Ask The Experts: Money Matters

By Mike Miles

When to begin TSP withdrawals

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Q. I am a single, 57-year-old CSRS Offset retiree, mortgage-free, no car payment, no children and debt-free. I have enough pension to live on comfortably and still put away money into savings monthly. I have more than 30 quarters of Social Security credit. I have two six-figure IRAs that I do not plan to touch until required. My Thrift Savings Plan is approximately $400,000 and I have yet to touch it. I am perplexed about when to begin drawing money from my TSP, but I know that I will have to begin withdrawals by age 70½. Should I draw TSP monthly distributions based on my life span, or should I pick the amount myself and be more conservative based on my outliving the actuarial table established by TSP and/or by insurance tables? At this point, while in good health, I would only use the extra money to take an extra vacation each year. One friend said that I should start withdrawing well before 70½ and live a higher lifestyle standard. Finally, I do not want to move the TSP money into an IRA since the fees in TSP are so low.

A. I recommend that you leave your money in the TSP as long as possible, spending other money first. Whether you can safely maintain a higher standard of living, and how much higher, is impossible to determine without a comprehensive analysis of your circumstances, goals and constraints. The answer is also dependent upon how you will manage your investment decisions along the way. Before you take your friend’s advice, you should make sure that he or she will stand responsible for the results if things don’t work out in your favor. What if you spend money now that you wind up needing later?

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Early withdrawal penalty

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Q. The Internal Revenue Service is penalizing me for withdrawing my Thrift Savings Plan. I am less than 59 years old, but I retired under a Voluntary Early Retirement Authority. It is my understanding that I do not have to pay an early withdrawal penalty because I am retired. Please correct me if I am wrong. I also need to find the regulations for the IRS if I am exempt from paying this penalty.

A. Unless you retired during or after the year in which you reached age 55, or meet one of the other special exceptions, your withdrawals will be subject to the early withdrawal penalty until you reach age 59½ . See Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for details.

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401(k) to IRA to TSP

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Q. Regarding the Thrift Savings Plan and what can be deposited into my active TSP account: I was previously employed in a nonfederal job for which I had a 401(k) plan in which I was fully vested. After leaving the company’s employ, I rolled the 401(k) into an IRA. Now, I am thinking about taking the IRA and depositing it into my TSP. Is this allowed? Is there a maximum amount that can be rolled into the TSP? Where should I look to get the appropriate forms?

A. You may transfer an unlimited amount of pretax money from a 401(k) or IRA into the TSP at any time. Use Form TSP-60, which is available at www.tsp.gov.

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Loan non-repayment

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Q. I am 60½ years old, under FERS and plan to continue to work until 66. I took out a loan from the Thrift Savings Plan and currently have payments for two more years. I am wondering if I could not pay this loan off and have it counted as a disbursement since I am old enough to withdraw from my account. I would not do this until 2013.

A. Yes, if you default on your loan repayment, the TSP will declare your unpaid balance, including interest, a taxable distribution and the usual rules will apply.

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Want to retire this year

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Q. Current age: 56

Entered U.S. Navy active duty: May 1978

Active-duty military time: 11 years, four months

Retired reservist after 26 years as an O-5

Entered civil service: November 1997

Current paygrade: GS-9, Step 8

Received a $30,000 severance pay when released from active duty in January 1989

Points accumulated, active and reserve, for retirement: 5,245

What do I need to do to retire at the end of this year? I know you can’t tell me what I should do, but if you could give me guidance as to what I need to do so I can make an informed decision I would greatly appreciate it.

A. The analysis needed to make this determination can be quite complex since there are multiple variables and probabilities involved. Mistakes can be costly and irreversible, so you need to get it right the first time. I suggest that, if you’re not a professional pension fund manager, or have equivalent expertise, you find a trustworthy, affordable person to help you with the decision.

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MRA and TSP withdrawal penalties

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Q. I am a FERS employee with the Postal Service and will have 30 years of service at age 57. Can I withdraw from my Thrift Savings Plan without penalty if I have reached my minimum retirement age?

A. Your MRA has no effect on TSP withdrawal penalties. After you retire, you’ll have access to your TSP account without penalty. While you’re still working, you’ll have to wait until you reach age 59½ to avoid the penalty.

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72(t) withdrawal

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Q. I made the costly mistake of rolling over my Thrift Savings Plan into a traditional IRA. I had to file a Form 72(t) to take out payments until I reached age 59½. Then I moved to another firm, filed a new 72(t), and now I violated the original 72(t), and take a 10 percent retroactive penalty.

A. I’ve written many times about the reasons not to roll your TSP account over to an IRA. This illustrates one of them — that you may be giving up penalty-free access to your funds. I’ve also written many times about the pitfalls of 72(t) withdrawals, how strict the rules are and how stiff the penalties can be for violating those rules. See, I wasn’t kidding!

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First required minimum distribution

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Q. I will turn 70½ years old on March 29, 2014. In what year do I have to take my first required minimum distribution? I have been told it would be on April 1, 2015, but I want to be 100 percent sure it isn’t April 1, 2014.

A. It’s the year after the year in which you reach age 70½, so 2015.

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Delay for TSP contributions

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Q. I just discovered that my contributions to the Thrift Savings Plan don’t show up there until seven to 10 days after I’m paid, but that money doesn’t sit in my bank account all that time. Do you have any idea where that money goes for that time? Is the TSP earning interest on it? If so, does that interest get deposited in our accounts, or does the TSP get to keep it and put it toward administrative costs? At the speed money can move these days, I find it hard to believe it takes seven to 10 days to get it into my TSP account.

A. Seriously? It’s making its way from your agency to the TSP. The TSP isn’t earning interest. When they get it, they post it to your account.

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Penalty-free TSP transfer to VCP?

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Q. I am planning to retire next year. If Congress extends the Roth rollover provision, I am interested in pursuing the following scenario: I have funds in the Thrift Savings Plan that will be fully taxable upon withdrawal. If I withdraw them upon retirement (at 56), I will be taxed on them but not subject to the 10 percent penalty. I propose to take those funds and immediately (within the same day if possible) transfer them to the CSRS Voluntary Contribution Program account, which then could also allow a rollover into a Roth account.

Therefore, am I permitted to fund the CSRS VCP account with “after-tax” funds that would come from a TSP?

I also understand that the tax on the TSP withdrawal must come from outside funds and not from the TSP proceeds?

A. You may fund a CSRS VCP account with any after-tax money you like, but not after you retire. Even without this limitation, I don’t know why you’d want to convert your TSP account assets to a Roth IRA, paying tax now rather than paying tax later and giving up the advantages of the TSP.

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