Ask The Experts: Money Matters

By Mike Miles

TSP withdrawal and Roth transfer

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Q. I know you can transfer a Thrift Savings Plan balance directly into a Roth and pay taxes on the entire amount, which are due at time of tax filing. This causes a tax burden that may be difficult to cover with personal funds. However, is it possible to withdraw the funds directly into your checking account and within the 60-day window, still roll over these funds into the Roth, but at a level that is net of taxes?  This would allow a portion of the TSP withdrawal to cover the ultimate tax liability?

A. This is a question for your tax preparer, but I believe that entire amount must be converted and the taxes paid from other funds.

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Any reason not to retire?

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Q. I worked for the Department of Justice from 1989 to 2003 under FERS. I have worked in the private sector since that time. I will be 62 in 2015, at which time I think I qualify for a retirement annuity. Can I do all of the following:

1. Receive a FERS annuity based on my high-3 salary;

2. Continue to be employed in the private sector; and

3. Leave my Thrift Savings Plan money where it is for now.

Is there any reason not to do this, or any value in deferring this? My impression is that the annuity is not going to get any larger, so I should start receiving it as soon as I can. Am I missing something?

A. Mike: You can, and should, leave your money in the TSP, and manage it there, for as long as possible. It’s the best retirement investment vehicle you’ll find. You should also consider moving your eligible IRA, 401(k) and 403(b) money into the TSP, when they become available for rollover.

Reg: You are correct. You are now eligible for a FERS annuity based on your high-3 and length of service on the day you left. Since the initial amount won’t change, it’s better to claim it now than later. And receiving it will neither be affected by your private-sector employment nor will it affect that employment.

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Rebalance TSP allocation

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Q. I would like a clear explanation of how (i.e., method) to rebalance my Thrift Savings Plan fund allocations at particular intervals or cycles as mentioned in Mike Miles’ financial column. I am 63 and plan to retire at 66.  My current allocations are:

G: 25 percent

F: 15 percent

C: 35 percent

S: 10 percent

I: 15 percent

A. This is a question for the TSP support staff. Call the Thrift Line.

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F Fund losses

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Q. All of my money is in the F fund and I’ve lost a few thousand dollars in the past couple of months. What fund transfer/allocations would you suggest to recover that money (quickly?) and what investment allocation would you recommend until I retire in eight years?

A. Losing money is not a reason to change your investment strategy. All strategies/allocations are subject to loss – that’s the price you pay for the prospect of growth. If 100 percent F Fund was the right asset allocation for your account a couple of months ago, what makes you think it isn’t the right allocation now? It’s impossible to determine the right asset allocation for you with the information you’ve provided. If investment management were that easy, it wouldn’t be such a pervasive problem for so many people.

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Social Security reduction

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Q. My husband was forced to retire early when the Army depot closed here in Sacramento, Calif. Several years later, he was forced to stop working due to a stroke and applied for Social Security disability.

He was told that his Social Security allotment was greatly reduced because of his Thrift Savings Plan retirement account.

He never thought this was fair because he has worked and paid Social Security all his life, but instead of receiving about $1,500 a month on Social Security, he receives a reduced $450. By comparison, I retired on a state pension and am fully qualified for all of my Social Security benefits. But they are also slightly reduced because of his TSP.

Is this correct?

A. This doesn’t sound right. I know of no offset to Social Security benefits based on a TSP account balance. There are offsets for other sources of income, however, and you should visit www.ssa.gov to review the rules and see if you have a basis for appeal.

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RMD

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Q. I turn 70½ this year and want to start Required Minimum Distribution withdrawals from the Thrift Savings Plan based on life expectancy.

1. Starting withdrawals now will not equal the total RMD amount required for the year (since withdrawals are paid monthly). Will TSP issue a “catch-up” payment before Dec. 31 to fulfill the total RMD?

2. My TSP account is allocated among all five TSP funds (based on percentages advised by financial adviser). Will TSP apportion the RMD from all of those funds and keep my designated allocation percentages?

3. TSP told me it will not withhold taxes on my RMD distributions because they are not high enough (about $300 a month). I thought all RMD withdrawals would have taxes withheld.

A. You’ll find the answer to your questions at https://www.tsp.gov/PDF/formspubs/tsp-775.pdf. TSP will issue a “catch-up” check, but it might not be issued until the following year. The distributions will come proportionately from the funds in your account at the time of the distribution. The TSP will withhold taxes unless your annual distribution is expected to be less than $200.

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Annuities and timing

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Q. I have been in FERS for 16 years. I have been in the Army Reserve for 21 and plan to stay in until after my FERS minimum retirement age (58). I have enough combat time to be eligible for early reserve retirement pay at 58.

I have deployed to combat several times and receive a combat-related injury compensation from the Veterans Affairs Department. I have a FERS Thrift Savings Plan and a military member TSP. I am thinking of buying back four years of active-duty time toward my FERS retirement. I believe former President Bush signed a special combat-related compensation offset to allow for full VA compensation and military retirement. I meet the criteria as I was injured in Iraq.

When I turn 58, would I receive:

My full FERS annuity (34 percent), my full VA compensation check, and my full Army Reserve military pay?

When I turn 59.5, would I receive:

My full FERS annuity (34 percent), my full VA compensation check, and my full Army Reserve military pay  + now my TSP annuity + my military member TSP annuity?

When I turn 62, would I receive:

My full FERS annuity (34 percent), my full VA compensation check, and my full Army Reserve military pay  + my FERS TSP annuity + my military member TSP annuity and now reduced Social Security?

A. You may purchase an annuity with your TSP money at any time following separation from federal service and that annuity income will continue for as long as you live, regardless of your other income.

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Return former TSP funds to TSP?

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Q. When I left federal service in 2001, I rolled over my Thrift Savings Plan savings to a private investment firm. Subsequently, I returned briefly to federal service and accrued enough money in my TSP account to permit me to return funds to the TSP from a private-sector financial manager. Should I do this? I am about to turn 65.

A. The TSP is best retirement investment environment you’ll find. If it were me, I’d choose the TSP over a bank or broker any day.

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Lump-sum payment of leave

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Q. If the lump-sum payment is considered earned income for tax purposes but is not eligible to Thrift Savings Plan deferral nor does it serve as the base for automatic agency contributions, wouldn’t it make better sense not to cash in the leave? Rather, wouldn’t it be more lucrative to continue working, take the earned vacation over the year, collect matching funds for TSP, matching funds for health insurance, and on top of that, continue to accrue more annual leave, more sick leave, and enjoy the vacation time off?  I understand no supervisor/manager would approve a single vacation of 5+ weeks, but spreading a vacation out over a period of time can’t be denied.

A. Yes, financially, it would be better.

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Taxes on TSP withdrawal

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Q. I retired in 2005 with 30 years in the military. I am 58 years old. If I want to make a full withdrawal now, how much will I pay in taxes? If I wait until I’m 59½, will I pay less?

A. TSP withdrawals are taxed as ordinary income. The amount of income tax you pay will depend upon your tax return for the year in which you take the withdrawal. If you withdraw the money before you reach age 59½, you will likely also have to pay the 10 percent early withdrawal penalty. You’ll avoid this penalty by waiting until age 59½.

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