Ask The Experts: Money Matters

By Mike Miles

Early withdrawal penalty and deferred annuity

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Q. I am 50 years old and plan to resign in within two years. I will more than 10 years of service, but my minimum retirement age is 56. Sometime after I turn 56, I plan to submit for a deferred retirement, even though I know I will take a penalty of 5 percent each year under age 62. The Thrift Savings Plan states that “if you are age 55 or older in the year you separate or retire, the 10 percent early withdrawal penalty tax does not apply.” Does this apply to deferred retirements, as well?

A. There is no such thing as “deferred retirement.” You’ll be separating from service and then claiming a deferred annuity. It’s the separation date that counts for the early withdrawal penalty.

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‘Financial services companies’

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Q. I am a 60-year-old FERS employee and have decided to retire in March. With $250,000 in my Thrift Savings Plan, I am being courted by insurance companies to buy into their annuities. I can see some benefit but am worried that the administrative fees will take too much of my money. How can I overcome these anxieties?

A. If history has taught us anything, it’s that these “financial services” companies don’t care about you and your interests. They care about profits, which always come at their customers’ expense. They’ll do and say anything they think they can get away with to confiscate your money. They are your adversaries, not your allies. I know because I used to work for one.

I can’t think of a time when buying a deferred annuity contract is a smart move, and I can’t think of a worse time than now to buy a fixed annuity contract. Caveat emptor.

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Resignation and matching funds

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Q. If I resign at age 51 with 25 years of service, will I lose the government matching funds that went into my Thrift Savings Plan? Will I be able to receive a deferred annuity at age 62? What would that be — 25 percent of high-3?

A. Mike: Agency matching contributions are not subject to a vesting requirement and are not forfeited at termination.

Reg: Because you have at least 20 years of service, you could apply for a deferred annuity at age 60. Since each year of service would be worth 1 percent, with 25 years, your annuity would be 25 percent of the high-3 you had on the day you left government.

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Q. I spent 22 years with the Postal Service and quit in 2010 to take another career. I was under FERS. Do I get a pension from the Postal Service, or is that what the Thrift Savings Plan is? And can I collect it at 55?

A. Mike: If you left FERS service before the calendar year in which you reach age 55, you will be subject to the early withdrawal penalty rules.

Reg: If you didn’t take a refund of your retirement contributions when you left, you can apply to the Office of Personnel Management for a deferred annuity at age 60.

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Directed reassignment

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Q. I am 46 with 22 years of service, and have been told that I will soon receive a letter of directed reassignment to a job in my same grade far outside my commuting area. When the letter arrives, if I should decline to move to the new position, what are my options for drawing retirement? How about insurance? Severance pay? What about my 401(k) in the Thrift Savings Plan? My performance ratings are not an issue.

A. Mike: Your circumstances will not affect the usual rules that apply to your TSP account. As long as you remain employed, you will be subject to the in-service withdrawal rules described at If you separate from service, the rules described at will apply. If you separate from service before the calendar year in which you reach age 55, you will be subject to the Internal Revenue Service’s early withdrawal penalty unless you meet one of the exceptions specified on Page 7 of the notice at

Reg: Because you wouldn’t meet the age and service requirements to retire, you’d only have one option. If you didn’t take a refund of your retirement contributions, you could apply for a deferred annuity at age 60.

You would be entitled to severance pay only if you lost your job through no fault of your own. However, if you were to resign or decline a reasonable offer, you wouldn’t. A reasonable offer is defined as one that is in the same agency, in the same commuting area, of the same tenure and work schedule, and not more than two grades or pay levels below your current position. Note: If you are covered by a mobility agreement, the reasonable offer exception wouldn’t apply.

You would be given a month of free Federal Employees Group Life Insurance and Federal Employees Health Benefits insurance coverage. At the end of that period, you could elect private life insurance coverage at your own expense. You could also elect to continue your health insurance coverage for up to 18 months under the temporary continuation of coverage provision. For that coverage you would pay 100 percent of the premiums, plus 2 percent for administrative expenses.

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Purchasing private annuities

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Q. I am really confused about the purchase of private annuities and when that is a good idea.

I am a FERS employee who just turned 59½. I plan on working for another eight to 10 years, as I only have 12 years of service. My Thrift Savings Plan fund is around $92,000.

Last year, my financial adviser, whom I met when his firm conducted a retirement seminar at the Atlanta Federal Center, suggested that I sell most of the securities in my private brokerage account and buy a fixed index deferred annuity from Midland National to avoid losses in the stock market and reduce tax liability. I agreed to do this and moved $47,000 of my private account into a fixed index annuity with a 5 percent premium bonus. I have to admit that I really did not understand exactly what I was purchasing. I am wondering if I made a mistake by moving money out of the market and into this kind of annuity? My reason was that I lost a lot of money from 2000 to 2002 and did not want to see that happen again.

Now that I am 59½, he wants me to take the one-time disbursement from my TSP and purchase a different fixed index deferred annuity with a 3 percent premium bonus. He says this would limit any losses from the TSP funds, and I would then start to rebuild my TSP from scratch for the next 10 years. From the answers I had read, I gather that you do not think taking money out of the TSP is a good choice.

I am really confused about annuities and now wonder if I am getting the best advice. I like the fact that they know federal benefits and can advise how everything works, which I find very confusing. The firm describes itself as a “registered investment adviser firm.” Is this who I should be working with? I am concerned about a conflict of interest?

A. You’re not getting advice, you’re getting a sales pitch from someone who is being paid big commissions for the sale of annuities. Unfortunately, the investment advice business is poorly regulated. Anyone can call themselves an “adviser.” A Registered Investment Adviser (RIA) is someone who is licensed to take a fee for advice directly from a client. This license does not permit them to accept payments, like commissions, from a third party. Unfortunately, an RIA may also be licensed as in insurance agent and/or a representative of a securities broker/dealer, and they frequently are. I can’t say whether the move you made was good or bad without knowing a lot more about you, your goals and your circumstances. You should not have trusted a commissioned agent or broker to advise you, however, and the move was more likely harmful than beneficial. If you engaged the individual or firm in their capacity as an RIA and paid them fees for this service, you probably have a claim against them for compromising your interests to further their own. An RIA has a fiduciary obligation to you, which this kind of self-serving “advice” may have breached. An agent or registered rep is not held to this same standard of care, however, and is actually expected take advantage of you to earn a commission!

The most important advice I can give any investor is that they NEVER TAKE ADVICE FROM SOMEONE WITH WHOM THEY HAVE A MATERIAL CONFLICT OF INTEREST!

Find an adviser without conflict and who knows the federal benefits system. You’ll have to pay for the advice, but in the long run, it should be a lot cheaper.

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Transferring to a variable or fixed annuity

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Q. What would be the advantage or disadvantage to a retiree of transferring their TSP to a variable and/or fixed annuity? What are the issues to look for, if any?

A. The main disadvantage of variable and deferred annuities is their high cost. The main disadvantage of a fixed immediate annuity, in the current environment, is a low payout rate. I don’t know a universal advantage to a variable or deferred annuity. The advantage of an immediate fixed annuity is guaranteed income for life.

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Rolling over deferred compensation pretax fund

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Q. I have a State of Kansas deferred compensation 457(b) pretax fund from when I worked for the state. Can I roll this into the Thrift Savings Plan without tax consequences?  If so, how do I go about the process?  If I have to receive a check from the fund directly — not made out to me — I believe I have 60 days in which to get it into another fund.

A. If it contains only pretax money, you may transfer it to the TSP. Use Form TSP-60 and follow the instructions.

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Deferred annuity

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Q: I plan on taking a deferred retirement at age 54 with 32 years of federal service in May 2012. I have been in the Federal Employees Health Benefits program since 1985. My wife plans taking a job in the federal government prior to me taking the deferred retirement. When she is hired, the plan is for me to transfer to her FEHB.

When I reach age 56 in May 2014, how will the deferred retirement impact the three parts of the Federal Employees Retirement System (basic retirement with high-3, etc.; supplement, which should be 32/40 x what I receive in Social Security at age 62; and Thrift Savings Plan), as well as my FEHB and my sick-leave reimbursement (current projection at 1,400 hours)?

A: Your deferred annuity will have no direct effect on your TSP account. Because you will have separated from service before the year in which you reach age 55, you will be subject to early withdrawal penalty rules until you reach age 59 1/2. You could avoid this restriction if wait to separate until Jan. 1, 2013.

(Read more about this question on the Federal Times Ask The Experts: Federal Retirement blog.)

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