Ask The Experts: Money Matters

By Mike Miles

Loan balance and G Fund

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Q. I am a 48-year-old GS-14/7 with about $240,000 in my Thrift Savings Plan (I have a little more in a prior 401(k), and my wife makes more than I do but does not have a 401(k) plan…I am willing to take reasonable risks).

I have contributed the maximum at 43 percent C, 22 percent S, 25 percent I and 10 percent F for several years and rebalanced each year. Indeed, I stubbornly left it like that during the crash but have recovered nicely.

I recently borrowed $30,000 (yes, I know, that is not the best course), at the G rate of 1.5 percent. It seems to me that that is akin to putting more than 10 percent of my savings in the very safe G Fund.  So, while I left my existing F Fund balance alone, this “new” G money (interest on my loan repayments) plus the “bond bubble” threat convinced me to stop putting new money into either bond fund. I now contribute 48 percent C, 25 percent S and 27 percent I. (Yes, I tweaked the ratio a little due to lackluster I Fund performance and good S Fund performance).

Is it correct/smart to treat the interest I am paying myself as a sort of surrogate G Fund investment? Secondarily, are these ratios out of whack for a (moderately) aggressive portfolio?

A. Your loan balance and the G Fund differ in a big way: The G Fund guarantees the principal and the interest on your investment with them; you do not provide the same guarantee. Your asset allocation is “out of whack” in that it is risk-inefficient. For the same risk you are taking, you could achieve a higher expected rate of return by adding allocations to the remaining TSP funds.

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Rollover into TSP

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Q. I have retirement funds in TIAA-CREF. The funds are listed as 401(a) and 403(b) accounts. All are pretax. May I roll over these accounts into my Thrift Savings Plan? I am considering this only for consolidation purposes.

A. Yes.

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Partial TSP withdrawal

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Q. I will be 63 years old in August. I have made a previous partial Thrift Savings Plan withdrawal but need another for a down payment on a home.

1. Can I make another partial withdrawal?  If not, what regulation dictates that I cannot?

2. If I can’t make another partial withdrawal and decide to take monthly payments, can I set the monthly payment amount or does TSP have a required monthly distribution rule?  And will the remaining balances continue to earn income?

A. You are limited to one partial withdrawal during your lifetime. I’m not a lawyer, so you’ll have to look up the regulation yourself. You may request automatic monthly withdrawals in any amount you like and change the amount once each year in January. Your remaining balance continues to be invested according to your direction.

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Divorce and TSP

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Q. I am about to divorce my husband, who works for the Federal Aviation Administration.

1. Can I keep his health insurance as an individual? Does this cost anything to him? How much will it cost me?

2. How can I be eligible for his life insurance after divorce?

3. Which is more beneficial: Getting a survivor benefit or getting a higher pension?

4. When can he start taking money from his Thrift Savings Plan?

A. You can’t withdraw money from his TSP account. Your divorce settlement will govern how the TSP is divided and distributed and you’ll likely wind up with your share in an IRA in your name. The usual rules for distributions will then apply.

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TSP MetLife annuity protection

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Q. Is an annuity purchased with Thrift Savings Plan funds from MetLife federally insured/guaranteed the way bank accounts have FDIC? Or is a MetLife guaranteed annuity not really guaranteed at all, in case even a huge company like MetLife fails?

A. A TSP annuity is guaranteed by MetLife, not by the federal government.

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TSP vs. Roth IRA

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Q. I am a fully vested CSRS employee with the Environmental Protection Agency for 33 years at age 55. I have received my numbers, but I missed my first date to retire. How long does it take to receive my first full check? Worst-case scenario? Best-case scenario? And is there any way to speed up processing?

When will I receive my annual leave payment? Will it be immediate in one lump sum without taxes since I already paid taxes on my leave?

Should I take all of my Thrift Savings Plan out at once or leave about 10,000 in and roll it over to a Roth IRA or leave it in TSP?

Is there a financial counselor at TSP to speak with about taxes and IRAs vs. TSP?

I was told the first three days of the month or the last day of the month are the best times to go out to receive the check earlier? Is this a good idea?

A. Mike: You should leave your money in the TSP for as long as possible, since it is the best retirement investment vehicle you’ll find. You’ll find information about taxes and the TSP at You may contact the Thrift Line with your specific questions, although I doubt they’ll help you with questions about IRA taxation.

Reg: I don’t know how long it will take for you to get your first full annuity check; nor, I expect, does anyone else. However, once your retirement package arrives at the Office of Personnel Management, they will put you in interim pay within a week or two. A complete and accurate retirement package speedily sent to OPM by your agency is the best hedge against delayed processing.

You’ll have to ask your agency when it will send you your lump-sum payment for unused annual leave. That can’t happen until your agency closes out your account. Since you couldn’t have paid taxes on that money until it was received, it will be treated as ordinary income from which taxes will be deducted.

To pick the best date to retire, try to find one that is at the end of a pay period — to get credit for any annual and sick leave you earned during that pay period — and as close to the end of a month as possible — so the time between when you are employed and on the annuity roll is as short as you can make it. Note: As a CSRS employee, you can retire up to the third day of any month and be on the annuity roll in that month. While you will be paid for the additional days you are employed, your first month’s annuity will be reduced by 1/30 for every day you are still employed.

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Keep bonds in your portfolio to guard against stock losses

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With interest rates so low, it might be tempting to think bonds are a bad investment. If you are counting on your portfolio to provide reliable income in retirement, however, this might be a dangerous idea on which to act.

Bonds are more than just interest generators and have value beyond the cash payments they spin off. They provide an important hedge against the risk of loss elsewhere in your portfolio.

Unless there are exceptional circumstances — you plan to withdraw and spend your entire Thrift Savings Plan balance within the next couple of years, for example — you should hold bonds in your investment portfolio all the time.

In the TSP, the F Fund is the only bond investment available. It tracks the performance of a broad sample of the U.S. domestic bond market, as represented by the Barclays Capital U.S. Aggregate Bond Index. This index consists of high-quality fixed-income securities with maturities of more than one year. It includes Treasury and agency bonds, asset-backed securities, and corporate and noncorporate bonds. At last count Dec. 31, the index included more than 8,000 notes and bonds. About 40 percent of these bonds were backed by the federal government. The remainder were guaranteed by corporations — with either assets or revenue. The average duration of the bonds in the index was about 4½ years.

The F Fund’s average yield — the interest rate being paid out — was recently about 3.25 percent per year. The F Fund’s share price reflects the market value of the underlying bonds in the index, along with the accumulated interest income, which is reinvested in bonds as it is received by the fund.

The return generated from the F Fund can be broken down into two component sources: the income from interest paid by the underlying bonds, and the change in the market value of those bonds between the time you buy the fund and the day you measure the return.

To understand how the F Fund’s returns are generated, you need to understand how a bond’s return is generated. Consider this example:

You buy a bond for $1,000, collect $50 in interest payments and then sell the bond to another investor for $1,050, a total gain of $100, or 10 percent. You might ask why the value of the bond went up between when it was purchased and when it was sold. The reason must be a decline in the interest rates for similar bonds. Since the interest rate paid on a bond is a fixed dollar amount, rather than a percentage, the price of the bond is adjusted up or down in the market until that payment is in equilibrium with the prevailing rate. When the bond was purchased for $1,000, that $50 interest payment represented a 5 percent rate of return. When it was sold for $1,050, that same $50 interest payment represented a return of only 4.76 percent. Why would you sell a 5 percent bond in a 4.76 percent market? You wouldn’t, so you raise the price to adjust the return for the buyer.

This price adjustment works both ways. If interest rates rise between when you buy a bond and when you sell it, the price you can get for the bond will fall. Like the bonds it represents, the F Fund’s share value can also risk and fall in reaction to interest rates. This is behind the recommendations to avoid bonds. In today’s low interest rate environment, many investors believe interest rates have nowhere to go but up in the future, and in turn, bond values have nowhere to go but down.

The problem with abandoning bonds is that they tend to produce a hedge against short-term stock price volatility. When the market price for stocks falls, investors tend to take their money from stocks and invest it in bonds — particularly government bonds — bidding up the prices and lowering interest rates. This offers investors who favor predictability important protection against losses. While it might seem attractive to avoid the risk of loss from bonds and rising interest rates, this must be balanced against the corresponding increase in risk from losses in stocks, which tend to be more severe. When all of the risks, including the risk of being wrong about interest rates, are taken into account, it’s hard to make a rational case for abandoning bonds in your portfolio, or F Fund shares from your TSP account. A more reasonable approach is to be vigilant in making sure your allocation to the F Fund is not significantly overweight relative to its target. This is accomplished by rebalancing your account at least once per year, but no more than four times per year.

TSP withdrawal at 70 1/2, Part II

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Q. I am retired CSRS. I was born Nov. 15, 1942. Therefore, I’ll be 70½ on May 15.

1. When will I have to start taking payments from my Thrift Savings Plan account?

2. Can I wait until January to March 2014 before I get my first payment?

3. What is the minimum I will have to take?

4. I do not want a total lump-sum payment.

5. Do I have to take a monthly payment, or can I get my minimum payment once a year?

6. What form do I need to submit to get minimal payments each year?

7. Can you provide the form?

A. You are required to take your first withdrawal by April 1, 2014. This will be the required minimum distribution for 2013. You are then required to take the 2014 RMD by end of the day on Dec. 31, 2014. The RMD amount is calculated for each year and will likely be different each year. The amount is calculated using the method described in IRS Publication 590. The TSP will calculate the RMD amount for you and send you monthly payments to meet the requirement. Use Form TSP-70 to request the monthly payments based on your life expectancy. You may take one lump-sum distribution from your TSP account and may only take monthly payments after that.

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TSP withdrawal at 70 1/2

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Q. I have to withdraw my Thrift Savings Plan because of my age (70½).

I am indecisive as to:

1. Withdraw all to a saving account

2. Get a partial withdrawal for 120 months, or

3. Withdraw part of it and gradually withdraw the rest over a 10-year time span.

My considerations are:

1. No taxes, as I understand it, over a period greater than 10 years on a gradual withdrawal

2. Putting me into a higher tax bracket.

What advice or comments can you give me?

A. Unless you can come up with a good reason – that is, using actual estimates of costs, taxes, etc., rather than just qualitative statements – I don’t know why you would take any more than the required minimum distribution each year.

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Penalty on TSP withdrawal?

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Q. My age is 52. I worked 22 years in the Postal Service. I have a Thrift Savings Plan account and am now retired due to a disability. If I make a full withdrawal, will I be penalized?

A. Yes, unless you qualify for one of the exceptions listed on Page 7 of the notice at

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