By Mike Miles
Penalty for transferring back into TSP
May 9th, 2012 | Uncategorized
Q. Three years ago, I let myself be persuaded to withdraw 50 percent of my Thrift Savings Plan and place it in a private qualified retirement account. I did this at age 61, and this was my one-time withdrawal, so there were no penalties.
I regret doing this. Before I retire, can I transfer this money back into my TSP without any issues?
The other option is to use this private account to purchase a fixed annuity and draw off of it during the first years of my retirement thus leaving the other half of my savings (in Thrift) alone to continue to build. Recommendations?
A. You may transfer the money back into your TSP account any time, subject to any restrictions imposed by the source retirement plan. As I’ve written many times: Absent any compelling reason to the contrary, you should maximize your use of the TSP for retirement saving and investing.
Tags: investing, retirement, savings, transfer, TSP
Mortgage payments
May 9th, 2012 | Uncategorized
Q. You made the following statement in a recent column on common mistakes regarding retirement: “Think paying off your mortgage in retirement is important in achieving the highest standard of living possible? It’s probably not.”
Why? I’ve always thought the opposite — that you should have your mortgage paid before you retire. Can you share your thoughts on this subject?
A. You’ll find a transcript of a column I wrote on the subject here: http://www.variplan.com/uploadedDocuments/1277733522Carrying_mortgage_into_retirement_can_pay_off.pdf.
Basically, the reason is that paying off your mortgage can tie up funds that you may need later to pay your bills — the bills for your lifestyle. Particularly, when you can lock in historically low interest rates for 30 years, your money can do more good in supporting your standard of living if it is invested properly in a more liquid portfolio.
Tags: paying off mortgage, retirement
Don’t be a sucker
May 8th, 2012 | Uncategorized
Q. I’m preparing to retire and trying to learn about TSP options and the outside world with investing my life savings. I have most of the outside world telling me to pull it out now — I’m 61 — because the G Fund is not even keeping up with inflation. I also have looked into investing some of it in a program called Diversified Stock Income Plan with Wells Fargo. Under $200,000 will cost me 1.5 percent every year if I invest in this program. What do the experts say about the advice I am getting?
A. This expert says: “Don’t be a sucker!” There is no better place to invest your retirement money than the TSP, period. Start by avoiding taking advice from salespeople who are more concerned about their interests than yours. Leave your money in the TSP as long as possible. If you have IRA money, move it into your TSP account.
Tags: G fund, inflation, IRA, retirement, TSP
TSP loan to fund Roth TSP
May 8th, 2012 | Uncategorized
Q. I am considering a Thrift Savings Plan loan of $40,000 to fully fund a Roth TSP for the next few years. I am in the Air Force and plan on staying in the service for at least six more years until retirement. I’m just not sure that the benefits of a fully funded Roth TSP will outweigh the tax I will pay on the loan payments, not to mention the tax I will pay on the interest from the $40,000 as it sits in the bank waiting to be deposited into my Roth TSP, and the gains that $40,000 would have made if it stayed in my traditional TSP?
A. You’ve identified the costs, which you will incur. I don’t see any mention of the benefit that would motivate you to do this. Without a benefit that is likely to outweigh the cost, you shouldn’t do it.
Tags: loan, retirement, Roth TSP, tax, TSP
Transferring into TSP
May 8th, 2012 | Uncategorized
Q. I invest the maximum in my Thrift Savings Plan L2030 account. What other monies can I move into my TSP account — e.g., mature CDs, ITF money from a deceased parent, bond dividends, etc.?
A. You may transfer previously untaxed retirement account (IRA, 401(k), 403(b), etc.) balances into the TSP.
Transferring from IRA
May 8th, 2012 | Uncategorized
Q. I am planning to retire in December 2013 with 41 years of government service. I am covered by CSRS and have been participating in the Thrift Savings Plan. I have several small IRAs for which I am charged $40 a year. I was going to switch this money over to a building and loan association that advertises it does not charge an annual fee. Would I be better to put these funds in my TSP? Would that result in a taxable event?
A. Generally, the TSP should be your first choice for retirement investment. Transferring your IRA accounts to your TSP account will not trigger a taxable event.
Tags: CSRS, fund transfers, IRA, retirement, tax, TSP
Annuity interest rates
May 8th, 2012 | Uncategorized
Q. I recently received my “FERS Your Personal Benefits Statement Based on your Account as of January 01, 2012.” It states, “As of December 31, 2011, your TSP account balance was $130,841.13. It goes on to say, “Assuming you continue TSP contributions [$877 per pay period] at the same rate and earnings on your account average 7% [Wow. How unrealistic is this!], your estimated TSP balance when you are first eligible to retire would be $158,107.” My current TSP balance is $137,000. It gives estimated Thrift Savings Plan monthly annuities as follows:
If you retire at age 64, your single life annuity would be $868.06;
If you retire at age 65, your single life annuity would be $1,130.12.
The statement also mentions an interest rate index on the level payment annuity, with no cash refund, when purchased, will be 2.250 percent.
What does the interest rate index represent? Does this mean the yearly level payments would increase by 2.250 percent?
Given today’s low interest rates, what, realistically, would my annuities be at age 64 and age 65?
A. The annuity interest rate does not have anything to do with increasing payments. A level payment is just that: level. It doesn’t change over time. The index is used to determine the payment amount that your annuity purchase will produce. A higher index means a bigger payment. Annuity interest rates are currently hovering at or near historic lows. Buying an annuity today means locking in low interest rates for life. I’d say that the odds favor higher interest rates and higher annuity payout rates in the future.
Tags: annuity, contributions, FERS, index, interest rate, retirement, TSP
Roth TSP advice for a 22-year-old
May 7th, 2012 | Uncategorized
Q. Our 22-year-old son is in the Navy. He is an E-5, so his earnings are fairly good. He is not married and has very few bills besides an apartment, vehicle and cellphone. He is contributing to the Thrift Savings Plan, but soon he will have option to contribute to the Roth TSP. I would like to know what your investment advice would be for him.
A. He shouldn’t be as concerned about where he saves his money, as he is about how much he saves. The TSP, traditional or Roth, should be his first choice for retirement savings. If he doesn’t know how to allocate his money once it’s in the TSP, he can use the L Fund that corresponds to his life expectancy.
Penalty exception?
May 7th, 2012 | Uncategorized
Q. I recently retired as a federal law enforcement officer at age 50 after 25 years of service. I am able to presently withdraw a monthly set amount from my Thrift Savings Plan without the 10 percent penalty, correct? May I also reduce the 20 percent tax withholding TSP imposes on me?
A. Based on the information you’ve provided, you will be subject to the early withdrawal penalty unless you take your payments as a series of Substantially Equal Periodic Payments under Internal Revenue Service Rule 72t. There is no exception to the early withdrawal penalty for LEOs. The usual rules apply. You may reduce or waive the automatic withholding. See the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for details.
Tags: early withdrawal penalty, law enforcement officer, taxes, TSP withholding
TSP monthly withdrawals
May 7th, 2012 | Uncategorized
Q. I retired as a CSRS employee after 31 years of service. I will be 70½ in June and, as I understand, I will have to begin taking out from my Thrift Savings Plan account then. If I am reading the information correctly, I have until April 2013 to do this. If so, when is the deadline for me to send in my request for withdrawals? Also, I have checked the TSP forms on the website but could not determine the appropriate one to use. I am planning to take out my TSP savings in monthly withdrawals.
A. Your first required minimum distribution must be completed by April 1, 2013, so if you plan to use monthly withdrawals, you’re going to have to be careful. I suggest that you consider setting up monthly withdrawals, starting in January 2013. The TSP will automatically calculate the RMD payments for you each year.
You can then use your one-time partial lump-sum withdrawal to cover the 2012 RMD early in 2013.
Use form TSP-70 to request the monthly payments and form TSP-77 to request the partial lump-sum withdrawal.
If you want both RMD amounts included on your 2013 tax return, I suggest submitting both forms Jan. 2, 2013.
Tags: 70 1/2, CSRS, lump-sum, monthly, Required Minimum Distribution, taxes, TSP, withdrawal