Ask The Experts: Money Matters

By Mike Miles

Traditional TSP vs. Roth TSP

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Q. Could you please explain the difference between the traditional Thrift Savings Plan and Roth TSP? I was told that the traditional TSP is taxed when you begin withdrawing it at retirement. And that only the government’s contribution to your retirement (let’s say they matched my 5 percent) is the only portion that is taxable when withdrawn; my contribution is not taxed at withdrawal. Is this correct?

A. Basically, you fund the Traditional TSP with pretax deferrals from your paycheck and pay tax on money as it is distributed to you later. You fund the Roth TSP with post-tax deferrals from your paycheck and pay no tax on money as it is distributed to you later. Every dollar you withdraw from the Traditional TSP will be taxed as ordinary income. There are other differences to consider, as well, and you should review the information available at www.tsp.gov to gain a better understanding.

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TSP withdrawal

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Q. I am a CSRS Postal Service employee and plan to retire at the end of 2014, when I will be 55 years old with 38 years of service (including sick leave). After reading other answers, I understand that I can immediately withdraw funds from my Thrift Savings Plan without penalty but would like advice regarding those withdrawals. Considering that TSP withdrawals are subject to regular income taxation, is it beneficial to move the funds to an IRA? Would I avoid any tax? Other than future growth potential and smaller tax rate, is there any benefit to delaying withdrawals until later in life?

A. You may roll over your TSP withdrawals that are not required to an IRA and continue to defer the tax to a later time. I can’t tell you whether this will be beneficial since I don’t know enough about you and your circumstances to make that determination. Better investment performance and tax management are the only reasons I can think of for delaying your TSP withdrawals. What more reason do you need?

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RMD

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Q. If I have Thrift Savings Plan funds in both G and C funds when I am required to begin taking required minimum distributions at age 70½, can I specify which funds the RMD are taken from? (My concern is that the C Fund may be at a low due to market conditions, and withdrawals may be better to defer till the market improves.)

A. TSP distributions are always taken proportionately from your various holdings at the time. I don’t see the rationale for your concern, though. Your account will be allocated exactly as it was before the withdrawal. If you don’t like the allocation, you can rebalance it. Alternately, you could invest the proceeds from the withdrawal in the equivalent of the C Fund in a discount brokerage account and be right back where you started.

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Retirement date’s effect on TSP and catch-up contributions

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Q. I’m 59 and retiring June 2, which is the first day of a new pay period. Will my Thrift Savings Plan election and catch-up contribution be deducted from my last paycheck? I will have earned no salary in that pay period, but I will have my lump-sum annual leave payout.

A. TSP deferrals are not taken from annual leave payout checks.

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Contribution limits for partial years

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Q. My husband will be retiring in June 2014. He will turn 50 in March 2014. Can we still contribute the full $17,500 plus $5,500 catch-up (I realize next year contribution limits may increase) even if he is only in for half a year?

A. Yes, as long as his pay will support the deferrals. The limits are not adjusted for partial years.

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TSP loan

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Q. I recently took out a $40,000 Thrift Savings Plan loan so I could refinance my house. I had a first 4.875 percent and a second 8.5 percent. This lowered my monthly house payment by $1,000. I am paying it back over five years at $309 per payment. Would it be better to lower the amount I contribute from 10 percent to 5 percent and put that amount toward the loan? I did a quick calculation, and the taxes would be an additional $1,250 a year (approximately) since I would lose the pretax exclusion on the $5,000.

A. I think I’d stick with the loan repayment and maximum TSP deferrals.

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Pay off refinanced mortgage or max out Roth TSP?

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Q. I’m a 45-year-old reservist who has been recalled to active duty. I’m also an E-6 with more than 18 years of service.

I can afford to invest my entire pay, including incentive pays, and wondered if it would be better to pay off an existing mortgage, approximately $60,000, just refinanced last month at 3.5 percent and a 15-year term? Or would it be better to max out the Roth TSP and set up another deferred account or IRA of some sort?

My wife makes about $55,000 per year.

A. It’s impossible to say what’s best for you without the proper analysis and understanding of your particular goals, resources and constraints. In general, however, I prefer to see you retain the mortgage and invest the money prudently instead of using it to pay off the mortgage.

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Deferral limitations

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Q. The Internal Revenue Service deferral limitation for 401(k) accounts is based upon a dollar limitation, which is the same for government and service members who contribute to the Thrift Savings Plan. For federal employees wanting to maximize their TSP contributions, this is a simple process on Form TSP-1: You merely take the current IRS limit ($17,000) and divide it by the number of pay periods (26) and you get the amount you should withhold in each pay period ($653.84). If you receive a step increase, or get promoted, or anything else that changes your pay, there are no effects to your present TSP contributions. The only time you need to adjust the forgoing is if the IRS increases the 401(k) limit and you wish to match that limit.

Service members must use a different TSP Form (TSP Form U-1), which only permits them to allocate a percentage of their basic pay (and other special pays if one receives them) toward their TSP account. This isn’t a terribly difficult calculation to generate the right percentage to maximize your TSP contribution, but the problem is that active-duty members have to readjust this percentage every time they get promoted or their basic pay changes. Getting promoted isn’t something that happens too often for officers, but Congress adjusts the basic pay every year (lately in a way that rightfully benefits the troops). Plus, every two years all service members get a longevity bump in their basic pay, too.

This is a huge waste of time for service members that seems like such an easy fix: Just change the Form TSP-U-1 to permit dollars and percentages. Yet I’ve been unable to glean anything from the TSP website or elsewhere on the Internet as to why this is not being changed.

Can you please explain why the TSP and/or Defense Department wastes our time like this?

Full Disclosure:  My wife is on active duty, but, as the family CFO, I end up redoing the TSP-U-1 every year.

A. I can’t tell you why the rules are what they are. This is a question for the Retirement Thrift Investment Board (www.frtib.gov).

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Increase to TSP maximum contribution

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Q. Have you heard anything regarding an increase to the maximum Thrift Savings Plan annual contribution ($17,000)?

A. You should expect the TSP deferral limit to track the 401(k) deferral limit, which is indexed to inflation with a $500 minimum increase. Any increase for 2013 won’t be announced until later this year, usually in October.

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Tax consequences of lump sum

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Q. My husband retired from 36 years of federal service on June 2.  He is in CSRS. We hope he will begin receiving his check within a month or two. Given that he retired halfway through the year, and given that his initial checks will be only 60 percent to 70 percent of what is due, we anticipate that he could get the money owed for those first months in a lump sum in the next tax year. This could be a sizable sum and could have significant tax consequences. It also makes it hard to plan for the correct amount of withholding for this year.  I was told that there is a rule that when he gets that lump sum, if it is over $5,000, he can put it in his Thrift Savings Plan account. Is that correct? If so, what paperwork do we need to file?

A. I know of no such rule. Annuity income is not eligible to be deferred into the TSP.

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