Ask The Experts: Money Matters

By Mike Miles

Calculating RMDs

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Q. I think that RMDs are calculated using the account balances as of the “end of last year.” What I am not clear on is whether the person’s age used is as of the end of last year or the end of this year, and whether the rules are different for a traditional IRA at a brokerage firm versus the TSP.

IRS Pub 590 page 36 says: “To figure the required minimum distribution for 2014, divide your account balance at the end of 2013 by the distribution period from the table. This is the distribution period listed next to your age (as of your birthday in 2014) in Table III in Appendix C, unless the sole beneficiary of your IRA is your spouse who is more than 10 years younger than you.”

So this seems to mean your age at the end of this year.

A. The IRS Pub 590 rules apply, and you are reading them correctly. Use the trailing account balance and your age at the end of the distribution year.

Taxed twice on TSP distribution?

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Q. I am a FERS retiree. I receive a small annuity and Medicare; both are taxed. This year, however, I made a partial distribution from my TSP account (federal taxes of $17,000 were withheld). As I prepared my taxes I found that the TSP withdrawal combined with my annuity and Medicare puts me in a higher tax bracket, and now I owe $10,000 more in taxes. How do I offset this obligation if the TSP taxes were already paid? Can I file the TSP distribution separately or transfer it to a Roth account?

A. The $17,000 was not tax; it was a deposit against your tax liability. When you prepare your return, you calculate the tax you owe, and then you are permitted to deduct whatever deposits you made during the year (withholding or estimated tax payments), including the $17,000. Any difference between the tax and the amount on deposit will be what you owe or receive as a refund. Either you failed to account for the $17,000 you deposited, or your tax obligation is $10,000 greater than what you deposited during the year.

TSP consolidation

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Q. I came to federal service late in my career. I am approaching my five-year anniversary and am a term employee subject to a July 1, 2015, departure. I have several small investments in IRA Variable annuities and a college annuity with TIAA-CREF. None of these other funds have much in them, but between the TSP and these other funds, there is approximately $150,000 in assets. My reading in your columns and others leads me to the conclusion that I should consolidate into my TSP to the extent possible, even though my time is short. My costs with my IRAs outside of TIAA-CREF is approximately 1.4 percent to almost 2 percent. Is there a benefit to consolidation at this late date? What are my options when I take retirement?

A. You should consolidate since you may retain your TSP account, and its advantages over other retirement accounts, for the rest of your life. The benefit, if you use the TSP to your full advantage, will be higher expected rates of return for the risk you take than you’ll find anywhere else. Total investment costs, which include sales commissions, management fees and expenses, advisory fees and trading costs, should never be more than 1 percent of your portfolio’s value.

TSP vs. traditional IRAs

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Q. As a federal employee nearing retirement, I love the TSP! I’ve been a dedicated saver, and my account has done well. But I’m flummoxed by the limited withdrawal options. I’d really like to keep all my savings in the TSP when I retire, but I won’t be able to. I’ll need to take out a large chunk (maybe as much as $200,000 or more) & open an IRA somewhere else, unfortunately at much higher management fees. Because every now & then, I know I’ll need $5,000 or $10,000 — to get the house painted, or buy a car, or a health-care emergency, or an opportunity to take a dream trip, etc. Or what if I want to buy a new house, or move into assisted living? Then I might need $25,000 all at once, or $200,000. The one-time-only big withdrawal is really problematic, if one would rather keep all money in the TSP. Do you have any idea why it’s this way and whether they have any plans to change this in the future?

A. I don’t know of any plans to change the restrictions. It is possible, but some trouble, to devise workarounds, however. Your goal should be to use the withdrawal options available to your advantage. Start by using a partial withdrawal, if necessary, to create a cash reserve. Then initiate monthly distributions to keep that cash reserve adequately replenished. You may change the amount of fixed withdrawals each year to adjust to your needs. As a last resort, you can roll over a final withdrawal to an IRA and work from there, but you should do what you can to avoid this. Use a discount broker for the IRA, and invest the money using low-cost exchange traded index funds and you can come close to duplicating the TSP’s environment (except for the G Fund).

Retirement funds from former employer

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Q. I have about $100,000 in a Vanguard account from my old employer. Since I can’t contribute anything to that account, can I drop those funds into my TSP and get better return?

A. Yes, you may and probably should transfer the pre-tax part of these funds into your TSP account.

TSP contributions while on disability

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Q. If I go out on FERS disability, will I still be able to make contributions to my TSP while on disability? If so, will there be matching contributions?

A. You may not make TSP contributions from FERS disability retirement income payments.

TSP withdrawal for financial hardship

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Q. I am 50 years old and have been employed with the federal government for more than 20 years. I have an outstanding TSP loan with a balance of around $14,000 from about three years ago. Each month I have difficulty paying all of my bills. I have no problem proving negative cash flow due to years of frozen pay, furloughs, increases in the cost of living including energy, food prices, medical expenses and prior debt. I see no circumstances where these costs will decrease nor do I see my income increasing in the foreseeable future. I need to take a hardship withdrawal, around $20,000, an amount sufficient to pay off the TSP loan along with the penalties and taxes. This would increase my monthly usable cash flow by around $500, enabling me to meet my obligations and start bringing down debt. I plan to work for at least 15 more years and contribute as soon as the penalty period is complete. I am aware of the taxes and penalties as well as the impact on my final TSP balance and retirement income. If I am willing to pay the taxes and penalties, can I not take this hardship withdrawal to prevent possible bankruptcy? A smaller withdrawal will do little more than a temporary reprieve and just prolong the inevitable in the hopes that my income may increase.

A. Recurring negative monthly cash flow will qualify you for a financial hardship in-service TSP withdrawal.

Rolling TSP to Roth IRA not a good option

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Q. I am 69 years old and made a small early withdrawal from my TSP. I am thinking of retiring within the next two years and wondered if I should roll part of my TSP earnings into a Roth IRA. What are your suggestions? What type of Roth should I choose, and what amount should I roll over?

A. Nothing in your note indicates that there is a good reason for doing this. You will certainly incur higher investment expenses, lose access to the G Fund, and pay taxes at today’s rate. What do you expect to gain in return? Better returns? No. Less risk? No. Significantly lower taxes in the future? Not likely.

G Fund vs. L Fund options for TSP account

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Q. I am a 49-year-old FERS employee, and I have been contributing to my TSP account for the last 8 years. I am contributing 100 percent to the G Funds because I was told that is safer, but I don’t see my money growing fast enough, and to be honest I don’t really understand the different options available to me. I have at least 13 more years of service before retirement and need to see my money grow faster. Please advise where should I be contributing my money. The options I have are:

  • G Fund Government Securities
  • F Fund Fixed Income Index
  • C Fund Common Stock Index
  • S Fund Small Cap Stock Index
  • I Fund International Stock Index

A. You also have the option to contribute to the L Funds, and given your lack of understanding, you should consider doing so. If you’re interested in taking your planning and investment management to the next level, you may contact me through my website at www.variplan.com.

TSP and in-service withdrawals

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Q. I’m 58 yrs old with 34 years at the Postal Service. I have about $400,000 in my TSP account. I’m not ready to retire, but I would like to take a one-time withdrawal from my account to use for down payment of a house ($100,000). Is that money subject to a penalty? Do I have to pay it back? Or is it just treated like ordinary income?

A. You may take a loan up to the TSP loan limit, which will not be taxed if you repay it on time. You may take an in-service hardship withdrawal if you qualify, and you do not pay it back, but it will be taxed as ordinary income and subject to the early withdrawal penalty. You may wait until you reach age 59 ½ and take an age-based, in-service withdrawal, which you do not pay back and which will be taxed as ordinary income. Visit www.tsp.gov for more information about in-service withdrawals and loans.