Ask The Experts: Money Matters

By Mike Miles

TSP withdrawal without penalty

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Q. I am a CSRS postal employee retiring at age 56 with 38 years of service. Can I withdraw from my Thrift Savings Plan without penalty?

A. After you retire, yes.

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TSP

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Q. I’m planning to retire Jan. 2 and would like your suggestions as to what to do with the $165,000 in my Thrift Savings Plan account. I thought about transferring the money from the TSP, buying an IRA and letting it remain there for a couple of years since do not think I will need the money at the present time. I am 63 years old and covered under CSRS. Any suggestions as to what to do with the money and the best company or companies to purchase an IRA would be greatly appreciated.

A. The TSP is the best retirement savings and investment account you’ll find. Leave your money there and manage it for as long as possible. You’ve proposed no good reason to move it away.

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VCP

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Q. I am a CSRS employee. I have decided to take the Voluntary Separation Incentive Payment and should be off the rolls by March 31. I am told that I can put in 10 percent of my basic total federal wages (could be in excess of $200,000) into the Voluntary Contribution Program and I should withdraw all of it when I retire. I am also told that I can deposit this withdrawn VCP money into a Roth IRA, which is the main reason I want to do this. Are my assumptions true? If it is, how can I open a VCP account, since I am told that it will take at least a couple of months before the Office of Personnel Management acts on my request?

A. I can’t tell you what you should do with what little I know about you and your circumstances. For the timing, you’ll have to work with your agency and OPM to figure out how to make it work. I can tell you that what you’re considering is allowed and worth considering.

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CSRS redeposits and taxes

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 Q. If I take money out of an IRA to make a redeposit into CSRS, do I have to pay taxes on the money taken out of the IRA?

A. Yes.

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FERCCA

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Q. I retired in 2010 and, at that time, I was informed that I was in the wrong retirement system (FERS). I chose to be put in the proper program (CSRS Offset). I was also told by my human resources manager that, since I was in retirement, I would be able to keep all of my Thrift Savings Plan contributions, including the agency’s matching contributions. On Dec. 3, the agency forfeited about a fourth of the value of my TSP account, without any notification that this was going to happen. Is this a legal action? Why was I not informed with a letter that this was going to happen?

A. I’m not a judge, so I won’t comment on the legality of what has happened, but I have consulted on more than one Federal Erroneous Retirement Coverage Corrections Act case, and this is consistent with my expectation. You would not have been entitled to the FERS employer contributions under CSRS Offset, and so they are typically recaptured when you retroactively switch to CSRS from FERS.

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401(k)-to-CSRS rollover

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Q. I am the 401(k) specialist for our tribal government. We have a former employee who wants to roll over his 401(k) into making a deposit in CSRS. Is this possible? A transfer from CSRS into a 401(k) is not allowed, so should his attempted rollover be allowed?

A. This is not allowed. CSRS deposits are made with after-tax money.

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Test your retirement financial fitness

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Are you planning to retire soon? If so, you’ll need to figure out whether you’re financially able to make it work in the near and the distant future. Because there are few, if any, truly reliable financial guarantees, this can be a difficult thing to determine.

The essential question is this: “Will I have the resources — usually cash — available when I need it to support my desired standard of living for the rest of my life?” If someone else is depending upon you for all or part of their financial support, your retirement decision will affect them, as well, and they should answer this question before you commit.

If you are relying solely on a CSRS annuity, or even Social Security, to support your living expenses in retirement, your job is fairly easy. Both of these income streams are fully indexed for inflation and guaranteed by the best guarantor there is. The most significant risk you have to consider with these is that the guarantee you’re counting on might fail. While this may seem like a large risk, it is relatively small when compared with the risks associated with other potential income sources, like FERS and private annuities, and withdrawals taken from an invested portfolio. These risks include loss of purchasing power, insolvency, reduction in benefits, and market and interest rate risks. Assigning probabilities to these risks and analyzing their potential effects on your retirement plan is beyond the ready ability of most people who don’t specialize in statistical analysis. So, what can you do?

Start with this basic test. Add up the sum of your guaranteed retirement income streams from such sources as CSRS, FERS, Social Security and other defined benefit pension plans.

Then do some research to see what kind of payout you can expect to receive if you used all of your savings and investments to purchase one or more inflation-adjusted guaranteed fixed immediate annuity contracts.

Make sure that you choose the maximum inflation adjustment rate available when requesting the quote. The Thift Savings Plan website has a calculator that will give you a quote, on the spot. Add this guaranteed annuity income to your other guaranteed income to find your total pretax guaranteed retirement income.

If this is enough to meet your expected cost of living, after deducting an allowance for taxes, then you can probably safely retire.

If not, you should investigate your options further to see if an alternative approach might be workable.

With annuity payouts near historical lows, the invest-and-withdraw option, if managed prudently, will probably support a higher standard of living and produce better results — at least until the payout rates rise significantly.

Here’s a sample test calculation based on three guaranteed income sourses — FERS, Social Security and TSP:

FERS annuity: $30,000

Social Security: $20,000

TSP annuity payout with increasing payments on $200,000: $10,000

Total guaranteed pretax income: $60,000

Less 25 percent allowance for taxes: -$15,000

Total guaranteed after-tax income: $45,000

After-tax cost of living in retirement: $40,000

Test result: Fit to retire.

This test is not conclusive, but it is a good starting point in determining your financial fitness for retirement.

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Avoid these mistakes when planning to retire

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It’s easy to make mistakes when you are planning to retire. Some of the biggest mistakes apply to all employees; a few apply only to CSRS or FERS retirees. All can be costly. Here they are and what you can do to avoid them:

Retiring on the spur of the moment. It can be disastrous, for two reasons. First, if you hand in your retirement application at the last minute, it may contain errors that delay processing or even cause it to be rejected. Second, decisions made in haste often come back to bite you. Once committed to a course of action, it’s hard to undo it if you change your mind. If you do change your mind before you actually retire, you won’t be able to withdraw your application if your job has been abolished or it’s been offered to someone else. If you’ve already retired and want to cancel your retirement, your agency has no obligation to bring you back on board.

Confusing a salesperson with an adviser. The two are not the same. Actually, they’re opposites. One is paid to convince you to buy what they have to sell; the other is paid a fee to conduct analysis and provide you with decision support. One is your ally. The other is your adversary. Why would you trust an adversary for advice? Be skeptical of any source of “advice” that might be influenced by a conflict of interest. This is single mistake probably costs the American public more than any other when it comes to financial decision making.

Losing your health or life insurance. Make sure you are enrolled in the Federal Employees Health Benefits or Federal Employees’ Group Life Insurance programs for the five consecutive years before you retire. If you aren’t, with few exceptions, you won’t be able to carry that coverage into retirement. Here are the exceptions: you are covered by your spouse’s FEHB policy; you have been covered by Tricare of CHAMPVA, enroll in the FEHB program before retiring and the total equals five years; you enrolled in the FEHB at your first opportunity and retire in less than five years; or you accept an early retirement offer and were enrolled before the latest offer of early retirement was made by your agency.

Before you retire, check with your personnel office to be sure that you’ve met either the five-year rule or one of its exceptions.

Not getting credit for active-duty service in the military. If you served on active duty in the military, you can get credit for that time in determining your years of civilian service and have it used in the computation of your annuity. If you are a FERS employee, you’ll have to make a deposit to get credit for that time. If you are a CSRS employee, the rules differ depending on when you were first hired. If it was before Oct. 1, 1982, you will only have to make a deposit if you retire and are eligible for a Social Security benefit at age 62 (or when you retire, if it’s after age 62). If you were hired on or after that date, you’ll get credit for that time only if you make a deposit for that service. Whether you are a CSRS or FERS employee, if you’ll be eligible for or receiving military retired pay, in most cases you’ll have to waive that pay when you retire from your civilian job. You won’t have to do that if you are eligible for or receiving reserve retired pay.

Check with your personnel office to make sure that any active-duty service is recorded in your Official Personnel Folder and find out if a deposit will be required to get credit for that time.

Getting caught by “Catch-62.” If you are a CSRS employee who served on active duty in the armed forces after Dec. 31, 1956, and haven’t made a deposit for that time, you could be in for a rude awakening. If you retire and are eligible for a Social Security benefit at age 62 (or when you retire if it’s after age 62), your annuity will be reduced by 2 percent for each of those years of military service for which you haven’t made a deposit.

Determine whether you’ll be eligible for a Social Security benefit at either of those points in time. If you will, you may want to make a deposit for that time. If you won’t, don’t waste your money. Your CSRS annuity won’t be affected.

Rolling over Thrift Savings Plan assets. This mistake is usually caused by either trusting the wrong source for advice or failing to think “outside the box” a little when it comes to planning for your cash flow needs. Financial salespeople generally have to gain custody of your assets in order to be paid their commissions or fees, so naturally, their advice always includes rolling over any significant TSP sums into an IRA or other investment vehicle with higher costs. This is a formula for diminished investment performance. If the reason for leaving the TSP isn’t to enrich a financial salesperson, it’s often to gain more freedom in withdrawing TSP assets. While this is sometimes a valid reason to leave, it can often be dealt with through a combination of a lump-sum withdrawal or a series of fixed monthly distributions that will create and maintain a slush fund outside the TSP that is sufficient to meet your cash flow needs.

Focusing on wealth instead of cash flow. Speaking of cash flow, this mistake is propagated by financial professionals and journalists all the time. Much of what you’ll read and hear from financial and investment experts is aimed at maximizing economic wealth — basically your net worth. The mistake is in assuming this is your retirement goal. It’s probably not. And managing to this goal can cause serious problems for you in retirement. Paying off a fixed-rate, low-interest-rate mortgage is an example. It is often proposed that saving the interest over 10, 20 or 30 years will dramatically increase your net worth. While the validity of this proposal will vary from case to case, and is certainly debatable, it also completely misses the point that your retirement standard of living is not dependent upon your net worth but rather on your ability to generate cash flow. Having massive amounts of equity in a piece of real estate is of little use to you in making a car payment or paying for a cruise if you can’t sell the property or borrow against the equity on attractive terms.

Getting hit by the windfall elimination provision. If you are a CSRS retiree who will be eligible for a Social Security benefit, it may be reduced by the windfall elimination provision. That will happen if you have fewer than 30 years of “substantial earnings” under Social Security. The difference between the amount needed to earn four credits under Social Security and the amount considered to be substantial earnings is significant. In 2013, you would only need to earn $4,640 to get four credits; however, you would have to earn $21,075 for it to be considered substantial. (Since the Social Security Administration doesn’t know which retirement system you are in, if you are a CSRS employee, any estimate of future Social Security benefits they give you will very likely be wrong, often very wrong.)

If you’ll be affected by the WEP, know in advance how much less your Social Security benefit will be. You can get started by reading the Social Security Administration’s publication at ssa.gov/pubs/EN-05-10045.pdf.

Getting hit by the government pension offset. If you will be receiving a CSRS annuity, any spousal Social Security benefit you may be entitled to will be reduced or eliminated by the government pension offset. The GPO will reduce those Social Security benefits by $2 for every $3 you get in your CSRS annuity.

If you’ll be affected by the GPO, you need to find out how great the impact will be. That’s because it isn’t uncommon for the GPO to wipe out those benefits. You can learn more at ssa.gov/pubs/EN-05-10007.pdf.

Relying on emotion instead of reason. This mistake is so common, it’s the norm. It also has the potential to cause disaster. There have been books written about this mistake and how to avoid it, yet the behavior continues to be rampant. If you’re going to get the most of what you want from what you have, you need to realize that markets have evolved to take advantage of your fear and greed, which are amazingly predictable, and turn them against you. The investment markets aren’t fair; they’re like poker games, and trust me, you’re not the best player in the game. If you want to survive and, better yet, enjoy the game, you need to rely on a strategy that acknowledges the odds you face, accepts them and uses reason to turn them to your favor.

Failing to account for inflation. Inflation is a pervasive threat to any retirement plan. Not so much inflation in general, but differential rates of inflation among the various incomes and outflows that affect your plan. Your expenses will inflate, over time, at varying rates, while your income may or may not keep pace with that inflation. CSRS annuity and Social Security income increase with the Consumer Price Index (for now), FERS annuity income increases less than the rate of inflation, and many other pension and annuity income streams either don’t increase at all or increase at a fixed rate. Differences in these inflation rates can have a profound impact on your financial picture in retirement and failing to properly account and plan for this impact can leave you without the resources you’ll need to live the life you’ve been expecting years, or decades, down the road.

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TSP residential loan

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Q. I am a longtime CSRS employee with a pretty good Thrift Savings Plan balance. I plan to retire in two years and move to another city when I retire. My spouse is planning to retire in eight months, and we are planning to buy a house in the new city. We would like to buy the new house and begin the transition to the new city without selling our existing home until I retire. We are looking at a number of ways to finance the purchase of the new home and afford a mortgage payment on that house, a mortgage that we should be able to substantially pay off with the proceeds of the sale of our existing home two years from now. I am looking at ways to keep the payments lower and am considering either taking an over-59½ withdrawal from my TSP account or taking a loan. I am considering withdrawing or borrowing an amount equal to about 25 percent of the balance. If I take the withdrawal now, I use up the one-time allowance to take part of the balance and incur immediate tax bills for the amount withdrawn. If, instead, I take an equal amount out as a loan, I do not lose the ability later to withdraw part of my TSP and I don’t create an immediate tax liability.

Because I am CSRS, the loan wouldn’t affect a TSP match that would come if I were a FERS employee.  The question is really whether or not I am eligible for a residential loan from TSP. The loan requirements are that it be for a “primary residence.” I assume this means I can’t use this loan program for a vacation home.  The house that we would purchase using this loan as part of the down payment will be our principal home two years from now. Would the fact that we are not immediately selling our existing home mean that we cannot use this loan provision? Or does the fact that this will be our principal home in the future allow us to use this loan provision?

A. Like everyone who’s requesting a residential loan, you will be requesting the loan for the purchase of a house that will become your primary residence. How many people are living in the house they’re trying to buy when they request their loan?

The question is really about the timing, and I think you’ll have to submit a loan application to find out for sure. If you’re planning to rent the new home between now and the time you take occupancy, you may have a harder time justifying your application. If practical, you can fall back to a general purpose loan as your “Plan B.”

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TSP vs. variable annuity

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Q. I am 63 years old and will be retiring under CSRS in January. I have about $150,000 in my Thrift Savings Plan account. I have talked with a financial adviser who told me it would be better to buy from outside and cheaper than MetLife annuity. The annuity is from Prudential and has a living benefit rider. They claim it is the cheapest one out there. Can you give me any advice as to which annuity would be best?

A. Your “financial adviser” is not an adviser but a salesperson. Don’t be foolish. Now is not the time to buy a fixed annuity if you can avoid it. The payout rates are the lowest they’ve been in generations and that living benefit rider is an expensive insurance policy that is unlikely to pay off. Keep your money in your TSP account until you find someone trustworthy to advise you.

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