Ask The Experts: Money Matters

By Mike Miles

Follow-up to ‘TSP advice’

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Q. I am the CSRS retiree who turned 70 years old in July. My email was posted Aug. 19.

Boy, you have a way of really making a person feel small and stupid. I chose to start withdrawing my money so I wouldn’t have to be concerned about the 70½ deadline. These withdrawals were based on my life expectancy, and I knowingly started withdrawing my money a little ahead of time. I have not concluded that I am not receiving any gain from the G Fund with the Thrift Savings Plan. I wondered why I was taking such a significant hit from the fund with DWS Scudder, which is also a GNMA fund?

I have taken your advice, and my DWS Scudder IRA is now being processed to be transferred to my TSP account. I appreciate the advice, but you could have been a little less brutal.

A. Oh, please! There’s was nothing “brutal” about my answer. If you didn’t want an honest, direct answer to your question, you should have asked a banker, broker or insurance agent. Furthermore, I gave you good advice that you’re using to your advantage — for FREE! A simple thank-you would have been sufficient.

But I’m not one for carrying a grudge, so I’ll answer your additional question, which was not clear to me in your earlier question: The DWS Scudder fund lost money because it is a bond fund and is subject to losses in an environment of rising interest rates. The G Fund is not a bond fund and is not subject to the risk of loss. They are two different types of investments.

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Roth TSP withdrawal

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Q. I’ve been making substantial contributions in the Roth TSP and plan to do so until I retire. I have a large sum in my non-Roth TSP account. I’ve read that when I begin to take TSP withdrawals in retirement, I cannot specify whether they come from the Roth or non-Roth TSP. I read that the withdrawals will be taken pro-rata from both forms of the TSP. Is that correct?

If I want my Roth TSP to grow for as long as possible, is there anything I can do to preserve it other than keep delaying all TSP withdrawals until age 70½?  For example, may I transfer only my Roth TSP to a Roth IRA with a company like Vanguard?

A. Your understanding is correct. Your withdrawal(s) will be taken, pro-rata from both balances, but you may elect to transfer all or part of each payment to a corresponding (traditional or Roth) IRA wherever you like.

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TSP loan

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Q. In February 2012, I took a loan of $50,000 from my Thrift Savings Plan account to make a down payment for the joint mortgage with my spouse for our first home.

In July 2013, my spouse refinanced our home in her name. I am off the title of this home and do not make any more mortgage payment. In return, among other items, I will receive back $50,000 of my contribution using my TSP account. TSP loan is only for primary residence purpose. Do I have to immediately make the payment to the balance of my TSP loan when I am now neither on the title of the home nor on the new mortgage loan? Could I use this money to buy another home for myself while still making monthly payment to my TSP loan?

A. To the best of my knowledge, there is no requirement to accelerate repayment of your loan under the circumstances your describe.

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FERCCA

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Q. I am 56 years old and just found out that I should be in CSRS Offset, not FERS.  I’ve paid into my Thrift Savings Plan for more than 10 years. How does this affect my TSP contribution?

A. If you are erroneously covered by FERS and you choose to move out of FERS, the Federal Erroneous Retirement Coverage Correction Act allows you to keep the employee contributions you made in your TSP account (plus the earnings attributable to your contributions) even if the contributions exceed 5 percent of the basic pay you earned for the pay period that contributions had been made. However, all government contributions that were made to your account and the attributable earnings must be removed from your account if you do not choose FERS.

If you choose FERS coverage under FERCCA, you may make up those employee contributions that you could have made had you been correctly covered by FERS, as provided by the current TSP error correction legislation. In addition, you will receive the agency automatic (1 percent) contributions and agency matching contributions that you should have received had you been correctly covered by FERS. Finally, you will receive lost earnings on both your employee and agency make-up contributions. (Prior to FERCCA, lost earnings were payable only on agency make-up contributions.) The lost earnings on both employee and agency contributions will be determined the same way lost earnings are now determined on agency make-up contributions (that is, as provided by the current TSP regulations).

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Withdrawal of Roth TSP contributions

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Q. I realize that the withdrawal of Roth earnings have different implications. But if I understand this correctly, the withdrawal of Roth IRA contributions can be done at any time without triggering a taxable event or penalty. Is the same true for the withdrawal of contributions from the Roth TSP?

A. You may withdraw Roth funds without tax or penalty if you’ve had a Roth IRA for at least five years (starting from Jan. 1 of the year you first contributed to a Roth IRA) and you are at least age 59½. The same rule applies to your Roth TSP funds. See the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for more information.

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Avoiding taxes and penalties

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Q. If I withdraw my Thrift Savings Plan earlier than age 59, I will be penalized 20 percent at the time of withdrawal and have to pay 10 percent in taxes at the end of the year. What if I transfer the money into a traditional IRA and withdraw it a year later? Will I save on taxes?

A. Your premise is incorrect. Rolling over the money to an IRA doesn’t help you avoid taxes or penalties on your withdrawals. It may work against you, depending upon when you retire.

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TSP loan prior to retirement

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Q. I plan on retiring in September 2014. I bought a house in November 2012 and need some remodeling done.  If I borrow from my Thrift Savings Plan ($10,000), will I have to pay back the full amount borrowed prior to retiring?

A. You’ll have to pay the money back shortly after you retire or it will be declared a taxable distribution.

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TSP vs. self-directed IRA

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Q. Why would you recommended keeping money in TSP, when, with the possible exception of the G Fund, you can replicate the S, I and C via the use of low-cost exchange-traded funds.  The IRA provides much more flexibility regarding withdrawal of funds and many more investment choices — stocks, ETFs, MLPs, real estate investment trusts, to name a few.

A. To reap the benefits of the strategic use of the G Fund and the much lower costs. I know the benefit of these. You haven’t specified the benefit of the securities you mention. There may be times when you must leave the TSP to meet your income needs, but this can often be avoided with some good planning. I manage lots of retirement plans for federal clients and rarely do they need to abandon the TSP.

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TSP to Roth IRA

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Q. What are the negatives and positives as far as changing a Thrift Savings Plan account to a Roth IRA?

A. The negatives are that you have to pay taxes now and that you’ll likely incur higher investment costs, greater investment risk, or both in a Roth IRA. The positives might include an advantage if your tax rate rises sufficiently between the time you convert and the time you ultimately withdraw your money from the Roth IRA.

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Nursing home

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Q. I have money in the Thrift Savings Plan. I am 68 and hope to work for two more years. I have recently been diagnosed with small brain outages. I can’t remember very small things without written notes. I need to know if my TSP will be OK if I have to go to a nursing home. In one of your comments, it seemed like it would. But, I know the nursing homes are going to come after all I have. Is there any way I can save this money, or should I go ahead and give it away? I know I have to do this at least five years before my possible entrance into a nursing home. I have a son to let have the money, but I don’t want to get out of the TSP until I quit my job.

A. You should talk to a good estate planning attorney.

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