Ask The Experts: Money Matters

By Mike Miles

Minimum distribution date

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Q. When must I begin making my required minimum distribution? Since I turn 70-1/2 late in the month of April, I’m not sure about the requirement.

A. If you’re separated from federal service, your first distribution, for tax year 2015, will be due by April 1, 2016. If you’re still working, then it won’t be due until after you retire.

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TSP beneficiary designation

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Q. After filling out many beneficiary forms, I have found the standard beneficiary line to be Spouse, and then equal shares to offspring. This was my desired process anyhow. Does TSP have a similar beneficiary plan assuming no prior beneficiary designation? Read the rest of this entry »

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TSP taxation

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Q. Are all TSP withdrawals subject to the 20-percent federal tax withholding, including full withdrawal by way of monthly payments? And is this done automatically when you set up your payout options with TSP or do you need to complete a form?

A. Not all TSP withdrawals are subject to mandatory withholding. See the table on Page 3 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for the rules. Mandatory and default withholding happens automatically. Anything else, you’ll have to request.

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TSP risk

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Q. I am 25 and just started my TSP and want to invest in a very risky fund. What would be best for risky? Or should I take a different approach or is risky fine for someone my age? I am a risk-taker in life. Read the rest of this entry »

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TSP lump sum

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Q. I am a FERS employee and plan to retire at age 56. Can I take a lump-sum withdrawal from my TSP to pay off my home?

A. Yes, once you retire.

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Facing the truth about FERS

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Historical investment returns seem to be the focus of most investors’ attention. What rate of return did the C Fund produce over the past month? The past year? The past five or 10 years? Visit any investment product website, and this is pretty much all you find. Historical data sliced, diced and cooked up in just about every way imaginable. And, the Thrift Savings Plan’s website is no exception. It is filled with an impressive assortment of historical performance data for the various investment funds it offers. Unfortunately, and most critically, there is nothing about the prospective — or expected — performance of the investment funds to be found.

This is a serious problem for participants who are saddled with the responsibility of managing their accounts to produce a reliable and adequate stream of income during their retirement. Why? Because it is impossible to accomplish this task without knowing what to expect from the funds and, in turn, the entire account. If you use the retirement income calculator provided by the TSP, you’re obligated to enter a return number and then the calculator assumes that your TSP account will enjoy that return each and every future year, like clockwork. Of course, this is a ridiculous assumption and one that, on its own, should relegate the calculator to the trash bin. Even if we are willing to ignore this fatal flaw in the assumptions, how are you supposed to predict even the average rate of return for your TSP account? The best you can do is to estimate the probabilities of various returns, and that requires specialized expertise and a fair amount of effort. Without reliable estimates, all you can do is guess.

To predict the income-supporting capabilities of your TSP account, you must not only know the expected returns for your account over the coming years, but you must also know the range of returns it could produce and the probabilities across this range. If you figure out that the most likely return for the C Fund in a given year, for example, is 11 percent, you must also recognize that there is a slim chance that it will actually produce this return in a particular year. You also need to predict the worst possible outcome and then estimate the probabilities of the returns between the expected return and that worst case. If all of this sounds difficult, it is. But developing the best possible estimates for your account’s future behavior, and using these estimates to guide your withdrawal and investment management decisions along the way is the only way to safely maximize the standard of living your account will support.

The problems with the TSP’s calculator are merely symptoms of a larger problem. Pension fund management is beyond the current capability of the vast majority of TSP investors. With the growing dependence upon self-managed resources for producing retirement income among federal retirees and the prospect for continuing this trend, it’s time for TSP participants, their employer and their Thrift Savings Plan to stop pretending that investment management is something anyone can and should be prepared to do effectively. When the government moved from the CSRS to the FERS, it shifted the burden of funding a significant part of your retirement standard of living from it to you.

Effective investment management is a complex and difficult exercise, usually with life-altering outcomes. It’s not something to be taken lightly. In fact, if you can’t do it right, you probably shouldn’t do it at all. Without the necessary management capabilities, the safest thing to do is to park your savings in the G Fund until you retire and then either leave it there, or use your money to buy an immediate annuity that will guarantee your income for life. This is the dirty little secret that everyone seems all too willing to keep. Neither Wall Street, nor your employer, has any interest in letting the truth slip out. You may leave a large chunk of your retirement standard of living on the table, by doing this, but at least you’ll be secure in the knowledge of exactly how much you’ll have to live on each year. The alternative is to naïvely gamble with your resources in a game where you don’t know the odds.

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

TSP contribution

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Q. Since catch-up contributions must be renewed each year, is it possible to make non-payroll cash contributions? Or are all non-IRA rollovers required to be payroll contributions?

A. You may not make direct contributions to your TSP account. The only way in is through payroll deferral or transfer from an eligible retirement account.

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Partial TSP withdrawal

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Q. I have 36 years of FERS service with retirement at MRA 56 and four months. If I wanted to take a partial withdrawal of TSP at retirement (early withdrawal, before 59.5), do I have to elect to do this immediately when I retire or could I wait a year and request this?

A. You may wait as long as you like.

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MRA+10 and TSP

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Q. I am going to separate from federal service on my MRA+10. I will be 56 with 25 years of service. Can I start taking money from my TSP at that time without penalty?

A. Yes.

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Pension eligibility

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Q. I have a friend who resigned from civil service in 2004 (after 20+ years). He then took all his TSP fund, closed the account and rolled it over into an IRA. He will be 60 in 2014 and he heard that he might be able to collect a retirement pension from the federal government (GS-5) in 2016 when he is 62. Is he eligible for pension and is the retirement contributions and TSP the same? Since he took his TSP funding, will that make him ineligible to collect a pension? What is the retirement contribution? Read the rest of this entry »

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