Ask The Experts: Money Matters

By Mike Miles

Disability retirement and TSP withdrawal

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Q. I am 56 and had to retire under a disability retirement because of cancer. I am receiving Social Security, and I have 90 percent disability from the Veterans Affairs Department. Can I withdraw from the Thrift Savings Plan without the 10 percent penalty, or do I need to wait until I’m 59? What documentation do I need for taxes? Can you also refer me to the correct tax pubs and pages?

A. The answer will depend upon when you retired and the nature of your disability. See Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf to see if you meet one of the exceptions to the penalty.

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Disability retirement and TSP withdrawal

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Q. I am on federal disability retirement. If I make more than 80 percent of my high-3, I lose my disability retirement. If I withdraw from my Thrift Savings Plan, does it count as earned income, and will it make my disability pension stop?

A. No.

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TSP withdrawals and earned income

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Q. Are TSP lump-sum withdrawals considered earned income for the purposes of the earned income test for FERS disability retirement?

A. TSP withdrawals are not considered earned income.

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TSP withdrawal due to disability

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Q. I’m separated from federal service due to disability. I’m waiting on a federal disability decision. In 2011, I took money out of my Thrift Savings Plan while still employed due to a decline in pay stemming from my disability, and I knew I would be going out under disability. In 2012, I again took a withdrawal because I did not have any income, was waiting on a decision, and was told that the next withdrawal would deplete the account. Unfortunately, I had to take the last withdrawal this week due to lack of income and no decision on the disability filing.

I am not tax-savvy, and I file my own taxes using an online tax preparer. I put disabled not employed, and never claimed the TSP money in any of the cases. Now, the Internal Revenue Service is coming forward asking for me to pay taxes on the 2011 withdrawal. Is there a form I need to submit showing it was due to disability? Do I need to contact the TSP office for the form? As I understood it, if monies was withdrawn for disability, they wouldn’t/shouldn’t be taxed.

A. I suggest that you carefully read the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf. I don’t know of any exception to the tax liability for disability. But as your tax preparer, you are responsible for the contents of your return.

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TSP, IRA and disability

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Q. I am almost 47 years old and have applied for disability retirement from my federal job. I have 27 years of federal service and am covered under FERS. It was my understanding that upon disability retirement, I will not be able to contribute to my Thrift Savings Plan account any longer and the funds would basically sit in TSP until I’m 59½ years old. For that reason, I’m considering rolling over my TSP to a traditional IRA, in which I can then make contributions to until I reach 59½. I’d like to know why leaving the funds with TSP would be better than rolling over to an outside IRA, upon which I can then continue to make contributions? I have six figures in my TSP and have no other retirement accounts. My objective obviously is to continue growing the funds.

A. The TSP has lower expenses and access to the G Fund – two advantages you won’t find anywhere else. The benefit of these advantages is the ability to create a portfolio with better risk-adjusted returns than you’ll find in an IRA.

You don’t need to roll your TSP over to an IRA to contribute to an IRA, however. Open an IRA at a discount broker and make your contributions to it. You can invest in low-cost index funds in the IRA and then, when you’re done contributing, you can transfer your IRA balance into your TSP account. That would be the smarter move.

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TSP withdrawal and terminal illness

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Q. I was approved for disability retirement in November under FERS due to my diagnosis of a malignant, incurable brain cancer (my life expectancy is six to nine months). I withdrew my Thrift Savings Plan in lump sum ($29,000) to pay my medical and living expenses. I am including my TSP distributions in my tax return. If I understand correctly, my TSP money should be added to my earned income (for example, if I earned $50,000 + $29,000 TSP =$79,000 total year of 2012 income) and it will be taxed as ordinary income. Is there any way for a terminally ill person to exclude this TSP amount from my gross income tax return category? Because I am separating from service during or after the calendar year in which I reach age 55, no early withdrawal penalty will apply.

A. I’m not aware of any exception to the tax imposed on TSP withdrawals for a terminal illness. You should consult a CPA in your state for specific tax advice.

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Workers’ comp and in-service withdrawal

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Q. I have a friend who has been receiving workers’ compensation benefits for about 25 years but is not yet separated from service and worked under CSRS. Can he apply to the Office of Personnel Management to receive the monies in TSP in a lump-sum payment without having to retire? Or will he have to apply for disability retirement first?

A. As long as he is employed, the in-service withdrawal rules will apply.

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IRA withdrawal

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Q. I received a disability retirement four years ago. I had 25 years of service and will be 57 years old in February. I have rolled over my Thrift Savings Plan. At what age can I start receiving it?

A. You can withdraw money from an IRA at any time.

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TSP into IRA?

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Q. I have $200,000 in my Thrift Savings Plan and have just been approved for disability retirement from federal service. I’ll be separated from the agency in mid-May. I am 55 years old. I am not sure whether to roll my TSP into an IRA. I don’t want to start withdrawals from my TSP, but I don’t want to pay an investment firm big brokerage fees to manage an IRA. I have no debt but have a daughter in high school for another year. What should I do with my TSP?

A. Keep it and manage it for as long as possible.

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TSP payouts after disability retirement

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Q: I am 53 years old, and I was a U.S. Postal Service employee with 20 years of service under the Federal Employees Retirement System. I took disability retirement from the USPS in March after suffering injuries in Iraq as a reservist. If I take a full withdrawal from my Thrift Savings Plan account, will I pay a penalty to TSP, and at what percentage? How much will I have to pay in taxes? Will the USPS match my TSP balance? And how long must my money stay in a TSP account before I can make a full withdrawal without a penalty?

A: For the rules covering withdrawal taxes and withholding, see the TSP notice here. The TSP does not levy penalties against withdrawals; that’s a matter for the IRS. Whether you may withdraw your funds without penalty will depend upon the way in which you take the withdrawal and the extent of your disability.

While I’m not an expert on USPS-specific benefits, I don’t know why they would double, or otherwise increase, your TSP balance beyond what has already been contributed to your account. Because you are separated from service, your vested TSP balance is available to be withdrawn immediately.

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