Ask The Experts: Money Matters

By Mike Miles

FERS annuity

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Q. I have 25 years in civil service. I have a Thrift Savings Plan account and, once I retire, do I get an annuity automatically or do I have to use the money in the TSP account to get that? Should I buy an annuity or just take a monthly payment from the TSP account? Not sure if I will have enough to retire. I heard that in FERS, the government gives an annuity and then you get TSP. But when I go to the website to estimate how much I have in the TSP, I do not see the FERS annuity they talk about and see only one amount.

A. Reg Jones says: Assuming that you are eligible to retire, your FERS annuity would be calculated as follows: 0.01 x your highest three consecutive years of average salary (your high-3) x your years and full months of service. FERS employees can retire at their minimum retirement age with 30 years of service, 60 with 20 or 62 with five. They can also retire at their MRA with at least 10 but fewer than 30 years of service; however, if they do, their annuities will be reduced by 5 percent for every year they are under age 62.

Mike Miles says: You may use all or part of your TSP account funds to purchase an annuity from any source you choose. The TSP offers an annuity underwritten by MetLife, but you may also roll over TSP funds to an Individual Retirement Account and use those funds to buy an annuity from any insurer you choose.

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Tapping into TSP

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Q. I am under the FERS retirement plan. In four years, I will be 57 with 30 years. Will I be penalized in any way? Also, will I be able to tap into my Thrift Savings Plan?

A. Reg Jones says: Because you will be retiring at your minimum retirement age with at least 30 years of service, you’ll receive a full, unreduced annuity.

Mike Miles says: You’ll have access to your TSP account after retire without penalty.

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Withdraw TSP before MRA?

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Q. Can I retire from the Veterans Affairs hospital under FERS at age 55 with 25 years of service and withdraw my Thrift Savings Plan in lump sum. Or do I have to wait until I am MRA? Can I leave at 55 and defer my retirement until I reach my MRA at 56?

A. Reg Jones says: You can’t retire until you reach your minimum retirement age, which is 56. If you retired then, your annuity would be reduced by 5 percent for every year you were under age 60 (5/12 of a percentage point per year). You could delay the receipt of your annuity to a later date to reduce or eliminate the age penalty.

Mike Miles says: You may withdraw your TSP funds in a lump sum following your retirement.

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Transferring IRA to TSP

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Q. I have some money in a traditional Individual Retirement Account that is doing nothing for me, and I was wondering if I could transfer it to my Thrift Savings Plan account.

I invested roughly $44,000 in June 2008 and, as of March 30, I have a grand total of $46,190 in the account. I am also paying an annual fee of $344 for this IRA. In the same time frame, I made over $30,000 in my TSP account. I realize I will lose about $2,500 in the transfer, but I feel I can make that back up in no time.

A. You may transfer traditional IRA funds into your TSP account as long as the money does not include any nondeductible contributions.

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Excess contributions

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Q. I am a Postal Service employee, age 57, and I currently contribute $6,000 a year to a Roth Individual Retirement Account. Am I also allowed to contribute to the Thrift Savings Plan, or would that be considered an excess contribution?

A. You are permitted to contribute the maximum to the TSP, but, depending upon your circumstances, this may limit your ability to contribute to a Roth IRA. See Internal Revenue Service Publication 590 for the rules.

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Age-based in-service withdrawal

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Q. I work as a CSRS federal employee, 60 years old with 35 years of federal service. There is $200,000 in pretax money saved in my Thrift Savings Plan account. I’m interested in taking advantage of the “one-time” age-based in-service withdrawal option. Can I choose any amount to withdraw? For example, my plan is to take out $100,000 and roll (100 percent) directly into my private Individual Retirement Account and invest in stocks. Is it also correct to assume that I can move money from my IRA pretax account into my TSP account (any time and any amount) as long as I maintain a TSP account? I don’t plan to retire for another six years and want to maximize my TSP and IRA growth.

A. You may only withdraw funds in which you are vested. Otherwise, there is no limit on the amount of an age-based in-service withdrawal. You may transfer pretax IRA funds into your TSP account whenever you like for as long as you maintain an account. Before you proceed, you should know that your plan is more likely to fail than succeed in improving your returns.

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Taxes and monthly TSP withholdings

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Q. Will the Thrift Savings Plan automatically withhold money toward my federal and state taxes each month if I choose monthly withdrawals at retirement?

A. Federal withholding; yes. State withholding; no. See the table on Page 2 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for details.

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Roth TSP withdrawal

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Q. Will you be allowed to withdraw the principal (not the interest earned) from your Roth TSP account after the five-year seasoning period and without any retirement age restrictions? Do the Internal Revenue Service’s rules on Roth 401(k) or a Roth IRA apply to Roth TSP?

A. The early withdrawal penalty covers Roth distributions prior to age 59½.

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TSP withdrawal for debt?

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Q. I have been working for the federal government for 10 years. I have contributed the max for most of that time to the Thrift Savings Plan/FERS. After a divorce, I have been battling debt in the form of school loans, credit cards, etc. In an attempt to pay off the debt, I pay approximately $700 per month. I have attempted and requested to decrease the annual percentage rate on some items, with little success. I have a fair amount in my TSP. I am debating whether to withdraw just the amount I need to pay off the debt (20 percent of the entire amount) and be debt free. At that point, I would increase my contribution to the max again in an attempt to make up lost ground. I understand the six-month penalty. I am 34. I started at 24. I have many more years to contribute. I am also in the Air Force Reserve. Is this a good move, given my age and years to contribute? Also, what tax percentage would I be paying off the withdrawal amount (10 percent or 20 percent)?

A. I suggest you consider taking a TSP loan, instead of a withdrawal. If you elect to take, and qualify for, a financial hardship withdrawal, the automatic withholding will be 10 percent, but you’ll be on the hook for whatever tax and penalty accrue when you file your tax return for the year.

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Penalty-free rollover?

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Q. My husband has 15 years active-duty military and is working now as a NASA employee. It will cost about $20,000 to buy back his 15 years. Can we roll over money from our 401(k) into FERS and avoid penalties and taxes on that money?

A. No.

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