Ask The Experts: Money Matters

By Mike Miles

TSP withdrawal

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Q. I am 70½ and separated from federal service since 2008. I need to make a withdrawal election (my Thrift Savings Plan has $180,000). I was told I have three options: withdraw the account as a single payment, monthly payments or an annuity (or a combination). Assuming I do not need the money right now, what is the best option to maximize the interest I am getting and paying taxes on what I’ll be withdrawing?

A. If you don’t need the money, I suggest that you begin fixed monthly distributions in an amount that will satisfy or nearly satisfy your required minimum distribution for the year.

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Avoiding a penalty at age 70 1/2

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Q. I will turn 70½ after Feb. 19, and will retire from my full-time position at the end of the month. I have notified Social Security, the state retirement funds in two states where I worked, and my fund in a private approved pension fund with accounts from two other universities of my intention to retire at the end of February and to start receiving distributions in March 2014. Is there anything else that I need to do to avoid being hit with that horrid 50 percent penalty?

I received an unsavory email from the Wisconsin Employee Trust Fund scolding me for not filing at age 69½ and hinting that I would owe a 50 percent penalty for distributions not taken in 2013. I see no federal information that indicates that I needed to act at age 69½, or that I needed to begin withdrawals before age 70½. I have relied on the information posted at the Internal Revenue Service website to guide my action, but it seems to contradict the information now being sent to us prospective retirees. I hope that I have done nothing wrong to merit any penalty.

A. Your first required minimum distribution is due by April 1 of the year following the year in which you reach age 70½. Subsequent RMDs are due by the end of the calendar year. You are not required to take a distribution from an employer-sponsored retirement plan while you are still working, however.

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RMD from TSP and IRAs

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Q. My first required minimum distribution at age 70½ was made in August, when I took the total RMD required for both my IRA and Thrift Savings Plan accounts from one IRA fund. However, I have just received my notice from TSP stating I must make a withdrawal by April 1 from the TSP account to avoid dire circumstances. I am not clear on whether what I have already done meets my obligations for the first withdrawal, based on two of your answers concerning this matter.

Q: “Also, I thought if I have other IRAs, I could take the RMD from those and leave my Thrift Savings Plan unscathed. If I withdraw the entire account balance from my TSP, I will have to pay federal tax on whole amount. Can you clarify?
A: Unfortunately, the TSP does not allow you to waive the RMD for your TSP balance. It must be taken from your TSP account.”

Q: “Can I add all of my accounts together — IRA and Thrift Savings Plan — compute the required minimum distribution, and then withdraw from one account?”
A: “…but you may take your RMD from any account or accounts you wish. You should leave your TSP account untapped for as long as possible.”

If the original RMD I made in 2013 meets the requirement for the TSP account, should I notify TSP in some way that this has been done so they do not withdraw it again on April 1 and mail to me? I have made my one withdrawal allowed back in 2009 and do not wish to change to monthly withdrawals, an annuity or a total lump-sum transfer to another IRA. Are yearly RMD withdrawals allowed?

A. I’m sorry for the confusion. You must take your TSP RMD from your TSP account. You will have to begin monthly withdrawals, and I suggest that you use fixed monthly withdrawals since they may be changed in the future and the TSP will send you an extra payment, if necessary, to make sure that your RMD is taken each year. Annual withdrawals are not allowed.

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Starting TSP withdrawals now vs. at 70 1/2

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Q. I retired under FERS two years ago, and I haven’t needed to touch my Thrift Savings Plan account so far. I am receiving Office of Personnel Management, Social Security and military retirements. I am 68½ years old. I just received a 100 percent Veterans Affairs Department disability award, which will change my taxable military retirement to a nontaxable VA retirement. I don’t think this will have any effect on my long-term life expectancy. I have determined that I do not want to elect an annuity on withdrawing from my TSP. I am considering immediately starting a monthly TSP withdrawal based on life expectancy. What are the advantages and disadvantages of starting withdrawals immediately versus waiting until the 70½ mandatory withdrawals? I am a married man, and we declined a survivor benefit plan.

A. Starting withdrawals now will provide you with more income now but will produce a larger taxable income and begin to deplete your account. Waiting will reduce your current taxable income and preserve your account’s value (if you don’t lose it to the markets), but also reduce your current standard of living and increase your taxable income later in life.

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TSP withdrawal

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Q. I retired from the federal government under CSRS. I turned 70½ years old in May. I have $40,000 in my Thrift Savings Plan account. I am thinking about withdrawing all of my funds in a lump sum. Is this a good idea? How will this affect my tax obligations? What do you recommend?

A. The money you withdraw from your TSP account will be counted as ordinary income for tax purposes. If you need the money, then fine. If not, you should leave it in the TSP for as long as possible.

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TSP and age 70 1/2

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Q. I know that after reaching age of 70½, I have to withdraw a minimum requirement from my Thrift Savings Plan account. Will I be able to keep the rest of my TSP money in that account?

A. Yes.

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Simple IRA and rollover

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Q. I am retired at age 63 from the Postal Service. Can I roll over my Thrift Savings Plan funds to a simple IRA without any penalties before I reach 70½?

A. Only simple IRA money can be rolled into a simple IRA.

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Holding on to capital

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Q. I’ve just been flying straight with the L2030 plan until I can get some reliable advice. I would like to keep my capital I have in the Thrift Savings Plan, receive a monthly or quarterly check, and reinvest the amount I don’t need back into my capital. When I turn 70½ (in four years) I’ll have to start receiving the required minimum distribution, which I can’t reinvest. I don’t want to get an annuity because I’d have to give up my capital. How can I hold on to my capital, reinvest in it and possibly leave that money to my children or even my grandkids?

A. I don’t see a problem. The money in your TSP carries a tax liability that must be paid, eventually. There is no requirement that you spend the RMD. You can just move it from the TSP to a similar investment in a taxable discount brokerage account.

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TSP

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Q. I’m unsure of what to do with my Thrift Savings Plan account. I understand that I could leave it in the account as it is until I’m 70½. I can also make a full or partial withdrawal.  Full withdrawal is not an option for me. A TSP life annuity (both single or joint life) option is based on life expectancy or until the money runs out. Also there is the TSP annuity vendor (MetLife) where I could get the annuity but money used to purchase this annuity goes to the insurance company if you die before it’s used up.

I’m thinking of purchasing a fixed index annuity with my TSP. This fixed index annuity guarantees that I will receive at least the minimum guaranteed interest (3 percent to 7 percent) credited to the contract. Taxes are deferred until you receive money from the contract. I can choose from several different payout options based on personal needs, including option for lifetime income, guaranteed. I’m wondering what to do with my TSP. I don’t need the money right away. I don’t want to lose money when the market falls. I would like to make as much as possible.

A. 1. Your assumptions about the options available to you are incorrect. You need to review the information available at www.tsp.gov more carefully or seek guidance.

2. You don’t need the money now, so why would you consider converting it to income now? Don’t.

3. You don’t want to lose money but want to make as much as possible. The only investment option that meets both of these requirements is the G Fund. Use it.

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Periodic withdrawals from IRA

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Q. I am considering retirement at 62 (FERS) but not collecting Social Security until my full retirement age of 66. I know that once you start withdrawing from your Thrift Savings Plan account, you must continue to make withdrawals each year. To bridge the time from 62 to 66, I’m thinking of taking funds from my IRA instead. If I start taking withdrawals at 62, can I stop taking withdrawals from my IRA at 66 when I start Social Security and then resume withdrawals at 70½?

A. You’ve got the right idea, and it will work. You may start and stop IRA withdrawals any time you want to. When you reach age 66 and stop taking money from your IRA, you should transfer what’s left into your TSP account, if it’s all pretax money.

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