Ask The Experts: Money Matters

By Mike Miles

Roth IRA

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Q. Can you roll an existing Roth IRA into you Roth TSP fund?

A. No.

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TSP withdrawal

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Q. I retired a few years ago under the VSIP/VERA program under the MRA +13 years of government service.
Can I take a withdrawal of my TSP funds out before I turn 59½? If so, what are the tax penalties and is there a 20 percent federal income tax I have to pay ? Also, is this income that will be reported on my federal and state taxes for that year?

A. Your questions are too complicated for a simple answer, since they depend upon circumstances not explained in your message. You’ll find the information you need in the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

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Timing of mixed withdrawal

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Q. Upon retirement, I want to take a mixed withdrawal. I would like to take partial withdrawal ($50,000), sign up for monthly withdrawals, and possibly buy a TSP annuity. Is it possible to hold off buying the annuity when the interest rate is better? I was under the impression that one had to make and take all of these options up front. Otherwise, you lock yourself out of making/buying any other options TSP withdrawal has to offer.

A. Once you begin a full withdrawal, you lose the option to buy a TSP annuity at a later date.

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Taxes and TSP

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Q. I understand TSP withdrawals will be taxed as regular income come tax time.
However, when one takes/chooses monthly TSP payments upon retirement, are
taxes taken out of these payments? In other words, when I run the TSP
calculator, understanding it is only an estimate, can I expect these
payments to be lower due to taxes being taken out? Read the rest of this entry »

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TSP and SEPP

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Q. I Have $400,000 in the TSP at age 53. I am out of the government and I want to start SEPP. I have run 72t computations with single life expectancy option at 31.4 years, and the fed mid-rate interest, no more than 120 percent (using 1.5 percent in the computation, to be conservative and stay out of trouble). No problem on the five year or 59-1/2 requirement. After consulting with a CPA for the SEPP, we’re almost good to go, except for one question. Does the TSP calculate my monthly SEPP payment? Can they be relied on to do it correctly, or do we calculate it, have the annual amount divided by 12 to get monthly rate, then ask for that amount each month, which would be deposited, less the tax withholding? I am not sure the TSP has experience/supports SEPP and expect to have to file the 5329 to correct their 1099-R once I start SEPP. Read the rest of this entry »

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TSP rollover

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Q. I am almost 57-1/2 years old, and I have more than 30 years with the Defense Department. Can I roll my TSP into a self-directed IRA now without retiring or quitting? I want control over where it is and how it grows, and I am concerned about the government taking it to pay its debts before I can remove it normally at 59-1/2.

A. No.

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TSP access

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Q. I will be 57 in June 2022, meeting the criteria of MRA +30 years creditable service. If I postpone retirement to age 62 for 1.1 percent multiplier, will I be able to access my TSP funds in the meantime; i.e. at age 57 until retirement at age 62?

A. Once you’ve retired; yes.

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What TSP investors should worry about

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As a Thrift Savings Plan investor, what should you worry about? You might be surprised that my list doesn’t include whether to contribute to the Roth or traditional accounts, or that you’ll have to begin taking distributions someday, if you aren’t already. Here is my list of things worth worrying about:

Political meddling. The greatest threat to the TSP, as an institution, comes from members of Congress. The TSP contains nearly $400 billion. It’s the juiciest single profit target for the financial services industry. So far, they’ve had to go after it one retired investor at a time, but they imagine — fantasize, really — how great it would be to gain access to all $400 billion at once. Connect the dots, and you realize that the only way to do this without having to pass through the protective fiduciary gauntlet imposed by the Federal Retirement Thrift Investment Board is through Congressional action.

So far, the attempts by certain members of Congress to insert new investment options, for example, have failed, but it will only take one successful effort to ruin the TSP for the federal worker.

Another stock market crash. This always will be a concern for a retirement investorbecause the risk is ever-present and can do real harm to your retirement standard of living. It is impossible to predict with certainty when market crashes will occur and how severe they’ll be. I think of it this way: At any given moment, the probability that the C, S, I or F Funds will either beat, or lag, the expected rate of return is about 50 percent — a coin flip. The market’s tug-of-war makes it so. If you need that expected return to support your planned standard of living in retirement, then you don’t want to risk not being there to collect that return when it comes. But if losses come instead, you don’t want to participate in them any more than necessary. For most investors, there’s risk to being in, and out of, the market, so a balance must be struck. Hold as much of each fund as you need to hold to support your retirement plan, but no more.

Rising interest rates. Rising interest rates pose two threats. First, they drive bond prices, and hence values, down. Yes, that means that, like stocks, bonds are risky investments. The F Fund, which is a bond fund, can and does lose value from time to time. Second, rising interest rates tend to depress the value of stocks. This is because the formulas used by competent investors to assess the value of a company’s stock are heavily dependent upon a “discount rate” that is, in turn, dependent upon interest rates. And higher discount rates mean lower prices for stocks. The F Fund’s primary purpose in your portfolio should be to hedge the risk of loss from holdings in the C, S and I Funds. Whenever you hold stocks, you should also hold bonds as a hedge. Because they are risky assets, however, like stocks, you should only hold the amount needed to efficiently hedge your stock positions, and no more. Today’s low interest rates mean that controlling your exposure to the F Fund is particularly important.

The rationale for your choices. There about a zillion financial decisions you’ll face during your life — choices you’ll have to make. Before you act, you should thoroughly investigate, understand and critically evaluate the rationale for taking that action and the reasons why that action, alone, is the best possible action to take. There are reliable ways to make your financial decisions, including those you’ll make in managing your TSP account, the best they can be. There is no need to settle for anything less.

Mike Miles is a Certified Financial Planner licensee and a principal adviser for Variplan LLC, an independent fiduciary in Ashburn, Virginia. Email your financial questions to fedexperts@federaltimes.com and view his blog at blogs.federaltimes.com/federal-money.

Maximizing investment

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Q. I’m 53 with 30 years of government service. I’m invested at 15 percent to TSP. Looking at my account, I feel I am not going to have enough money in my TSP to retire comfortably. I have 6-1/2 years until I can retire without penalty to TSP. What can I do to maximize my investment?

A. I suggest that you contribute as much as you can and direct all of your current and future investments to the L Fund that most closely corresponds to your life expectancy. If you’d like more certainty in predicting and producing the outcome of your retirement plan, you can review the information provided at www.variplan.com. My ongoing help is trustworthy and cost effective for most feds with $100,000 or more in savings and investments.

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Retiring & TSP amounts

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Q. I’m 53 years young with 30 years of government service. I’m invested at 15% to TSP. Looking at my account, I feel I am not going to have enough money in my TSP to retire comfortably. I have 6.5 years till I can retire without penalty to TSP. What can I do to maximize my investment (or get the most bang for my buck)?  Read the rest of this entry »