Ask The Experts: Money Matters

By Mike Miles

Retirement bonus and contributions to Roth IRA and TSP

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Q. I agreed to a $20,000 retirement incentive bonus offer from the Postal Service and retired in May 2011.  The first half of the bonus was paid in November 2011 and the second half in November 2012.

Today, I received a W-2 from the Postal Service describing this second half of the bonus as wages received in 2012 even though I officially retired in May 2011 and haven’t worked for them since then. (I had been assuming the bonus payment in 2012 was going to be incorporated into my CSRS retirement accounting.)

I haven’t earned any other income since I retired, but since I have “USPS wages received in 2012,” am I eligible to contribute $6,000 to my Roth IRA for 2012? And, if I had acted on this in 2012, would I have been eligible to contribute perhaps my entire $10,000 to my Thrift Savings Plan account?

A. Income that is included on your W-2 as wages qualifies as the basis for an IRA contribution, but your tax preparer is ultimately responsible for what goes on your tax return. Regular TSP contributions can only be made by payroll deferral, so if the money wasn’t included in a paycheck, you could not have contributed any of it to the TSP.

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TSP allocation

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Q. I have worked in the GS system for 13 years, and I have always taken out the maximum percentage allowed for my Thrift Savings Plan. For the past 13 years, I have put everything into the G Fund. I am not very educated on which funds to invest in. At this time, I have $165,000 in my TSP account. I would like to know which funds I should invest in and what percentage would best suited for me. I am 42 years old, and I plan to work until I am 65 to 67 years of age.

A. You’ve asked the big question: “Which allocation is best suited to YOU?” No one can answer this question properly without knowing a lot about you, your goals, resources, and constraints. Without the proper analysis and understanding, the best you can do is to choose the L Fund that most closely corresponds to your life expectancy.

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10-year monthly annuity

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Q. I retired Dec. 31. I plan to use the 10-year monthly annuity option. Does the principal in my account continue to be in play in the market? Will I benefit or suffer from market volatility?

A. If you use your Thrift Savings Plan money to purchase an annuity, you give up ownership of the principal in exchange for the guaranteed payments. The principal will be removed from your account to pay for the annuity.

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TSP contributions

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Q. I have been contributing to the Thrift Savings Plan for a number of years. I am a GS-4. I will have 28 years of federal service in June. In the beginning, I started contributing $10 (twice a year), then $25 (a year). Beginning last May, I started contributing $50 to the TSP out of my paycheck each pay period. At this time, I have no plans on retiring. I was hired under FERS. However, with furloughs, cutbacks and early retirements, should I keep increasing my TSP by $50 each year, or should I increase it by either $75 or $100?

A. You should contribute as much to the TSP as you can afford to commit to retirement savings.

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Age-based in-service withdrawal

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Q. I am 62 years old and still a federal employee (for the next several years). I am thinking of withdrawing $100,000 of the $250,000 I have invested in Thrift Savings Plan. The purpose behind this withdrawal is to save paying federal taxes on this amount. That is, we will be selling an investment property that has $100,000 in “unrealized tax losses” and we should be able to offset the taxes owed on the $100,000 TSP withdrawal with the $100,000 loss from the sale of the property.

I am confused by a statement on the TSP website that says if you make an age-based withdrawal, “you will lose the opportunity to make a partial withdrawal from your account once you are separated from federal service.” What does that mean?

After the $100,000 withdrawal, we will still have $150,000 in the TSP account.  Does “losing the opportunity to make a partial withdrawal once separated from federal service” mean we can withdraw only the required yearly amount once I reach 70½  and can make no other withdrawals before that time?

Does it mean that we could not, in the future, withdraw another $75,000 if we needed/wanted it?

Does it mean we could withdraw only the whole amount ($150,000) left in the TSP account?

A. You are allowed only one partial withdrawal from your TSP account. After that, your only option is a full withdrawal, which can be in the form of monthly payments or a lump sum, or monthly payments ending in a lump sum. Before you make your age-based, in service withdrawal you should consult a CPA to make sure it will work. Your withdrawal will be considered ordinary income, and not capital gains, for tax purposes.

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Early withdrawal penalty

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Q. I am a 52-year-old Postal Service employee and am seriously considering liquidating my TSP account. What are the penalties for this action? Would there be a less painful way to do this to lessen the amount of money I will lose?

A. The early withdrawal penalty is 10 percent of the gains in the account. The only way to avoid the penalty is to meet one of the exceptions listed on Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

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Rollover limit?

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Q. Is there a limit to the number of rollovers that can be made from a single, traditional IRA to the Thrift Savings Plan? In other words, can I roll over my previous years’ deductible IRA contributions to my TSP account each year?

A. I know of no limit.

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Mandatory RMD?

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Q. I am an active federal employee, over 70½ in age. Am I required to start my Thrift Savings Plan required minimum distribution withdrawals, even though I am not retired?

A. No.

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VCP to Roth IRA

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Q. I retired from federal service last year. The Office of Personnel Management made a direct rollover of my Voluntary Contributions Program after-tax contributions to a Roth IRA, and a direct rollover of my interest earned on those contributions to my Thrift Savings Plan account. However, OPM will not issue 1099Rs documenting these two direct rollovers, forcing me to file Form 4852 “substitute for 1099-R” with my 2012 tax return. This form requires these two direct rollovers to be identified with a distribution code. Of course, the Internal Revenue Service instructions aren’t that clear about which code is appropriate for each direct rollover.   It appears that both Code 7 and Code G are appropriate to use. Is there additional information, applicable guidance or relevant experience to offer regarding the correct codes for these two types of direct rollovers?

A. This is a question for your tax preparer.

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TSP and inflation

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Q. With a 300 percent increase in the money supply since 2008, I believe inflation will have a devastating effect in the years to come. Is there any recommended Thrift Savings Plan strategy to prepare for it if it occurs? From the risk information on the TSP website, it appears inflation will have a negative risk on all of the TSP funds.

A. The C, S, I and G funds should be the most resistant to inflation pressure.

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