Ask The Experts: Money Matters

By Mike Miles

Guaranteed income benefit?

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Q. I anticipate retiring within the next six to 12 months with 34 years of service and a projected $350,000 Thrift Savings Plan balance (diversified in the L Fund). In the latest meeting with my financial adviser, he recommended that, upon retirement, I consider taking a portion of my TSP balance and purchasing a product that would guarantee an income stream at a minimum percentage of growth over time regardless of the bond or stock market performance. He called it a GWIB (??) He pointed out that there are numerous products to choose from and they all offer different benefits. In general, can you offer any advice regarding these products?

A. Be careful not to confuse a sales pitch with advice. The two are not equivalent. Advice implies the primacy of your interests, while a sales pitch is motivated by furthering the interest of others at your expense. It would be foolish to trust the advice of a salesperson in making such an important decision. It would also be foolish to commit to something you clearly don’t understand. Just say no to propositions like this unless and until a competent analysis of all of your options clearly proves it to be in your best interests. I can’t count the number of clients I’ve worked for who regret committing to abusing financial products with the benefit of hindsight.

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TSP distribution

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Q. My husband is retiring from the Postal Service on Nov. 1. We have $850,000 in tax-free municipal funds (all AAA rated and paying over 5 percent), and another $200,000 in natural gas and oil limited partnerships and some preferred stocks in energy companies that I recently inherited. I would like to live on the interest from these investments, leaving the principal alone.

My husband is 62 and we want to wait until he is 66 to receive his Social Security payments. (Waiting until 70 is out of the question as both parents were stricken with Alzheimer’s disease at an early age. Mother at 70 and father at 75.)

My husband has a Thrift Savings Plan account with a balance of $91,000. I am concerned that the interest and dividends coming in from the inheritance have not had time to accrue enough interest for us to live on and would like your advice on how to distribute his TSP for the first few years.

I am disabled and am receiving a monthly check for $1,477. If my husband takes Social Security now, his monthly payments would be $1,588. Also, my husband will receive a monthly retirement check from the Postal Service for $850 — just enough to cover our health and life insurance and his long-term care insurance.

Can you give me some advice on the best way to get my TSP to pay out a larger sum in the first three years so I can protect the principal of my inheritance? Should we start now collecting his Social Security now?

A. It is not possible to determine the answers to your questions, which are complex and interdependent, without the proper understanding, analysis and consideration. There are no simple answers. Your questions are beyond the scope of a forum like this and will require comprehensive financial analysis to answer.

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Payment to state required for TSP withdrawal?

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Q. I’m planning on a FERS retirement at the end of December 2014. At that time, I’ll have already met the minimum retirement age and will have credit for 32 years of service. I’ve read that I can withdraw funds from the Thrift Savings Plan without an early withdrawal penalty upon my retirement, and that approximately 20 percent will be withheld for federal taxes, but what I don’t know and can’t seem to find is the amount of money that will need to be paid to my state of residence, West Virginia. My plan is to use the money in my account to pay off a mortgage and other debts, and leave the remainder in a savings account. Are there any other issues I should be concerned about?

A. I can’t comment on your plan of action, since I don’t know nearly enough about your circumstances and objectives. There is no withholding from your TSP withdrawals required for state income taxes. The amount that you will ultimately owe West Virginia for taxes can only be determined by preparing your tax return for the year. A tax preparer should be able to give you an estimate if you want to make estimated tax payments or request state tax withholding.

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TSP loan

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Q. I have a loan balance of $18,366. I’m 56 years old and plan to retire in three months. Am I subject to the 10 percent penalty if I do not repay the loan?

A. No.

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When to withdraw TSP without penalty

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Q. I work for the Postal Service. I have 30 years of service. I will have to take a discontinued retirement today. I will turn 55 in December. My minimum retirement age is 56. I understand from a previous question that I qualify to receive my Thrift Savings Plan without penalty because I am retiring in the year that I will turn 55.  Will I be able to start withdrawing this money from TSP without penalty when I retire? Or in December, when I turn 55? Or at my MRA of 56?

A. Your MRA has nothing to do with it.

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G Fund

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Q. Could you tell me how the G Fund did during the last three big market crashes?

A. The G Fund’s value increases (and has increased) every month. It is not affected by market fluctuations.


Managing and continuing deposits to TSP after retirement

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Q. I am covered under FERS. After I retire, may I:
a). Continue to deposit funds into my Thrift Savings Plan?
b). Move money among the various funds, e.g., from F to G, from C to L2040, etc.?

A. After you retire, the only way to deposit funds to your TSP account is to transfer them in from an IRA or other qualified retirement plan. You may continue to manage your TSP investment, as in the past, for as long as you retain the account — potentially for life.

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Monthly TSP withdrawals and SRS earnings limit

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Q. Are monthly Thrift Savings Plan withdrawals counted against the earnings limit for the special retirement supplement?

A. No.

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Roth TSP and law enforcement

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Q. I am a federal law enforcement officer. I recently read an article that discussed the downside of the Roth TSP for federal law enforcement officers and firefighters. Is this true?


Many of you are probably unaware of the serious pitfalls you will encounter if you opt to contribute to the Roth TSP.  For a federal law enforcement officer or firefighter, the Roth TSP is a poor choice. It wasn’t until this week that a reader posed a question to me that caused me to realize what a bad idea the Roth TSP is for many of us.

The idea behind the Roth TSP is that you contribute after-tax monies and when you withdraw funds from the account in retirement, the earnings are tax-free. The trick here is that the withdrawal must be a “qualified withdrawal for the earnings to be tax-free. In order for the withdrawal to be considered a “qualified withdrawal” by the IRS, “five years must have passed since January 1 of the calendar year when you made your first Roth TSP contribution AND you are at least 59½, permanently disabled (or deceased).

Here’s the problem: As a law enforcement officer or firefighter, you can retire as early as 50 years of age and are mandatorily retired at age 57.  If you decide to take post-retirement withdrawals from the TSP (under the life expectancy option or the age 55 exemption), you will not meet the age test for the Roth TSP withdrawal to be considered “qualified.”  (You may also not meet the five-year rule as the Roth TSP has only been an option since May 2012.)  Since your withdrawal is not “qualified,” you will be taxed on the portion of your withdrawal that represents the attributable earnings. This eliminates the tax-advantaged nature of the Roth TSP. You’d be just as well off having a regular post-tax investment account outside of the TSP. You’re contributing after-tax dollars and paying taxes on the earnings generated by the post-tax investment.

The TSP will not allow you to specify that your post-retirement withdrawals come only from your traditional TSP balance, nor will the TSP allow you to roll over/transfer out only the Roth TSP portion of your account.  When you make any withdrawal from the TSP, the withdrawn amount will be taken ratably from both your traditional and Roth balances under TSP rules.

If you roll over/transfer both your traditional TSP and Roth TSP to another custodian, then you lose your eligibility under the age 55 exemption, as that requires the funds to be left in your employer-sponsored account.  If you retire between age 50 and 59½, at retirement, you could roll over/transfer your traditional TSP and Roth TSP to another custodian and withdraw only the funds that came from the Traditional TSP account using an IRS Section 72(t) withdrawal plan and wait until age 59½ to start to withdraw the portion that came from the Roth TSP funds.

Please consider these facts when deciding if the Roth TSP is right for you. If you already jumped into the Roth TSP, you can always stop and change your contributions to be 100 percent traditional TSP and limit the tax damage.

Even folks who aren’t covered under the special provisions get affected by these rules if they retire at their MRA.

A. The issue you raise is valid. You can get around it by transferring the Roth portion of a distribution to a Roth IRA. I realize this isn’t ideal, but it is an option to avoid the penalty.

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Q. My husband is retired for seven years now and is 67 years old. So far, we haven’t needed to use this money. We are trying to keep our income below $70,000 per year to stay eligible for our state property tax freeze, which is a significant saving of $2,000 or more per year.

1. What percentage or dollar amount are we required to take out each year?

2. Did I read correctly on someone’s question that if we set up a 10-year timetable we do NOT have to pay taxes on that money?

A. The required minimum distribution changes each year based on the account’s closing balance for the previous year and the account owner’s life expectancy. See IRS Publication 590 for the rules and a table of RMD factors for use in calculating the RMD for a given year.

There is no way to avoid the taxable income produced by RMD. That’s the point.

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