Ask The Experts: Money Matters

By Mike Miles

Withdraw from Roth or TSP?

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Q. I’m 52 and a recently retired FERS law enforcement officer. I plan to leave my Thrift Savings Plan alone for at least two more years ($500k+ balance) and then do a 72T Substantially Equal Periodic Payment withdrawal. However, I may need approximately $30K to $40K, probably in 2014, before I do the 72T SEPP withdrawal. Would it be better to do the one-time partial TSP withdrawal, or withdraw from my Roth IRA contributions (tax-free)? I have approximately $140K in the Roth.

A. This is really a question for your tax preparer after a look at some pro forma returns for the relevant years. In general, however, I recommend that you leave your TSP account in tact for as long as possible, unless there is a clear advantage to doing otherwise.

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Changing monthly TSP withdrawal amount

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Q. As a federal law enforcement officer with 25 years of service, can I retire at the age of 47 and withdraw monthly payments from my Thrift Savings Plan balance based on life expectancy without paying a 10 percent penalty? If so, can I change this at 60 years of age to a specific dollar amount monthly payment without a penalty?

A. Yes, as long as they continue, without interruption or error, until you reach age 59½. After that, you may change the payments without penalty. The rules for avoiding the penalty are complex and strict, so you should consult and qualified tax adviser before proceeding.

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Changing TSP contribution

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Q. I will retire from the Postal Service this summer. Can I change my contribution to the Thrift Savings Plan to several thousand dollars on my terminal leave check to allow me to not pay taxes and increase my TSP account balance? Congress has not yet finalized this proposal.

A. No.

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Election and TSP

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Q. I am sure the upcoming elections will affect the market, as elections always do. What would be the recommended fund to put my money into for this? I have 13 years until I plan to retire, but I want to maximize earning without taking too big of risk. Right now, I have about 90 percent in the C Fund the rest in the S Fund.

A. Assuming that your Thrift Savings Plan is your only investment account, your current allocation is unnecessarily risky and inefficient. If you’re not a competent investment manager, and your question hints that you’re not, you should either engage trustworthy help or put your account balance into the L Fund with the target date that most closely matches your life expectancy. Trying to game the election is speculative, rather than prudent.

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G Fund to L Fund

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Q. Can I move the total amount of money in the G Fund over to the L Fund?

A. Yes, if you have not already requested two interfund transfers during the current calendar month.

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Buyout questions

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Q. I qualify for a buyout with 25-plus years of service. If I take the buyout, it is my understanding that I must wait until my normal minimum retirement age of 56 to begin receiving the Social Security supplement. Would this prevent me from receiving increases in Social Security supplemental benefits that I would have received had I waited until 56 to retire? I believe I would get the increases at 62, in any event, when I could first draw reduced SS benefits.

Also, what happens to my Thrift Savings Plan account? May I purchase an immediate annuity and/or take a lump sum at the time even though I am below the MRA? Would this cause me to have to wait until I was 59½ to begin being able to access TSP if I took an early-out? Do you believe the $25,000 buyout and the extra six or so years of retirement payments I would receive with an early-out would make up for the growth in my TSP and the loss of the extra 1 percent a year I would have received for staying until my MRA? I am at about the top of the GS-12 scale. I have been contributing the maximum allowed to my TSP and will be eligible to make catch-up contributions soon. I know you may not want to make a prediction, but I would love your opinion based on what you have observed with others in this situation.

Mike: Once you retire, you are free to access your TSP in any way usually allowed for retirees. The MRA does not apply to the TSP. You do not have to wait until you reach age 59½ to take money from your TSP once you are retired, but withdrawals taken before reaching age 59½ might be subject to the early withdrawal penalty if you retire before the calendar year in which you reach age 55. It’s impossible to say whether the early-out income will be enough to offset the potential TSP gains in the future without knowing how you’ll invest the TSP money along the way.

I think that accepting the buyout/early-out offer will substantially reduce your maximum standard of living in retirement if you don’t continue to work, though. I think it’s reckless to make such a big, irreversible decision without a clear understanding of the financial implications. Based on your questions, I suggest that you keep working and skip the buyout offer. This is the safer bet without the right decision analysis and support.

Reg: You can estimate what your special retirement supplement would be at age 62 by multiplying your estimated Social Security benefit at age 62 by your years of FERS service (rounded up to the next higher year) and dividing the product by 40. Your actual Social Security benefit at age 62 would be determined by the Social Security Administration based on such factors as your average indexed monthly earnings.

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Disability retirement, tax rates and penalties

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Q. I retired on disability in March 2007. I turned 58 on May 15. What tax rate will I have to pay at 59½ years of age, and what penalty would I pay for withdrawing before then?

A. The rules can be complex, depending upon your circumstances. I suggest that you read the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf and then I’ll answer any remaining questions you may have.

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Pulling retirement and redepositing

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Q. My wife and I pulled our retirement in about 1994 or later and invested. The market didn’t help it grow, given the lost decade and other downturns in the economy. I had previously converted mine to a Roth (bad idea).

Now I’m 63 and hoping to retire in three to five years unless something worse happens in the next two fiscal years. My wife is nine years younger. We deposited our retirement pulled from other employers into the Thrift Savings Plan, which in both cases is probably larger than if we had kept our federal retirement where it was. It is difficult to tell from the online calculators whether redepositing our TSP into CSRS (FERS for my wife) is better than leaving it where it is. Is it worthwhile to move our TSP into CSRS for the benefit of years worked being fully counted or is another way better? We both entered back into federal service Jan. 1, 2006.

A. You’re right. It is a complex question — too complex to be answered without a significant amount of careful analysis. In general, I consider CSRS retirement benefits to be an attractive investment option, but whether or not this is the best use of money for you is impossible to say without the proper analysis.

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TSP payments, withholding rate and tax liability

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Q. I will retire this year at age 70 and will request one on the following: 1.)  monthly payments for 10 years or more, or  2.) monthly payments based on the Internal Revenue Service’s life expectancy table. My withholding rate will be the same as if I were married with three children but at what tax percentage? Let’s say my annual payout is $10,000. What is my annual tax liability as it pertains to Thrift Savings Plan payments? Will I be paying less than 10 percent?

A. The default withholding rate is not fixed and will depend upon the amount of the distribution. You can use the instructions in IRS Circular E (http://www.irs.gov/publications/p15/ar02.html#en_US_2012_publink1000254686) to estimate the default withholding rate for your monthly withdrawals. You should note that you may request a high or lower withholding rate, or waive the withholding altogether. Also, keep in mind that withholding and your tax liability are two separate things.

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Moving money around

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Q. If I move an amount into the G Fund and set up a monthly withdraw equivalent to it, can I leave the remaining amount in a different fund and, if needed, move it around also?

A. Your withdrawals will be taken proportionately from each of the funds held in your Thrift Savings Plan account at the time the withdrawal is processed.

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