By Mike Miles
May 13th, 2013 | Uncategorized
Q. I have been a federal employee for 27 years, just long enough to have been one of the first forced into FERS. About seven years ago, I looked at my Thrift Savings Plan statement and learned that the prediction was that if I retired at age 62 and bought an annuity, I would have a pretty good monthly salary. Now, I notice that the prediction is that if I use my TSP savings, with about the same amount predicted for me at age 62, to buy a monthly annuity, that annuity will be about one-third of what was predicted seven years ago. Not a very good deal now.
My belief is that the years of low interest rates are responsible for the change in what the same amount of money will buy now. I wonder if that is true. I also wonder if these annuity companies that agreed to pay the larger amounts when they signed people up seven or more years ago are going to have to have massive bailouts by the federal government if interest rates continue to remain where they are. Finally, if I retire soon, I will not want to buy an annuity at that time, but if interest rates go up in five years, how much more attractive are monthly annuities going to be? If the interest rates go back to where they were 10 years ago, will the price of annuities go back to where they were, or have annuity companies learned a lesson and are likely to be more conservative in pricing?
This also might be a good topic for one of your columns for other FERS feds who have to decide about using some of their savings to buy annuities.
A. I have written columns about the pros and cons of using your savings to buy an annuity, and about the dangers of using the calculators provided by the TSP. You’re a witness to the problems. There was never a promise by the insurance company to provide a certain payout for a future annuity purchase. The payout is always calculated at the time of purchase. Annuity payouts are dependent upon the prevailing interest rates at the time of purchase, and those rates are now at historic lows. Same with the payout rate. If interest rates increase in the future, the payout you will be offered should also increase. In addition, as you age, the payout will go up since the number of payments the insurer expects to make will decrease.
May 9th, 2013 | Uncategorized
Q. I will be retiring at the end of this year with 37 years and 10 months of service. I am a CSRS employee and will be 57 years old in September. My annual annuity would be $81,958. I will have a little over $200,000 in my Thrift Savings Plan account.
Is it smartest to take the spousal annuity or take out a life insurance policy on myself to sustain my wife once I pass away? My annual annuity will be reduced by around $7,900 a year if I chose the spousal annuity. Which would be the wisest?
A. This isn’t your choice to make. It’s your spouse’s choice. If I were your spouse, I’d favor the full survivor benefit.
May 9th, 2013 | Uncategorized
Q. I have been in the Foreign Service since 1986 and am being involuntarily retired for expiration of my time in class on Sept. 30, 2014. I will be 49 years old at the time. Even with an involuntary retirement, do I still get penalized for any lump-sum payment I take from the Thrift Savings Plan? I know annuities and equal payments are not penalized.
A. There is no exception to the early withdrawal penalty for involuntary retirement.
May 9th, 2013 | Uncategorized
Q. Based on a reading of Internal Revenue Service Publication 721, it appears to say that since the CSRS and FERS retirement systems are considered “eligible retirement plans” you could roll over a distribution (including a regular annuity payment) into another IRA and defer the taxes, or into a Roth IRA and pay the taxes immediately. If this is the case, the normal IRS limitation on contributions to IRAs and Roth IRAs are bypassed. Am I reading this correctly?
A. From IRS Publication 721: “Distributions eligible for rollover treatment. If you receive a refund of your CSRS or FERS contributions when you leave government service, you can roll over any interest you receive on the contributions.You cannot roll over any part of your CSRS or FERS annuity payments.”
April 29th, 2013 | Uncategorized
Q. Is an annuity purchased with Thrift Savings Plan funds from MetLife federally insured/guaranteed the way bank accounts have FDIC? Or is a MetLife guaranteed annuity not really guaranteed at all, in case even a huge company like MetLife fails?
A. A TSP annuity is guaranteed by MetLife, not by the federal government.
April 29th, 2013 | Uncategorized
Q. I am a fully vested CSRS employee with the Environmental Protection Agency for 33 years at age 55. I have received my numbers, but I missed my first date to retire. How long does it take to receive my first full check? Worst-case scenario? Best-case scenario? And is there any way to speed up processing?
When will I receive my annual leave payment? Will it be immediate in one lump sum without taxes since I already paid taxes on my leave?
Should I take all of my Thrift Savings Plan out at once or leave about 10,000 in and roll it over to a Roth IRA or leave it in TSP?
Is there a financial counselor at TSP to speak with about taxes and IRAs vs. TSP?
I was told the first three days of the month or the last day of the month are the best times to go out to receive the check earlier? Is this a good idea?
A. Mike: You should leave your money in the TSP for as long as possible, since it is the best retirement investment vehicle you’ll find. You’ll find information about taxes and the TSP at www.tsp.gov. You may contact the Thrift Line with your specific questions, although I doubt they’ll help you with questions about IRA taxation.
Reg: I don’t know how long it will take for you to get your first full annuity check; nor, I expect, does anyone else. However, once your retirement package arrives at the Office of Personnel Management, they will put you in interim pay within a week or two. A complete and accurate retirement package speedily sent to OPM by your agency is the best hedge against delayed processing.
You’ll have to ask your agency when it will send you your lump-sum payment for unused annual leave. That can’t happen until your agency closes out your account. Since you couldn’t have paid taxes on that money until it was received, it will be treated as ordinary income from which taxes will be deducted.
To pick the best date to retire, try to find one that is at the end of a pay period — to get credit for any annual and sick leave you earned during that pay period — and as close to the end of a month as possible — so the time between when you are employed and on the annuity roll is as short as you can make it. Note: As a CSRS employee, you can retire up to the third day of any month and be on the annuity roll in that month. While you will be paid for the additional days you are employed, your first month’s annuity will be reduced by 1/30 for every day you are still employed.
April 24th, 2013 | Uncategorized
Q. I have more than 20 years of service as a federal law enforcement officer and will turn 55 in 2014. I plan to retire under FERS from my agency this year, before my age 55, and immediately (with no break in service) become re-employed on a full-time basis with another federal agency. I understand that my salary during the period of re-employment will be offset by the amount of my FERS annuity, and that retirement deductions (including Thrift Savings Plan contributions) will be made from my re-employment salary. I understand further that I would earn a supplemental annuity upon termination of re-employment if I am re-employed for more than a year, and that I could alternatively elect a redetermined annuity if I am re-employed for at least five years.
However, if my re-employment terminates before I reach age 59½ (but well after 55), and I wish to make withdrawals from my TSP account at that time, how will the Internal Revenue Service calculate my “separation from service” date? That is, will the IRS consider that I “retired” in 2013, prior to age 55, and thus apply the 10 percent penalty for early TSP withdrawals? (That would effectively force me to lock myself into the life expectancy withdrawal option for a full five years after the termination of my re-employment period.) Or, would the IRS determine that I “retired” on the date of the termination of my period of re-employment – after age 55 – enabling me to withdraw from my TSP account penalty-free?
A. To the best of my knowledge, your TSP account, if it is kept going through the transition in federal employment, will be eligible, in its entirety, for penalty-free withdrawal under the “age 55 exemption.” But, you should consult a qualified tax accountant before you make any plans.
April 22nd, 2013 | Uncategorized
Q. When I retire, I will be 59½ and will have 30 years of service at the Postal Service. I will not have any earned income from that point on. I understand federal and state taxes will be taken out of my FERS annuity and any money I take out of my Thrift Savings Plan. Will I also have Social Security deducted from these two sources? Also, will my special retirement supplement and — when I turn 62, my SSI benefit — also be subject to federal and state taxes?
A. Mike: Your TSP withdrawals are subject to income taxation, but no employment taxes, like Social Security, Medicare or unemployment insurance.
Reg: Your special retirement supplement will be treated as ordinary income. To find out to what extent your Social Security will be taxable, see IRS Publication 721.
April 9th, 2013 | Uncategorized
Q. So if I follow all the rules related to my current Thrift Savings Plan account, and I begin making systematic withdrawals under the annuity factor method at age 55:
1. Can I contribute to my new employer’s 401(k) while drawing from my TSP? (I may want to take a downscaled job and subsidize the lower income with my TSP distributions.)
2. Are any Internal Revenue Service restrictions in place regarding my Roth IRA because I am taking distributions from my 401(k) at age 55?
A. Yes, you may contribute to a 401(k) while taking distributions from your TSP account, and no, there are no special rules limiting Roth IRA contributions because you are taking withdrawals from your TSP or 401(k) account. Only the usual income limits apply.
March 26th, 2013 | Uncategorized
Q. I am a federal law enforcement officer covered by FERS and, by Sept. 30, I will have more than 29 years of service plus more than a year of sick leave. To obtain my annuity beginning Oct. 1, I would like to retire on Sept. 30, but it is in the middle of a pay period. I plan on front-loading my Thrift Savings Plan and TSP catch-up contributions starting in April for the rest of this year to reach the maximum for both. Would there be any TSP match in my last, partial pay period, or should I just aim to reach my TSP limits in the previous complete pay period?
A. There will be matching on every pay period.