Ask The Experts: Money Matters

By Mike Miles

TSP, IRA and taxes

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Q. I know I can move my money in the Thrift Savings Plan to an IRA (I’m retired) and pay no taxes doing so. But can I move my TSP to an IRA outside of the U.S. and still not pay any taxes during the transfer?

A. An IRA as established by the U.S. tax code outside the U.S.? I’m not sure how that is even possible.

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Avoiding penalty on TSP withdrawal

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Q. I’m retiring from the military at age 52 after 30 years of service. As I understand things, I can’t withdraw my Thrift Savings Plan funds without a penalty until age 59½ (except as an annuity or equal payments based on life expectancy). What if I go to work for the government as a civilian until age 55? Then, could I withdraw the whole amount without penalty? Is there a certain length of time I must spend as a civilian federal worker?  What if I only worked for the government for three months during the year I turned 55? Is that sufficient to qualify for penalty-free withdrawal?

A. The rule to avoid the penalty on TSP withdrawals is that you must separate from covered service during or after the year in which you reach age 55.

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L2020

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Q. I am looking for some feedback on information received from a financial adviser. I have been in the L2020 fund. The financial adviser is primarily for military and federal employees. He indicated that the L2020 fund currently has 60 percent in stocks (C, S and I funds) and 40 percent in fixed income (G and F funds).  He had suggested conducting an interfund transfer to allocate 65 percent to stocks and 35 percent to fixed income.  The formula would be 25 percent C, 20 percent S and 20 percent I funds, equaling 65 percent.  The second equation would be to put the 35 percent into the G and F funds. Any further contributions would be allocated to these funds. I chose the L2020 because I not an expert in financial investing. What are your thought on this particular formula?

A. The appropriate allocation for your Thrift Savings Plan account should depend entirely upon the demands that will be placed upon the funds in the future. Your account should be managed to meet your objectives, so I can’t possibly give you advice without understanding your financial goals. The decisions about how your account is invested should be made by the person who is responsible and accountable for the results those decisions produce. It doesn’t sound like you trust your “financial adviser” to make those decisions. Is that adviser accountable for the results — that is, your standard of living in retirement — they produce? If not, I suggest that you find an adviser/manager who is worthy of your trust.

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TSP to Roth IRA

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Q. I plan to retire in nine years (at 63). I have $176,000 in the Thrift Savings Plan. I add the maximum to the TSP every year ($22,500) and will continue that until I retire. Then, my strategy, once retired, is to withdraw a monthly income from my TSP, and I will then start adding that money to a Roth IRA (e.g., a Vanguard fund) until I max out the Roth for both my husband and me. My thought is that I am getting a tax break by adding the max to the TSP during my high-income years as a GS-13; then, since I am FERS and I will only have 20 years in service, my income (and my husband’s) will drop to a 15 percent income bracket in retirement. The taxes I pay on the withdrawals will be less in retirement, since our income is reduced, but adding money to the Roth where it will grow tax-free will be great for us later in life and for our heirs. Am I thinking correctly? Does this sound like a plausible strategy?

A. I don’t see any advantage to converting TSP money to Roth IRA under those circumstances, and you’re not allowed to make Roth IRA contributions if you have no earned income.

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‘Restarting’ on TSP vesting

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Q. I have been working for the federal government for just over two years. I am planning on moving in the next few months. I have applied to federal jobs, as well as private-sector jobs and have, so far, heard back from the private-sector jobs. I read that the Thrift Savings Plan is vested at three years and that employees are entitled to retirement benefits after five years. If I were to leave the federal system at this point, would I be able to return to the system in the future and “restart,” as it were, at my two-year mark?

A. Mike: Your service credit for use in meeting the three-year TSP vesting requirement will pick up where it left off, but any automatic agency contributions that were forfeited when you separated will not be restored.

Reg: Yes, you could, if you didn’t take a refund of your contributions when you left. If you did take a refund, you’d have to re-deposit that money when you returned to get any credit for that time.

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F Fund

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Q. I am 61 and have $200,000 in the Thrift Savings Plan. I’m in process of transferring another $240,000 from an outside discount brokerage firm to my TSP. I would like to transfer all of the $240,000 to the F Fund. With interest rates possibly remaining low for another few years, is this a good move? When interest rates rise, how much will the F fund shares decrease? The bonds it holds are short and intermediate, so I’m assuming it won’t lose as much as if it held long-term bonds, but I’m not clear on how much I could lose.

I’m trying to move from equities to bonds due to my age and plans for retirement, but still make some money.  The G Fund has been doing so poorly. What are the risks to the F Fund? I’ve been watching the F Fund now for a few years, expecting it to go down, but so far it’s doing pretty well.

A. With interest rates near zero, I don’t think a 100 percent allocation to the F Fund is a good idea. In fact, I can’t think of a situation when it would ever be a good idea. I suggest that you use the L Fund that most closely corresponds to your life expectancy, or find a trustworthy investment adviser to help you.

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VCP

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Q. I am a CSRS employee who plans on retiring in 2013. I want to open a Voluntary Contribution Program account and deposit after-tax money in that account, and then, at retirement, transfer the deposit into Roth TSP, and any earnings into traditional TSP. Is that allowed?

A. No. You’ll have to use a Roth IRA for the after-tax portion of the VCP account.

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Life-expectancy payments vs. fixed-dollar payments

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Q. I am a FERS retiree who must begin taking my required minimum distribution in 2013. I am contemplating receiving monthly payments based on my expected life expectancy, but I need to know whether an initial decision to do so locks me forever, or whether, say in 2014 or 2015, I can change to monthly withdrawals based on an amount set annually. If the Thrift Savings Plan allows the later switch, are there barriers to my later going back to monthly payments based on life expectancy?

A. You may change from life-expectancy payments to fixed-dollar payments one time only. You may change the amount of fixed-dollar monthly payments once each year. You may not change from fixed-dollar payments to life-expectancy payments.

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Death benefits

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Q. I plan to choose an annuity for my Thrift Savings Plan savings that will pay my spouse half if I die. What happens to the balance of my money in TSP if we both should die shortly after the annuity is activated?

A. If you select and pay for the cash refund option, any unrecovered premium will be paid to your beneficiary(ies) as a death benefit. If you do not purchase the cash refund option, then annuity payments stop and no death benefit is paid.

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Stretching TSP funds

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Q. Can Thrift Savings Plan funds left to a beneficiary be stretched as they can in an IRA?

A. Yes. See the brochure at https://www.tsp.gov/PDF/formspubs/tspbk31.pdf for more information.

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