Ask The Experts: Money Matters

By Mike Miles

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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Early withdrawal

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Q. I have been working under federal Law enforcement for seven years. I started when I was 21. So at age 46, I will have 25 years of law enforcement. If I retire at 46, can I have access to my TSP, and what are my choices for withdrawals or the penalties to take out?

A. You’ll have access to the usual partial (Form TSP-77) and full (Form TSP-70) withdrawal options as soon as you retire. Unless you meet one of the exceptions listed on Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf, your TSP withdrawals will be subject to the early withdrawal penalty until you reach age 59-1/2.

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Partial withdrawal, Part II

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Q. I retired from an air traffic control job at age 53. I am receiving monthly payments based on my life expectancy. I will be age 55 in April. Can I take a partial withdrawal? If not, are there any options? I need to access more funds. Will there be a tax penalty on the amount I have received? Will my partial withdrawal be penalty-free now that I am 55? Are there other options, such as increased monthly payments?

A. You may not take a partial withdrawal once monthly payments have begun. You may increase your monthly payment amount using Form TSP-73 or you may request a final withdrawal, but making any change to the series of substantially equal periodic payments before you reach age 59½ will subject all of your early distributions to the early withdrawal penalty.

The rules for all of this are complicated. You should consult a CPA before proceeding.

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Converting traditional TSP to Roth 401(k)

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Q. I am an active-duty military officer with 17 years of service. I would like to convert my traditional Thrift Savings Plan account to a Roth 401(k) and pay taxes now. I want to see if it is possible to transfer my balance to a traditional 401(k) with my civilian investment company and then convert that account to the Roth 401(k). Additionally, I want to minimize my taxes by doing this during my deployment this year, because I will be receiving tax-free pay for most of this year. Is this allowed and/or possible? I would love to pay zero or low taxes on the deferred portion of my traditional TSP during this transfer.

A. This might be possible using an age based in-service withdrawal if you’re at least age 59½. Otherwise, it’s not.

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Early withdrawal penalty

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Q. I will be 52 years old March 9. I am covered under FERS, and I have 31 years of federal service. If my base offers an early-out this year, I plan to take it.

I have a substantial balance in the Thrift Savings Plan and would like to withdraw it in its entirety when I take the early-out so I can invest it in my daughter’s business.

1. Will I be penalized for withdrawing my TSP funds early? If so, how much? I know I will be taxed, and I am OK with that. My husband plans to keep working. He is a GS-12, retired military and we have no bills, so we will be fine.

2. I know I cannot draw Social Security, and I don’t plan to do so until I reach the required age. In the meantime, will I be eligible for the special retirement supplement if I retire now? If not, at what age will I be eligible, if at all?

A. Mike: Unless you are sufficiently disabled or have massive medical bills, you will pay the 10 percent early withdrawal penalty on the lump sum.

Reg: If you accept your agency’s offer of early retirement, you’d be entitled to the special retirement supplement when you reach your minimum retirement age, which is 56. The SRS will end at age 62, whether or not you apply for a Social Security benefit.

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Avoiding early withdrawal penalty

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Q. I am under FERS and my minimum retirement age is 56. I plan to take regular retirement at age 58 with 34 years of service. I would like to take level monthly payments, rather than a Thrift Savings Plan annuity, as my TSP withdrawal choice starting immediately upon retirement. Can I do this without incurring the 10 percent penalty for being under age 59½?

A. If you retire from federal service at age 58, you will be exempt from the early withdrawal penalty for TSP withdrawals of any kind.

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Paying taxes at retirement on TSP balance

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Q. Is it possible to pay all taxes on the Thrift Savings Plan at retirement and then still keep money in a Roth TSP? If not, is there any way to convert money in TSP before I turn 70 to avoid having to take minimum distribution? I do not want to pay taxes again on money that I may not need if it is paid out as a minimum distribution.

A. You may not convert a traditional TSP balance to a Roth TSP balance. You should also reconsider the logic of what you’re trying to do, which is electing to pay tax on a large sum now rather than pay tax on a series of much smaller sums later. There is no risk of double taxation, and you’re likely to wind up paying a higher rate using your proposed strategy.

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Follow-up on TSP withdrawal

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Q. The following question/answer was recently posted. Where can I find the full information to support the answer? Are there penalties involved?

Q. I will be 55 this month and plan to retire in November with 33 years of service under CSRS. Do I have to wait until I am 59½ to withdraw from my Thrift Savings Plan?

A. Not if you wait until you’re retired to request the withdrawal.

A. Check Page 7 of this notice: https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

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Waiting to claim Social Security

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Q. I retired in July 2013 and have $500,000 in my Thrift Savings Plan. I need more money to support retirement and would like to take a lump sum of $30,000 out of TSP. I was thinking about taking the rest of the money as an allotment. Does this make sense? I have delayed my Social Security until I am 66 (I’m 64 now). My wife is taking her Social Security.

A. Waiting to claim Social Security is probably a good idea unless you have a shorter than average life expectancy and are single. If your only other source of income until you reach age 66 is your TSP account, then I think it’s reasonable to consider using it to fill the gap. If you have other resources, I encourage you to leave your TSP account for last.

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Using TSP to pay off home debt

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Q. I am a federal employee under CSRS and I plan to retire at age 55½. To minimize my debt, I plan to sell my current residence and relocate to a place where my income goes further. Unfortunately, my current residence is underwater by about $80,000. Would a good strategy be to withdraw the funds from TSP?

A. I can’t tell you without knowing what other alternatives are available to you. If the $80,000 is a big part of your net worth, you should do what you can to avoid it and proceed very carefully.

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