Ask The Experts: Money Matters

By Mike Miles

Keep your money in the TSP

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Q. I retired the end of July 2011. Since then, companies are coming out of the woodwork requesting that I invest my Thrift Savings Plan funds with them because “keeping it in the TSP will not allow growth due to the fact that I am no longer contributing.” But I am hesitating to do anything with it because once I hear their fees, it scares me.

I don’t expect to need the money and would like it to grow into a nice inheritance for my daughter.

I have about 90 percent in the G Fund and the remaining 10 percent divided between the C, S, and I funds.

My daughter is 42 years old, and there is approximately $300,000 in the TSP.

Am I looking at these companies and their fees too conservatively for the 20+ years ahead?

A. Keep your money in the TSP, which will allow you to be as aggressive or conservative as you will want to be. The pitches you’re hearing are an attempt to turn your money into theirs. Ignore them.

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TSP disbursement after death

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Q. My sister retired in 2010 and most likely will not move her Thrift Savings Plan into an IRA and begin withdrawals until she’s required to in 2015. In the meantime, she has awarded percentages of her TSP to children and friends.

If she dies before 2015, I know that the beneficiaries will have to notify TSP. It’s my understanding that the TSP beneficiaries will each have to start new IRAs to receive their portions. I don’t think there’s any way for the beneficiaries to receive a lump-sum payment, unless they pay penalties. Am I correct? And this is true regardless of their ages?

A. The beneficiaries don’t have to start IRAs to receive their share of the TSP account. The money will be distributed as taxable income unless it is transferred into a beneficiary IRA. The early withdrawal penalty does not apply to distributions made on account of the account holder’s death.

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Exceeding maximum TSP contributions

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Q. I’m a Postal Service worker with 33 years of service under CSRS. Can I make contributions to Thrift Savings Plan that exceed the $17,000 maximum and $5,500 catch-up contributions?

A. No. You may transfer money into TSP from an eligible IRA without limit, however.

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Wrong retirement system?

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Q. I may be in the wrong retirement system (CSRS). If I am, are there any companies that can guide me to decide between CSRS offset and FERS under the Federal Erroneous Retirement Coverage Corrections Act?

A. Yes. I have capabilities and experience in this area (I provided decision support in one of the largest FERCCA cases on record) and will be happy to discuss your situation with you. You may contact me directly through www.variplan.com.

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Increase to TSP maximum contribution

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Q. Have you heard anything regarding an increase to the maximum Thrift Savings Plan annual contribution ($17,000)?

A. You should expect the TSP deferral limit to track the 401(k) deferral limit, which is indexed to inflation with a $500 minimum increase. Any increase for 2013 won’t be announced until later this year, usually in October.

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One-time penalty-free TSP withdrawal?

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Q. During a retirement seminar, I was told that federal employees who retire during the year they turn 55 but before age 59½ have a one-time opportunity to withdraw funds from the Thrift Savings Plan without paying the 10 percent tax penalty. Is this correct? If so, how should this withdrawal be reported to the Internal Revenue Service so that the penalty is not assessed? I am a retired federal law enforcement officer, which may or may not be relevant.

A. This is bunk. If you retire during or after the calendar year in which you reach age 55, any and all of your TSP withdrawals are exempt from the early withdrawal penalty for the rest of your life. You should report this seminar provider to your agency to make sure that they get it right in the future.

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Withdrawing from TSP at age 56

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Q. I am 56 years old with 38 years of service including military time which I bought. I am under FERS.  I am seriously contemplating retiring any day now. Can I, at this age of 56, withdraw from my Thrift Savings Plan? What are the penalties, if any? What about the 20 percent that TSP automatically deducts? Also, what about the federal taxes?

A. Under the circumstances you describe, your post-retirement TSP withdrawals will be exempt from the early withdrawal penalty. Your withdrawals will be subject to federal income taxes for the year of the withdrawal, and there may be withholding taken from your withdrawals. See www.tsp.gov for details.

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IRA

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Q. I have an IRA that guarantees me a 4.50 percent interest rate. I can roll over IRAs anytime. Very little fees if any. It is a variable annuity that I purchased in 1983 that has granted me the fixed income. I am thinking of rolling over my Thrift Savings Plan and only taking the required minimum distribution at the end of each year. I can take out money without any penalty except for taxes. There is also a good death benefit. There are no surrender fees. What are your thoughts? I am already 75 years old.

A. The phrases “very little fees” and “variable annuity” are usually mutually exclusive. Beyond this, I can’t possibly speculate on what you should do without reading the prospectus and contract for the annuity and analyzing your circumstances.

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In-service withdrawals for active employees

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Q. Can active employees do an in-service transfer of any portion of their Thrift Savings Plan?

A. Yes, if you qualify for a hardship or an age-based in-service withdrawal. Visit www.tsp.com for details.

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Taxes on VCP conversion to Roth

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Q. I am CSRS and will be retiring next year. I will be making a contribution (after-tax) to the Voluntary Contributions Program before retiring. I have an existing Roth IRA (after-tax), reflecting contributions I have made over the years. I do not have a traditional IRA (pretax). I do, however, have money in the Thrift Savings Plan (pretax). I plan on converting the VCP contributions (after-tax) to my Roth IRA (after-tax) at retirement. Any interest earned (pretax) in the VCP will be transferred to the TSP at retirement.

After doing some research on this and reading IRS Pub 590, it seems to me that I will be able to do this transfer with no tax liability. Am I correct on this? Does the fact that I have a TSP account have any impact on whether any portion of the transfer is taxable? With regard to a taxable event, it seems the primary consideration is whether the transfer is made to a traditional IRA (not a Roth IRA) containing a mix of both deductible and nondeductible amounts.

A. Generally, a direct rollover from a Voluntary Contributions Program account to the TSP is not a taxable event. A conversion of assets from a Voluntary Contributions Program account to a Roth IRA is only taxable in the current year to the extent that the money has not already been taxed. Your planned transactions should be possible without triggering any current tax, but you should check with your tax preparer to be sure. If they can’t, or won’t give you advice, find another tax preparer.

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