Ask The Experts: Money Matters

By Mike Miles

TSP contribution

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Q. I’m in FERS with about 15 years until I’m eligible for retirement.  When I increase my TSP contribution, my taxable income is reduced and the amount of federal tax withheld is obviously reduced as well.

How would I go about calculating the “sweet spot” in my TSP contribution amount to get the most benefit in reference to the amount of taxes being withheld.  Is there a law of diminishing returns here or is more always going to be better?
A. Sorry, but I’m not at all sure what you mean by “most benefit in reference to the amount of taxes being withheld.” If you mean to learn what TSP contribution amount will minimize the tax withholding from your paycheck, then, if all other factors are held constant, more is better.

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Roth IRA

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Q. I am a CSRS employee with more than 36 years of service. I have also been contributing to a TSP account. I plan to retire in June 2013. Should I start contributing to a Roth IRA or continue contributing to my TSP?

A. “Should I…” is not a question that I can answer through this forum. Whoever is responsible for managing your investment portfolio and delivering the results you expect should be the one to decide.

 

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Reporting TSP contributions on tax forms

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Q: When I am filing my simple taxes, do I need to include my 5 percent Thrift Savings Plan contributions as an investment anywhere in my return? I did not receive any IRS Form 1099s from the TSP, but want to ensure I do the right thing.

A: Your TSP contributions do not need to be reported as an investment. The contributions are reported to you on your W-2.

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Moving TSP funds into an IRA

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Q: I am a Federal Employees Retirement System employee retiring on April 30, under the Voluntary Early Retirement Authority/Voluntary Separation Incentive Pay at age 55. Can I take some or all of my Thrift Savings Plan balance and transfer it to a self-directed individual retirement account? What is the process for doing that? What are the estimated costs and penalties?

A: You may roll over your TSP assets to an IRA following separation at at 55 with no penalty. Use Form TSP-77 to request a partial withdrawal or Form TSP-70 to request a full withdrawal of your account assets.

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Alternatives to managing your own retirement funds

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Q: I’m tired of moving funds all over the place trying to maximize my money in the Thrift Savings Plan. I have done so-so — retired federal law enforcement, 30 years of service, now 51 years old. I am going to start withdrawing funds at 59 1/2. I want to maximize my value in eight or nine years. I know it is hard to have the best of both worlds (safety of funds vs. maximized rate of return) — what are your thoughts?

A: I can’t possibly give you reliable investment advice through this forum, without the appropriate understanding, research and analysis. Managing the money to support your desired standard of living has its advantages, if it’s done right. If not, it can be disastrous. If you’re not competent in pension fund management (which is what’s required), then you should consider hiring someone who is. One way to do this is to use your money to buy an immediate, fixed annuity to guarantee lifetime income.

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TSP penalties for retiring at 62?

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Q: I plan on retiring at 62 from the Federal Employees Retirement System. Will I be penalized for withdrawing money from my Thrift Savings Plan account at that age?

A: No.

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Figuring out required minimum distributions

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Q: I have a question concerning the following paragraph from your Feb. 20 column in Federal Times:

I find it disappointing that it appears that you will not be able to manage, or withdraw, money selectively between the two options. Your contribution allocation and any interfund transfers you direct will apply to both options. Any withdrawals will be taken, pro rata, from both options. You may, however, split a rollover distribution between traditional and Roth IRA accounts.

Specifically, I am puzzled by the statement in the second sentence. As I understand the general concept with “tax deferred” individual retirement accounts and 401(k) plans, mandatory minimum withdrawals begin not later than April 1 of the year following the depositor reaching age 70 1/2.  As I understand the general concept with “tax paid” — i.e., Roth IRAs and 401(k) plans — no mandatory minimum withdrawal is required earlier than the death of the contributor/owner of the tax-paid account.

If I understand the meaning of the language in the paragraph in your column, and assuming a Thrift Savings Plan participant has made both “tax deferred” TSP contributions and “tax paid” (Roth) contributions to the TSP, any mandatory minimum withdrawal from the tax-deferred segment of the TSP will result in a pro rata withdrawal from the tax-paid (Roth) option of the TSP.

Do I understand that the allocation mix in the non-Roth and the Roth segments of the plan must be identical?  Given the option, I would elect to allocate greater risk to the Roth segment in order to avoid being forced to make mandatory minimum withdrawals after taking a “financial hit” similar to that which occurred during the period beginning in late 2007. Surely Congress could not have intended to impose a mandatory minimum withdrawal on “tax paid” (Roth) contributions to the TSP when it authorized the Thrift Savings Board to offer a Roth option to the TSP.

A: I based the comments in my column on the following excerpt from the TSP’s brochure: “A New TSP Element”

You will be able to take loans, in-service withdrawals, and partial withdrawals from your account as before. They will come out of your account on a pro rata basis — with a proportional amount from your traditional and Roth balances.

Details on how required minimum distributions will be handled have yet to emerge.

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Ready to cash out my TSP: How do I do it?

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Q: I have looked all over the Thrift Savings Plan website and cannot find the button to push that says I am retiring and want to start collecting my money. I am almost 62 and intend to retire in 191 days. I have figured out that I want to begin receiving my money on a monthly basis and can only change that election once a year. The online calculator tells me that amount is good for 60 years and four months. It does not tell me how far off the minimum distribution I am. But where is the button?

A: Directly from the TSP website:

How to Request a Withdrawal: If you are ready to request a withdrawal from your TSP account, you need to do the following:

1. Read the booklet Withdrawing Your TSP Account After Leaving Federal Service.
2. Read the TSP tax notice “Important Tax Information About Payments From Your TSP Account.
3. Complete either Form TSP-70, Request for Full Withdrawal (TSP-U-70, uniformed services) or Form TSP-77, Request for Partial Withdrawal When Separated (TSP-U-77, uniformed services).

The calculator is useless, in my opinion, and you won’t know how much your minimum withdrawal amount will be each year until after Dec. 31 of the year in which you’ve reached age 70 1/2.

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TSP and Roth

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Q: I have two Roth questions. First, I max out my TSP contributions and would contribute more if allowed. Am I right to view Roth contributions as a good means of essentially increasing my retirement contributions by pre-paying the taxes I’ll pay in retirement?  Second, after I retire, will I be allowed to transfer the Roth balance of my TSP account to an existing Roth IRA and leave my non-Roth balance in the TSP?

A: “Yes” to the first question and “It appears so” to the second.

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No rollover

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Q: I work for the postal service. If there is an early out I would jump at the chance. I would like to use the funds in my TSP to pay off our house and all our other bills. I am 53, my husband is 57. If I transfer the funds to an IRA in his name, when could they be withdrawn without paying a 10-percent penalty. Is this even possible?

A: You can’t transfer or roll over your TSP funds to another person’s IRA.

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