Ask The Experts: Money Matters

By Mike Miles

TSP early withdrawal

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Q. I am interested in buying a franchise. I am 61 and plan to retire in 2014. Can I withdraw my money without it being taxed for this type of investment?

A. No.

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Roll IRA to TSP?

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Q. I am a 55-year-old Postal employee planning to retire sometime in the next year under CSRS. Many years ago, I purchased a $2,000 Vanguard IRA that has grown to more than $40,000. I also have a separate similarly valued Roth IRA. I know that I can begin penalty-free withdrawals from TSP after separation, but can I roll my Vanguard IRA into TSP?  I also know that I cannot roll my Roth into TSP. My desire is to have the money accessible before 59-1/2 and to avoid having three pots to withdraw MRDs when I’m 70-1/2. Any suggestions?

A. You may transfer the IRA money into the TSP any time, as long as it contains no after-tax contributions.

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Investment diversity

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Q. I am 67, and I plan to work two more years. I am collecting my Social Security. My TSP is invested in the G fund, and I panic every time I invest elsewhere and the market goes bust and I lose $6,000 in one day. Should I diversify or stay in the G fund so close to retirement? I have diversified in the past and lost $52,000 in 2008.

A. It sounds like you’re not qualified to manage a retirement investment account. You should either stick to the G Fund, buy a TSP annuity or find a trustworthy investment adviser to help you.

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FERS account taxes

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Q. I will retire in two years. If I leave my money in the TSP, what happens when I reach 70-1/2 and I  am forced to pay a certain percentage of my savings out every year due to my age. Does that mean I would have to pull all my TSP money out (pay taxes on it) to transfer it to another account in anticipation of the yearly deduction?

A. If you begin monthly distributions using form TSP-70 during or before the year you reach age 70-1/2, the TSP will automatically distribute the required amount each year. There is no need to leave the TSP while you are still alive.

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Loan balance

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Q. I work for the BOP and I am 10 months away from being forced to retire with 20 years of service. A few years ago there was talk around work that the age restriction was going to be raised, and it seems that was wishful thinking.  I just accepted it as a probability because it was raised in the past and that gave me the opportunity to get hired. I took out a loan against my TSP account anticipating the age requirement would go up and as a result, unless something does change, I will most likely have a balance on this loan when I’m forced out. If I’m unable to pay this balance off prior to being forced out, what consequence can I expect as a result?

A. The unpaid balance will be declared a taxable distribution. The early withdrawal penalty may also 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.

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TSP payouts

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Q. Will TSP only pay out over a 30-year period? If so, then what happens to the money if I happen to pass away at 70? Can a beneficiary be set up so the rest of the money in the TSP will be paid out??

A. The TSP does not limit monthly payments to 30 years. If you pass away at any time, your account balance will be paid to your beneficiaries. I suggest that you review the information available at www.tsp.gov and then ask a specific question that is not answered by the literature.

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TSP withdrawal

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Q. I’m trying to decide how to withdraw my TSP. I really do not need the income at this time. I’m 60 years old with no dependents or heirs. I have about $240,000 in my TSP. Is it possible to buy a life annuity with half now and take monthly payments later? I was also considering a life annuity with increasing payments and 10-year certain. Or would it be better to do monthly payments? From what I understand, I can adjust the payment once a year. Read the rest of this entry »

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The value of patience

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Investors, as a group, make plenty of mistakes. When it comes to investing, bad decisions are not the exception, but the rule. Investing mistakes stem from a variety of influences: ignorance, gullibility, fear and greed, to name a few. But I find impatience to be one of the most pervasive, and underappreciated, drivers of bad investment moves. The burning desire to act immediately, to do something, anything, right now, underlies many of the bad decisions investors make.

The desire to act is part of the American way. We’re all responsible for our own fates, goes the thinking. Life is full of opportunity, and it’s what you do with that opportunity that determines your success or failure in life. At least, that’s the theory. Unfortunately, when it comes to managing an investment portfolio, more activity usually does more harm than good. In large part this is because of uncertainty. Unlike many other things we work hard at, the results of our investment activity are uncertain. If you want to build a brick wall, keep laying bricksand you’ll eventually have a wall. Skill plus action almost certainly equals success.

But investing is different. It is a competitive endeavor. To reap superior profits — or, beat the market — you must take them away from another investor. This other investor, and all of the others, would rather not give these profits up, and would like to take yours from you instead. The more active you are in the investment markets, the greater the opportunity for mistakes — and losses. If you want to be successful in this game, you’ll have to be careful and defensive.

As an investor, I encourage you to think of cash as your most valuable economic resource. While your wealth is in cash — or a cash-equivalent like the G Fund — it’s safe. It can’t be lost. Safe is the most attractive position to be in as an investment manager. Putting your cash at risk by deploying it into risky assets — like stocks, bonds, real estate or commodities — is something you should try to avoid unless you can’t achieve your life’s objectives any other way. If you can keep all of your wealth in cash and safely afford to live the life you want, why put your wealth, and your standard of living, at risk? If you must take risk to earn the return you’ll need to afford the life you want, then do it prudently. Only invest the amount necessary, and only invest that in a way that is risk-efficient; that is, in a way that is expected to produce the returns you’ll need with a minimum risk.

This goal of investing the minimum amount necessary, and subjecting that amount to the least risk possible while achieving the returns you’ll need, is inherently boring. It requires long periods of time without any activity at all. In my practice, the default frequency for measuring the progress of an investment plan is once about every six months. It’s possible that something could come up to disrupt this schedule, but that’s the exception and not the rule. If I were you, I’d want to know, about every six months, where my portfolio is compared to where it needs to be to safely support my desired lifetime standard of living. If it’s larger than it needs to be, then I’d reduce its exposure to risk. If it’s smaller than needed, I’d increase the level of risk. That’s it. No other activity should be required.

The time to deal with market events is not when they happen, but before they happen, during the planning process, when you configure the investment strategy you’ll employ. This strategy should be selected to allow enough room for the kind of market events that could occur, and not be derailed by these events, should they come to pass. Trying to react to market events in real time will do more harm than good in the long run. So, develop a solid investment management plan and focus on maintaining the patience it will take to implement it the way it is designed. If you’ve done things right, the best investment move is often to sit tight and do nothing at all.

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.

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Late start to TSP

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Q. I am 65 years old.  I have been employed in the federal government for nine years. At this late stage and age, should I join TSP.

A. If you’d like to save money for your use later in retirement, yes.

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TSP withdrawal

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Q. I’m 26 and I’m planning to get out of the Army next year. If i withdraw all the money and stop my TSP account after leaving the military, would I be charged for anything? If yes, what would it be ?

A. You will be subject to income tax and the 10 percent early withdrawal penalty unless you qualify for one of the exceptions on Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

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