Ask The Experts: Money Matters

By Mike Miles

ROTH IRA contribution

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Q. If I were to retire Dec. 31, can the payments actually received in 2015, such as my last paycheck earned in 2014, payment for unused annual leave and buyout, if any, be used to fund a 2015 ROTH IRA?

A. Paychecks constructively received in 2015 can be used as the basis for an IRA contribution to the extent that the income is earned income for this purpose. You annual leave payout is not considered earned income for this, however, and can’t serve as the basis for IRA contributions.

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Minimum age for TSP withdrawal

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Q. What is the minimum age I can begin taking withdrawals from my TSP account? And what is the tax/penalty I will incur? I intend to retire from Department of The Air Force with MRA +10 (15 years civil service).

A. While you are employed, you may take a TSP loan or a financial hardship withdrawal at any age, or an age-based withdrawal after you reach age 59 1/2. Once you separate from service, you may withdraw your TSP money at any age, although the 10 percent early withdrawal penalty may apply if you don’t meet one of the exceptions listed on page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

TSP distribution requirements

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Q. I am 73 years old and still working for a VA Medical Center. Are there any changes in the rules regarding my TSP account? I was recently reading something about receiving minimum distributions from my TSP account. Does this pertain to me since I am still working?

A. The distribution requirements will not apply to your TSP account until you have separated from federal service. See the notice at https://www.tsp.gov/PDF/formspubs/tsp-775.pdf.

TSP deposits

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Q. I am scheduled to retire in November. I am firefighter with 32 years, 6 months of service. I am covered under FERS. I plan to elect the TSP option that will provide me a monthly payment until my death. Do you know if the monthly direct deposit will combine all three (annuity, annuity supplement and TSP) as one payment, or should I expect three separate payments?

A. At least the TSP will come as a separate deposit.

Roll over IRA to TSP

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Q. Prior to the TSP coming into existence, I was doing a yearly IRA deposit. I can retire at anytime with over 80 percent of my high three. So, would it be prudent of me to roll this IRA into my TSP account?

A. Yes.

Forgotten TSP

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Q. My father retired about 18 years ago at age 62. He was in CSRS, but he accumulated about $40,000 in TSP. He is now almost 80 and is near death and says he forgot about his TSP. I’ve been reading about TSP and how you must start making distributions at age 70 1/2. What can my mother do to recover this money? I found a form (TSP-70-A) that my dad might be able to fill out if he lasts another week or so.

A. You should review the notice at https://www.tsp.gov/PDF/formspubs/tsp-775.pdf and submit form TSP-70-A on behalf of your father. Unfortunately, there will be hefty penalties to pay for failing to make the required minimum distributions, when due.

Pay off back taxes from TSP?

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Q. My husband and I owe back taxes to the IRS, and I would like to know if the IRS can deduct what we owe from my TSP. I have a residential and personal loan out through TSP, so I am unable to do that. We owe around $24,000 and would like it deduct from what is in my TSP. They keep telling me they can’t, but I am not sure of that. I would like to get this paid off so in around 7 years I can retire without owing them. If I was able to get them paid off I could up my TSP to around 15 percent and have a good, sizable amount when I retire, but I cannot go that high because we owe IRS. Any help you can give me would be greatly appreciated.

A. If the IRS says they can’t or won’t invade your TSP account to collect, then you have your answer. I’m not sure I understand your logic here, anyway. You want to take a big withdrawal now so you can pay it back to your TSP a little at a time. Why not leave the lump sum in your TSP and pay the IRS a little at a time? You should come out about the same in the end.

Annuity for the TSP

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Q. Why was MetLife chosen as the entity to provide an annuity for the TSP? Are there provisions or protections for federal employees that were negotiated? I asked that question of the TSP and they stated that there was no one within TSP or MetLife that I could talk to. Finally, most forums seem to discourage annuities — they suggest that we stay in the TSP and take monthly allotments. Comment?

A. The FRTIB chose MetLife, so they would be the ones to explain why. I don’t know of any special protections built into the deal. Once you buy the annuity, it’s between you and MetLife, and MetLife is the guarantor.

The income you are offered in exchange for your annuity purchase money varies with interest rates at the time of purchase. Once the purchase is made, the income rate is locked in for life, so buying an immediate fixed annuity is like locking in interest rates for life. Since rates are near historically low levels, now is considered an unattractive time to make the purchase. This doesn’t mean that you should not consider it as one of your options, however, since some money, guaranteed for life, is better than none if you wind up losing it.

 

Voluntary contribution options

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Q. I’ve been getting mixed advice regarding my voluntary contributions options. I was planning to ask OPM to send the (post tax) VC contributions to a new Roth IRA so I can more easily track the five-year holding requirement, and send what minimal interest accrued during the brief time the account will have been open to my TSP (if OPM will transfer such a small amount) or simply let them withhold 20 percent and send me the accrued interest.

However, I also have a small basis in an old traditional IRA because of a recharacterization several years ago, and now I’ve been told this leftover basis may have a negative impact on my disposition of VC funds. I had hoped to transfer the pre-tax amount in the traditional IRA to my TSP before mandatory withdrawals kick in, and to get rid of the remaining basis in the traditional IRA by converting it to a Roth (since post-tax money would not be accepted by TSP) .

But I’m now concerned that the rules regarding IRA conversion will trigger additional tax liabilities on the monies transferred from VC to Roth as well. I’ve been told — I hope erroneously — that the IRS requires that we combine all conversions from all types of accounts, and therefore taxes might be assessed on the VCs as well (because it would be averaged with the existing basis in the unrelated IRA and need to be withdrawn proportionately. It’s hard to believe that’s the case, but I certainly don’t want to find out the hard way that the large sum of post-tax contributions in the VC would then be subject to income tax because of the conversion to Roth. Say it isn’t so! If that were the case, an additional annuity funded with VC contributions + interest becomes a more viable option than Roth conversion – but it’s been hard to get a straight answer. Can you advise?

Does having a basis in a traditional IRA have a negative impact on my planned conversion of post-tax VC contributions to a Roth? If so, does conversion to Roth of the IRA basis alleviate the problem for the voluntary contributions conversion to Roth?

A. You may not selectively withdraw or otherwise remove after-tax money from an IRA account. If the account contains basis, then each dollar is considered to be partly basis and party taxable when removed. You must also follow the rules for aggregating certain types of accounts when removing money. So, for example, if you have two accounts, each with $50,000, and one of the accounts contains $10,000 in tax basis, then each dollar of each account is considered to consist of 10 percent basis and 90 percent ordinary taxable income. Basically, this means that when you covert you’re the after-tax portion of your VC account balance to a Roth, you’ll have to consider a portion of that conversion taxable. These rules are complex and you should consult a CPA – the one who will prepare your tax return and defend it – before proceeding any further.

 

TSP rollover

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Q. I am FERS-covered and plan to retire in August at age 62. I am now front-loading my TSP contributions to the maximum (including the $5,500 catch-up which I have already contributed). At retirement, I plan to roll over all my TSP balance to an outside IRA account.

Questions:
1) Will I be able to roll over the:
a) Traditional TSP portion to a traditional IRA account?
b) TSP Roth portion (which I started in 2013) to an outside established Roth IRA account?
2) Shall I now contribute the remainder (about $12,000 of $17,500) to the TSP Roth so that I can roll this over to my Roth IRA account where I can withdraw tax free whenever needed?

A. You are allowed to roll over your TSP Traditional and Roth balances to Traditional and Roth IRA accounts, respectively. You haven’t presented any reason to favor a Roth account over a Traditional account, so why complicate things? I think you would be better served to leave your money in the TSP for as long as possible.