Ask The Experts: Money Matters

By Mike Miles

TSP loan and taxes

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Q. I owe $24,000 to my Thrift Savings Plan from a loan I made. If I take the early retirement, how much will I owe in taxes to the government? I live in Florida.

A. The amount you’ll owe on the unpaid loan balance can only be determined by completing your tax return for the year. If you’re not prepared to make the estimates by running a pro-forma return, then you should consult a tax adviser who is.

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Moving and/or retiring: 4 options

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Q. I’m a 50-year-old postal clerk (FERS) with 23½ years of service, and I want to get out. I want to move from Florida back to my home state 1,000 miles away. I think I only have four options, and I’m looking for advice on what would be best for me.

1. Retire with 50/20 and either pay the penalties or defer or postpone annuities? If I do that, what will the penalties be?

2. Stick it out for another year and a half until I have 25 years of service and retire. If I do that, will there be any penalties?

3. Try to find a mutual swap close to home and work in a new office for another year and a half until I have my 25 years?

4. Resign. If I resign, what do I lose?

In all cases above, when is my Thrift Savings Plan available to me without penalties?

A. Your TSP is available without penalties as soon as you retire, if you stay within the rules. See Page 4 of the notice at https://www.tsp.gov/PDF/formspubs/octax92-32.pdf for the exceptions to the early withdrawal penalty.

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Early TSP withdrawal

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Q. I am 41 and due to unemployment for two years following my active-duty retirement, I need to withdrawal all my Thrift Savings Plan funds. When the 20 percent is withheld from my payment, does that then get applied to my tax liability for this year? I understand that I owe 20 percent in taxes on the money, so is it set aside like federal taxes withheld in a regular paycheck? In addition, there will be a 10 percent penalty due to my age? Is the penalty automatically taken out if I elect for a total withdrawal, or must I set this aside when filing 2012 taxes?

A. The withholding from your withdrawal will not include an allowance for any early withdrawal penalty you may owe, and is just a deposit against your future tax liability. It does not reflect the actual amount you will owe, which will be determined when you file your tax return for the year.

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Rolling IRA into F Fund

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Q. I know that I can’t put my wife’s Individual Retirement Account into the Thrift Savings Plan, so we would like to invest it into an F Fund equivalent. Can you identify such a fund that we can roll her IRA into?

A. Any fund that is based on the Barclay’s Capital U.S. Aggregate Bond Index should do — the lower the cost, the better. Try AGG from iShares.

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Transferring into Roth TSP

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Q. I deposited a little money into my Thrift Savings Plan, tax free, about five years ago, when I was in the military serving in Iraq. Since this money is in effect post tax, would it be possible to transfer it from my traditional TSP account to a Roth TSP account, thus allowing it to accrue tax-free interest?

A. It is possible. Consult a competent tax adviser for advice about if, when and how you should do it.

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Rolling over VC into Roth TSP

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Q. I am planning on rolling over my voluntary contributions account in the very near future. Can I roll my contributions to the new Roth Thrift Savings Plan once it is operational? I understand that any earnings I have from my VC account can roll over to my regular TSP account.

A. Based on the guidance provided by the TSP so far, this should be possible. We’ll have to see how things develop to be sure.

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Income limits and rollover

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Q. Will retirees be able to roll over funds from the Roth TSP option into a Roth IRA, even if we exceed the income limits for a Roth IRA?

A. Yes, you will.

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Credit for first stint

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Q. I worked for DoDDS schools from 1987 to 1990. At that time, vesting was five years with FERS. When I resigned, I believe I had to forfeit my retirement and was made to withdraw my Thrift Savings Plan. Would this have been correct for that time period with FERS? And DoDDS?

I came back to work for DoDEA in January 2001. I called to make certain that I was going to get credit for those three years. I wanted to redeposit my TSP money but was not allowed to, and was told there was no provision for repayment. It seems that I was also told that my forfeited retirement would now be reinstated and that the three years would be added to whatever time I worked. I am now ready to retire and this is causing some confusion.

A. Mike: If you withdrew your TSP money and did not roll it over to an Individual Retirement Account, you will not be allowed to redeposit this withdrawn money to your new TSP account. You may, however, roll untaxed IRA money into your TSP account at any time.

Reg: If you left your contributions in the retirement fund when you left, that period of service would be reinstated. If you didn’t, you’d have to redeposit that amount plus accrued interest to get credit for it.

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Qualified longevity annuity contract

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Q. Is there any way of structuring an annuity purchased through the Thrift Savings Plan into a qualified longevity annuity contract?

A. Since, under the proposed regulation, this would require the purchase of a deferred annuity contract and the TSP does not offer such a contract, this is not possible.

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Loan repayment and early-out

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Q. I have worked for the Postal Service for 24 years as postmaster. I would be able to take an early-out offer. I want to borrow on my Thrift Savings Plan for a residential loan. If I do a 10-year loan from my part of the TSP next month and then they offer early retirement and I take it, will I still have to continue making the payments? Also, when I retire, will I be able to pull out all my savings in TSP?

A. If you retire, your outstanding TSP loan will become due. If you don’t repay it shortly after retiring, it will be declared a taxable distribution from your account. You may withdraw funds from the TSP any time after you separate from service.

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