since then, nothing has happened. I check my TSP account balance every day, and the traditional IRA has never been added. On Jan. 6, I received a copies of some documents from the TSP — a request from the IRA division of my bank for a notarized signature, and a letter in response from the TSP, explaining why they were exempt from such a requirement. Then, on Jan. 7, I received a statement generated automatically by the bank, detailing the renewal of the traditional IRA at the bank for another year.

I called the bank’s complaint line Jan. 9, and tried to get some explanation. All they did was put me in contact with the same local vice president with whom I had been dealing. My husband brought copies of the most recent documents to the local bank and spoke to the vice president. She said not to worry about the renewal notice because the date of the transfer request took precedence. She then called the IRA division again, and also sent them copies of the recent documents. She assured my husband that the transfer would take place “by the end of the week.” Well, here it is the end of the week. Has the transfer taken place? No.

Do I have any recourse from what I now must conclude is the “stonewalling” of the IRA division of my bank? Is what they are doing illegal, as well as highly unethical? Do you have any advice for me?

A. I’m financial analyst and planner, not a lawyer, so I can’t tell you what legal recourse you may have. Banks are regulated by the states, so you may give your state’s financial regulators a call. The kind of nightmare that you’ve described is hardly unusual in my experience, however. Banks, brokers and basically all big financial firms are in it for their shareholders and they hate to give up your money without a fight. You can thank your elected representatives for the lax regulation of banks.

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TSP loan repayments and the Roth option

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Q.  Will TSP participants who have (or take out) a loan be able to make the repayments into the Roth portion of their TSP once the Roth option is established?

A.  The rules have not been published, yet.

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