By Mike Miles
October 16th, 2013 | Uncategorized
Q. As a current furloughed government employee, can I withdraw money from my IRA and not be taxed the additional 10 percent under the exception: being unemployed and paying for health insurance premiums?
A. From IRS Publication 590:
Even if you are under age 59½, you may not have to pay the 10 percent additional tax on distributions during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply:
* You lost your job.
* You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job.
* You receive the distributions during either the year you received the unemployment compensation or the following year.
* You receive the distributions no later than 60 days after you have been re-employed.
October 3rd, 2013 | Uncategorized
Q. I recently lost my job and withdrew my entire Thrift Savings Plan savings. I know that there is a 20 percent penalty for early withdrawal that they took out. Also, another 10 percent penalty that they hit you with at the end of the tax year. Is there any way I can lessen the blow? Are there any exemptions that I could put that money to, such as paying of my son’s college loans, home improvement or repairs?
A. The 20 percent taken from the distribution was withholding against your federal tax liability for the year of the withdrawal. The 10 percent early withdrawal penalty, if applicable, will be calculated and due when you file your tax return for the year. The exceptions to the early withdrawal penalty are listed in the left-hand column on Page 7 of this notice: https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.
September 30th, 2013 | Uncategorized
Q. My husband is retiring from the Postal Service on Nov. 1. We have $850,000 in tax-free municipal funds (all AAA rated and paying over 5 percent), and another $200,000 in natural gas and oil limited partnerships and some preferred stocks in energy companies that I recently inherited. I would like to live on the interest from these investments, leaving the principal alone.
My husband is 62 and we want to wait until he is 66 to receive his Social Security payments. (Waiting until 70 is out of the question as both parents were stricken with Alzheimer’s disease at an early age. Mother at 70 and father at 75.)
My husband has a Thrift Savings Plan account with a balance of $91,000. I am concerned that the interest and dividends coming in from the inheritance have not had time to accrue enough interest for us to live on and would like your advice on how to distribute his TSP for the first few years.
I am disabled and am receiving a monthly check for $1,477. If my husband takes Social Security now, his monthly payments would be $1,588. Also, my husband will receive a monthly retirement check from the Postal Service for $850 — just enough to cover our health and life insurance and his long-term care insurance.
Can you give me some advice on the best way to get my TSP to pay out a larger sum in the first three years so I can protect the principal of my inheritance? Should we start now collecting his Social Security now?
A. It is not possible to determine the answers to your questions, which are complex and interdependent, without the proper understanding, analysis and consideration. There are no simple answers. Your questions are beyond the scope of a forum like this and will require comprehensive financial analysis to answer.
September 30th, 2013 | Uncategorized
Q. I am a federal law enforcement officer. I recently read an article that discussed the downside of the Roth TSP for federal law enforcement officers and firefighters. Is this true?
Many of you are probably unaware of the serious pitfalls you will encounter if you opt to contribute to the Roth TSP. For a federal law enforcement officer or firefighter, the Roth TSP is a poor choice. It wasn’t until this week that a reader posed a question to me that caused me to realize what a bad idea the Roth TSP is for many of us.
The idea behind the Roth TSP is that you contribute after-tax monies and when you withdraw funds from the account in retirement, the earnings are tax-free. The trick here is that the withdrawal must be a “qualified withdrawal” for the earnings to be tax-free. In order for the withdrawal to be considered a “qualified withdrawal” by the IRS, “five years must have passed since January 1 of the calendar year when you made your first Roth TSP contribution AND you are at least 59½, permanently disabled (or deceased).”
Here’s the problem: As a law enforcement officer or firefighter, you can retire as early as 50 years of age and are mandatorily retired at age 57. If you decide to take post-retirement withdrawals from the TSP (under the life expectancy option or the age 55 exemption), you will not meet the age test for the Roth TSP withdrawal to be considered “qualified.” (You may also not meet the five-year rule as the Roth TSP has only been an option since May 2012.) Since your withdrawal is not “qualified,” you will be taxed on the portion of your withdrawal that represents the attributable earnings. This eliminates the tax-advantaged nature of the Roth TSP. You’d be just as well off having a regular post-tax investment account outside of the TSP. You’re contributing after-tax dollars and paying taxes on the earnings generated by the post-tax investment.
The TSP will not allow you to specify that your post-retirement withdrawals come only from your traditional TSP balance, nor will the TSP allow you to roll over/transfer out only the Roth TSP portion of your account. When you make any withdrawal from the TSP, the withdrawn amount will be taken ratably from both your traditional and Roth balances under TSP rules.
If you roll over/transfer both your traditional TSP and Roth TSP to another custodian, then you lose your eligibility under the age 55 exemption, as that requires the funds to be left in your employer-sponsored account. If you retire between age 50 and 59½, at retirement, you could roll over/transfer your traditional TSP and Roth TSP to another custodian and withdraw only the funds that came from the Traditional TSP account using an IRS Section 72(t) withdrawal plan and wait until age 59½ to start to withdraw the portion that came from the Roth TSP funds.
Please consider these facts when deciding if the Roth TSP is right for you. If you already jumped into the Roth TSP, you can always stop and change your contributions to be 100 percent traditional TSP and limit the tax damage.
Even folks who aren’t covered under the special provisions get affected by these rules if they retire at their MRA.
A. The issue you raise is valid. You can get around it by transferring the Roth portion of a distribution to a Roth IRA. I realize this isn’t ideal, but it is an option to avoid the penalty.
September 23rd, 2013 | Uncategorized
Q. After entering retirement from CSRS, are Thrift Savings Plan funds withdrawn classified as income in addition to the 20 percent accessed at the time of withdrawal from the TSP account. Are there ways to avoid double taxation if they are taxed twice other than rolling over into an IRA or Roth IRA?
A. The traditional TSP funds you withdraw are classified as ordinary income on your tax return. They are not subject to double taxation. The 20 percent withheld from your payment(s) is a deposit against your tax liability. If the distribution is not a required minimum distribution and you meet the timing limits, you may roll your distribution over to an IRA to avoid current taxation.
September 18th, 2013 | Uncategorized
Q. I have to retire in 18 months. I plan on taking a lump sum and monthly allotment from my Thrift Savings Plan at retirement. I understand both of these will be taxed at 20 percent. I am thinking of taking a TSP loan for the amount I had planned on requesting as my lump sum prior to my retirement date, with the understanding that I won’t have the time to pay it back in full and that the amount I don’t pay back will be considered disbursed income. My reasoning is that having the funds now will allow me to begin the process to purchase my retirement home, and allow me to at least pay a portion of the loan back. Is there a downside to this plan?
A. You should consult your tax preparer for testing and advice about the potential impact on your tax returns. The only general implications of this strategy that come to mind are:
1. If the distribution is declared before the calendar year in which you reach age 55, it will be subject to the early withdrawal penalty and
2. There will be no tax withholding in the case of a declared distribution.
September 18th, 2013 | Uncategorized
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.
August 9th, 2013 | Uncategorized
Q. 1. I am retired at 52. If I take a life expectancy withdrawal through the Thrift Savings Plan from now until I reach 59½, can I then roll over the balance of my account to a privately held traditional TSP such as Vanguard? Or does taking the life expectancy withdrawal through the TSP commit me to them for life?
2. If I receive life expectancy withdrawals now through the TSP, can I still take a partial withdrawal (amount of my choosing) when I am 59½ without the 10 percent penalty?
3. If I roll over my entire TSP account now to a privately held traditional TSP such as Vanguard and establish a 72(t) withdrawal arrangement using 120 percent of the applicable federal rate, does the yearly/monthly amount change each year if the AFR changes or will I receive the exact amount every year/month until I reach age 59½ (at which time I can change to equal monthly payments)?
A. If you want to avoid the early withdrawal penalty using the 72(t) rules, you’ll need to continue the calculated distributions for 10 years, or until you reach age 59½, whichever is longer. Moving the money from one custodian to another has no effect on the distribution requirement. During the required distribution period under 72(t), you may not take any more or less than the calculated annual distribution without violating the rules and invoking the penalty. Once you have committed to a fixed distribution scheme under 72(t), it must continue, unchanged for the entire distribution period, which in your case will be 10 years.
June 24th, 2013 | Uncategorized
Q. Are federal taxes taken out of the lump-sum payment for annual leave? And If I withdraw all of my Thrift Savings Plan upon retirement, will the tax be taken out before I receive the payment?
A. Mike: A lump-sum distribution from your TSP will be subject to 20 percent minimum federal tax withholding.
Reg: Yes, federal taxes will be taken out of your lump-sum payment for unused annual leave.
June 17th, 2013 | Uncategorized
Q. I have selected a retirement date of June 28, 2014. I will be 59½ years old with 33½ years of government service. I have been FERS my whole career. I have $365,000 in my Thrift Savings Plan. I will retire with a high-3 at GS-13, Step 4 and a 16.51 percent locality pay. I am debating paying off my mortgage on my retirement home by taking a partial withdrawal from my TSP.
The reasons for this are:
1) Escrow of property taxes
2) Flood insurance imposed by Dodd-Frank
3) Desire to be mortgage-free in retirement.
I owe $185,000 on my mortgage. I am single and will have no other debt once I retire. Does this make sense? What are the tax liability consequences if I pay off the mortgage in July 2014?
My TSP distribution is 50 percent C Fund, 25 percent L2020, 15 percent S Fund, and 10 percent G Fund. I am only able to fund my TSP at 5 percent to take advantage of matching funds. Would you recommend a more conservative distribution at this point in my career or continue with this risk model that I have been comfortable with for several years?
I have enclosed my most recent annuity estimates from my human resources center.
Also, if I were to marry after retirement what is the policy for covering my future spouse on my Federal Employees Health Benefits? If I choose a survivor benefit for my future spouse, is it possible to change from a self-only pension to one with survivor benefits?
A. You’re asking for personal financial decision support, which I can’t provide without an engagement agreement and some analytic work. If you’d like to consider hiring me to do the work necessary to answer your questions about using the TSP to pay off your mortgage and how you should invest your TSP to support your goals, visit www.variplan.com.