Ask The Experts: Money Matters

By Mike Miles

Mandatory TSP withdrawal

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Q. I am reading TSP-775 (6-2013) concerning important tax information about TSP withdrawals.  First paragraph (Deadline for withdrawing your TSP Account) states that “By April 1 of the year following the year you become age 70.5 and are separated from Federal Service, the TSP requires that you withdraw your entire account balance in a single payment.” It goes on to give options about monthly payments, life annuities. This leaves me perplexed. I thought I only needed to withdraw the required minimum distribution after becoming age 70½. Also, I thought if I have other IRAs, I could take the RMD from those and leave my Thrift Savings Plan unscathed. If I withdraw the entire account balance from my TSP, I will have to pay federal tax on whole amount. Can you clarify?

A. Here’s what you read:

By April 1 of the year following the year you become age 70½ and are separated from Federal service, the TSP requires that you withdraw your entire account balance in a single payment, begin receiving monthly payments, purchase a life annuity, or use a combination of these withdrawal options.

The requirement is that you do one of the three basic options separated by commas (full lump-sum withdrawal, monthly payments, purchase a life annuity), or elect some combination of them by the required beginning date.

Unfortunately, the TSP does not allow you to waive the RMD for your TSP balance. It must be taken from your TSP account.

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TSP withdrawal

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Q. I am a CSRS Postal Service employee and plan to retire at the end of 2014, when I will be 55 years old with 38 years of service (including sick leave). After reading other answers, I understand that I can immediately withdraw funds from my Thrift Savings Plan without penalty but would like advice regarding those withdrawals. Considering that TSP withdrawals are subject to regular income taxation, is it beneficial to move the funds to an IRA? Would I avoid any tax? Other than future growth potential and smaller tax rate, is there any benefit to delaying withdrawals until later in life?

A. You may roll over your TSP withdrawals that are not required to an IRA and continue to defer the tax to a later time. I can’t tell you whether this will be beneficial since I don’t know enough about you and your circumstances to make that determination. Better investment performance and tax management are the only reasons I can think of for delaying your TSP withdrawals. What more reason do you need?

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TSP fund transfer

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Q. I am 65 years old and retired from government service in March. I have about $ 400,000 in my Thrift Savings Plan account, with over $150,000 in G Fund. (For the record, I also hold about $70,000 in the F Fund, $90,000 in the C Fund, $50,000 in the S Fund and $40,000 in the I Fund.)

I am considering transferring $40,000 from the G Fund to L2020 to make my TSP portfolio a bit less conservative and also as a reflection of long-term price expectations on the bond market.

Do you consider this a wise move?  If so, is $40,000 enough/too much? (Incidentally, I do not intend to withdraw from my TSP until I am required to do so in 5½ years.)

A. Wise? It sounds like a shot in the dark to me. What is the expected rate of return for this portfolio? How likely is it to produce returns that differ from the expectation? Given these characteristics, what is the probability that this portfolio, along with the way you’ll manage it in the future, how likely is it to support your financial goals? Can you afford to take less risk and still achieve your goals? Without knowing the answers to these questions, you’re flying blind.

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TSP loan

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Q. I am 61 years old and have a Thrift Savings Plan loan of $24,000 and over $60,000 remaining in my TSP account. I applied for a Voluntary Early Retirement Authority/Voluntary Separation Incentive Pay at my human resources office awaiting approval. What happens to my TSP loan and to my remaining balance in my account if I request a full withdrawal when my retirement is approved? Does the remaining balance of my TSP loan gets paid up from my remaining balance and incur penalty for the full withdrawal?

A. If you don’t repay your loan within 90 days of the day your agency notifies the TSP of your separation from service, the outstanding balance due will be declared a taxable distribution. If you request a lump-sum withdrawal of your entire TSP balance at retirement, you’ll pay tax on the remaining balance and the un-repaid loan amount due.

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L Fund

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Q. I don’t understand what you mean by invest in the L Fund based on your life expectancy. My husband plans to retire in 2014 when he turns 62. If his life expectancy is 85 years old, does that mean he should put his money in the L2020 or L2030 Fund? He is still employed, but his Thrift Savings Plan money is in the L  Income Fund.

A. Recommendation to invest in the L Fund that most closely corresponds to your life expectancy (or joint life expectancy with your dependent) assumes that you don’t have the basis for a more suitable strategy. It’s like recommending that you fly a plane straight and level because I have no idea where you are or where you’re going. It’s the safest bet, but there is no assurance that it will get you where you want to go safely. Still, it’s better than recommending that you dive or climb.

Based on the information you’ve provided, you expect your husband to live until 2037, when he is 85 years old, so my rule of thumb would lead him to the L 2040 fund.

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Minimizing the tax burden of RMDs

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Q. I am 70 years old and have about $100,000 in my Thrift Savings Plan accounts. Can you guide me toward the best options to withdraw the amount? I would prefer to pay the least in taxes to Uncle Sam.

A. To minimize the tax burden from required minimum distributions, you should request distributions based on your life expectancy under IRS rules. For the first distribution — the one due for the year you reach age 70½ or retire, whichever comes last) — you should consult a tax adviser to determine whether it is better to take it in that year, or defer it into the following year. If you’re not sure, it’s probably best to take in the first year.

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Life annuity vs. TSP monthly payments

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Q. I am retired and turn 70 this month. Even though I do not want to begin distribution of my Thrift Savings Plan investment, I understand that by law I must select a required minimum distribution program. My dependent spouse is 76 and also retired.

I am healthy and, with my family genetics, could expect to live to age 100. I do not need the TSP to live on and want to maintain it in the TSP investment form for as long as possible.

Under these circumstances, what is the best RMD to select: a life annuity or a TSP monthly payment? Should it be a single, or joint with survivor benefits? What is the tax exposure for the recommended way to go?

A. You should request automatic monthly payments based on your life expectancy. This will minimize the size of the payments.

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The timing of claiming Social Security

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Q. Has there been any analysis over the cost/benefit of drawing Social Security at age 62, banking the money in a conservative investment instrument such as T-bills and drawing down on it at age 70 along with the reduced SSA amount using a 20-year amortization rate?

A. There has been much analysis done on the timing of claiming Social Security benefit. I analyze the options for every one of my clients who haven’t already made the choice. You didn’t ask, but I’ll assure you that there is no universal result to this analysis. What will work best for you depends entirely on your circumstances and objectives. In addition, the decision could be an incredibly important factor in your financial life, or not important at all. Anyone who tells you should claim at this age or that age without carefully considering all of your relevant particulars is just guessing.

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TSP transfer to self-directed IRA

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Q. I am 58½ and a federal employee. Can I take all or part of my Thrift Savings Plan and move it to a self-directed IRA? Or do I have to wait until I am 59½? How much tax will I have to pay on this?

A. You may not take an in-service withdrawal for rollover to an IRA until you reach age 59½.

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Annuity to TSP

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Q. I have a variable annuity (mutual fund) with Western Reserve Life Assurance and it has been doing terribly for many years. I put $10,000 in it in 2001, and it’s only valued at $14, 500 now, 12 years later! My Thrift Savings Plan account is doing much better, and I would love to transfer or roll over this money into my TSP account. Can it be done, should I, and, if so, how?

A. It may only be done if:

1. The annuity is an IRA or other Qualified Retirement Account; and

2. All of the money it contains is taxable on distribution.

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