Ask The Experts: Money Matters

By Mike Miles

RMD from TSP and IRAs

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Q. My first required minimum distribution at age 70½ was made in August, when I took the total RMD required for both my IRA and Thrift Savings Plan accounts from one IRA fund. However, I have just received my notice from TSP stating I must make a withdrawal by April 1 from the TSP account to avoid dire circumstances. I am not clear on whether what I have already done meets my obligations for the first withdrawal, based on two of your answers concerning this matter.

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

Q: “Can I add all of my accounts together — IRA and Thrift Savings Plan — compute the required minimum distribution, and then withdraw from one account?”
A: “…but you may take your RMD from any account or accounts you wish. You should leave your TSP account untapped for as long as possible.”

If the original RMD I made in 2013 meets the requirement for the TSP account, should I notify TSP in some way that this has been done so they do not withdraw it again on April 1 and mail to me? I have made my one withdrawal allowed back in 2009 and do not wish to change to monthly withdrawals, an annuity or a total lump-sum transfer to another IRA. Are yearly RMD withdrawals allowed?

A. I’m sorry for the confusion. You must take your TSP RMD from your TSP account. You will have to begin monthly withdrawals, and I suggest that you use fixed monthly withdrawals since they may be changed in the future and the TSP will send you an extra payment, if necessary, to make sure that your RMD is taken each year. Annual withdrawals are not allowed.

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Variable annuities

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Q. I just retired from government service under CSRS and have left my Thrift Savings Plan alone. My financial adviser, whom I consider a friend, is telling me I need to roll my TSP over into a tax-deferred variable annuity that guarantees a 5 percent return on investment each year even when the market does poorly. He says because of this “guarantee,” I can choose a very aggressive growth portfolio, while not having to worry about the results.

He claims my TSP is not protected against losses. I knew that already, of course. It’s with a highly rated company. Fees are around 2 percent annually. I noticed you have a real problem with these kinds of investments. The market is due for a major correction. Why are you so against these annuities?

A. They are expensive insurance policies. Two percent is huge! You’re more likely to lose than to gain from investing in one of these things compared to a comparable investment strategy invested in the TSP. Ask your “friend” how much money he will make from your purchase, including commissions, bonuses, fringe benefits, etc. You are paying that compensation from your account, in addition to the insurance and other costs which are designed to make sure that the insurance company profits at your expense. You shouldn’t even think about investing in a variable annuity until you’ve read the prospectus and clearly understand exactly what you’re getting into.

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Starting TSP withdrawals now vs. at 70 1/2

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Q. I retired under FERS two years ago, and I haven’t needed to touch my Thrift Savings Plan account so far. I am receiving Office of Personnel Management, Social Security and military retirements. I am 68½ years old. I just received a 100 percent Veterans Affairs Department disability award, which will change my taxable military retirement to a nontaxable VA retirement. I don’t think this will have any effect on my long-term life expectancy. I have determined that I do not want to elect an annuity on withdrawing from my TSP. I am considering immediately starting a monthly TSP withdrawal based on life expectancy. What are the advantages and disadvantages of starting withdrawals immediately versus waiting until the 70½ mandatory withdrawals? I am a married man, and we declined a survivor benefit plan.

A. Starting withdrawals now will provide you with more income now but will produce a larger taxable income and begin to deplete your account. Waiting will reduce your current taxable income and preserve your account’s value (if you don’t lose it to the markets), but also reduce your current standard of living and increase your taxable income later in life.

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Best plan for maximum returns

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Q. I have been using a Vanguard Roth IRA Target Fund for my retirement account. Now that I work for the federal government, I have a Thrift Savings Plan standard account and contribute the additional 5 percent to take full advantage of employee matching. I’m 37 and plan on working until at least 67. I believe my best bet is to just keep maxing out my Vanguard Roth IRA, taking full advantage of my employee matching and putting away anything extra I can into my Vanguard Roth IRA. Do you think that is my best bet, or should I stop investing in the Vanguard account and:

a.) Start maxing out the standard TSP with employee contributions?

Or b.) stop investing in the Vanguard IRA, keep investing the 5 percent to take advantage of employee matching in the standard TSP account and max the rest of my allowable annual contribution in the Roth TSP.

The reason I think I should stick with my Vanguard IRA and 5 percent employee matching instead of Option A or B is due to the advantage of dollar cost averaging from all of the years I already have invested in the Vanguard IRA.

A. I prefer maximizing the TSP contribution first, but it probably won’t matter much in the grand scheme of things. Your dollar cost averaging argument makes no sense, however, and should not be factor in your decision-making.

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Mortgage and C Fund

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Q. I retired Jan. 31, 2013. I have more than four years left on my mortgage. I owe about $25,000 on my loan. I was thinking of taking a lump sum from my Thrift Savings Plan for about $20,000 and use my tax refund to make up the difference I would owe. I have about $120,000 in my TSP. I’ve had it in the C Fund, which is doing very well. Do you think it’s a good idea to take a lump-sum withdrawal to pay off my mortgage? It would save me $900 per month, which is what I’m paying for my mortgage.

A. If you plan to leave all of your money in the C Fund going forward, it might be smart to use some of it now to pay off your mortgage before you lose it. You should note that the C Fund isn’t “doing very well,” it has done very well. Those are two different things. The question you should asking is: “What could it do in the future?” Since 2000, it has lost half of its value – twice.

The best decision about your mortgage will depend upon a number of factors, including your tax returns, how you will manage the money going forward if it’s not used to pay off your mortgage, the terms of your current mortgage and the demands you will place on your TSP account in the future.

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F Fund

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Q. It seems everywhere a person reads, the “expert” advice is to get out of bonds. It’s likely that interest rates will climb soon (they certainly will not go lower), the world is awash in debt etc. Your advice is to substitute a portion of other funds in place of F.

Given the predicted bond climate, why not reduce F Fund allocation to near zero? Is there some reason I’m missing for maintaining an allocation in F above low single digit percentages or perhaps no F fund allocation at all? In other words, if the F Fund is about to incur losses, why not move it all out for the short term?

A. As I have said, and you confirm, I have no objection to substituting G Fund for F Fund in the current interest rate environment. The reason to keep some allocation to bonds is for their ability to hedge stock risk. If the stock market loses 50 percent of its value again (for the third time since 2000), that F Fund exposure will look pretty smart.

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Rollover and TSP matching

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Q. I am a 56-year-old federal employee with six years of service. I have traditional and Roth Thrift Savings Plans. I also have a traditional IRA with TIAA-CREF. Since my budget is too tight to take advantage of the full federal matching amount, can I use my TIAA-CREF IRA funds to maximize my federal match? If I roll over TIAA-CREF funds into my traditional TSP, will these funds receive federal matching?

Also, I understand early withdrawal of traditional TSP funds is subject to income tax, but if I roll over TIAA-CREF funds into my traditional TSP, are withdrawals at age 56 penalized?

A. Your transfers into the TSP will not be matched. If you transfer the IRA into the TSP, it will, from that point forward, be treated just like your other TSP money. Any exemption to the early withdrawal penalty for which you may qualify will apply to all of your TSP money, regardless of its original source.

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Disability retirement and TSP withdrawal

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Q. I am 56 and had to retire under a disability retirement because of cancer. I am receiving Social Security, and I have 90 percent disability from the Veterans Affairs Department. Can I withdraw from the Thrift Savings Plan without the 10 percent penalty, or do I need to wait until I’m 59? What documentation do I need for taxes? Can you also refer me to the correct tax pubs and pages?

A. The answer will depend upon when you retired and the nature of your disability. See Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf to see if you meet one of the exceptions to the penalty.

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Partial TSP withdrawal

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Q. I will be retiring in May with 25 years of federal law enforcement service. I will be 50 years old and subject to penalties and taxes on a one-time, age-based partial withdrawal from my Thrift Savings Plan. If I withdraw $20,000 to take care of bills and home repair, how much should I request from my TSP account to cover the taxes and penalties?

A. Your withdrawal will be subject to 20 percent minimum mandatory federal tax withholding, so to receive $20,000 from the TSP, you’ll need to request $25,000. The actual federal income tax, early withdrawal penalty and state tax you’ll owe for the withdrawal won’t be computed until you file your tax return for the year of the withdrawal.

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TSP withdrawal

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Q. I retired from the federal government under CSRS. I turned 70½ years old in May. I have $40,000 in my Thrift Savings Plan account. I am thinking about withdrawing all of my funds in a lump sum. Is this a good idea? How will this affect my tax obligations? What do you recommend?

A. The money you withdraw from your TSP account will be counted as ordinary income for tax purposes. If you need the money, then fine. If not, you should leave it in the TSP for as long as possible.

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