By Mike Miles
TSP and annuities
May 13th, 2013 | Uncategorized
Q. I have been a federal employee for 27 years, just long enough to have been one of the first forced into FERS. About seven years ago, I looked at my Thrift Savings Plan statement and learned that the prediction was that if I retired at age 62 and bought an annuity, I would have a pretty good monthly salary. Now, I notice that the prediction is that if I use my TSP savings, with about the same amount predicted for me at age 62, to buy a monthly annuity, that annuity will be about one-third of what was predicted seven years ago. Not a very good deal now.
My belief is that the years of low interest rates are responsible for the change in what the same amount of money will buy now. I wonder if that is true. I also wonder if these annuity companies that agreed to pay the larger amounts when they signed people up seven or more years ago are going to have to have massive bailouts by the federal government if interest rates continue to remain where they are. Finally, if I retire soon, I will not want to buy an annuity at that time, but if interest rates go up in five years, how much more attractive are monthly annuities going to be? If the interest rates go back to where they were 10 years ago, will the price of annuities go back to where they were, or have annuity companies learned a lesson and are likely to be more conservative in pricing?
This also might be a good topic for one of your columns for other FERS feds who have to decide about using some of their savings to buy annuities.
A. I have written columns about the pros and cons of using your savings to buy an annuity, and about the dangers of using the calculators provided by the TSP. You’re a witness to the problems. There was never a promise by the insurance company to provide a certain payout for a future annuity purchase. The payout is always calculated at the time of purchase. Annuity payouts are dependent upon the prevailing interest rates at the time of purchase, and those rates are now at historic lows. Same with the payout rate. If interest rates increase in the future, the payout you will be offered should also increase. In addition, as you age, the payout will go up since the number of payments the insurer expects to make will decrease.
Tags: annuity, FERS, interest, retirement, TSP
TSP allocation
May 13th, 2013 | Uncategorized
Q. I’m 25 years old, series 1811 and have been contributing 5 percent into the Thrift Savings Plan (FERS) for three years. Until last week, I was contributing 100 percent into the L2040 fund, but now I’m doing 65 percent into the S Fund and 35 percent into the I Fund. Since I still have about 32 years until mandatory retirement, do you think I am making the right TSP choices now, and do you have any recommendations?
A. Your allocation is risk-inefficient. You could reconfigure it to deliver similar expected growth with much less volatility. If you don’t know how to do that, then I suggest that you go back to using the L funds.
Tags: allocation, FERS, I Fund, L Fund, mandatory retirement, S Fund, TSP
Switching to CSRS offset under FERCCA
May 9th, 2013 | Uncategorized
Q. I was recently informed that I fell under the Federal Erroneous Retirement Coverage Corrections Act and had an option to select CSRS Offset. I was also told that the 1 percent and matching in my Thrift Savings Plan would be removed if I selected CSRS Offset. My human resources office told me that it would be the exact amount that was put into my TSP. If it made money, I would be able to keep the difference; if it lost money, I would have to make up the difference. So I selected CSRS Offset. Now they are beginning to remove the 1 percent by pay period, but they are removing the amount plus interest. I also have a colleague who was told the same, but they are only removing the actual amount and not interest. What are they supposed to be removing from the TSP if you switch from FERS to CSRS Offset under FERCCA?
A. It’s not that simple. In fact, the FERCCA rules for this are pretty complex. The answer depends upon your particular circumstances.
Re-employment and TSP payments
May 9th, 2013 | Uncategorized
Q. If I start taking my retirement now at 62 — FERS, Thrift Savings Plan payments and Social Security — and end up being picked back up at some point in federal service: I understand my FERS benefits would be cut by the amount I make in a new job. What about TSP payments? Are they exempt from penalties of re-employment?
A. If you are rehired, your automatic monthly payments will stop and you will be subject to the in-service withdrawal rules.
Tags: age, FERS, in-service withdrawal, monthly, penalty, rehire, Social Security, TSP
CSRS annuity payments treated as rollover
May 9th, 2013 | Uncategorized
Q. Based on a reading of Internal Revenue Service Publication 721, it appears to say that since the CSRS and FERS retirement systems are considered “eligible retirement plans” you could roll over a distribution (including a regular annuity payment) into another IRA and defer the taxes, or into a Roth IRA and pay the taxes immediately. If this is the case, the normal IRS limitation on contributions to IRAs and Roth IRAs are bypassed. Am I reading this correctly?
A. From IRS Publication 721: “Distributions eligible for rollover treatment. If you receive a refund of your CSRS or FERS contributions when you leave government service, you can roll over any interest you receive on the contributions.You cannot roll over any part of your CSRS or FERS annuity payments.”
Tags: annuity, contributions, CSRS, distribution, FERS, IRA, IRS, retirement, rollover, Roth IRA, taxes
Age 55 exemption
April 24th, 2013 | Uncategorized
Q. I have more than 20 years of service as a federal law enforcement officer and will turn 55 in 2014. I plan to retire under FERS from my agency this year, before my age 55, and immediately (with no break in service) become re-employed on a full-time basis with another federal agency. I understand that my salary during the period of re-employment will be offset by the amount of my FERS annuity, and that retirement deductions (including Thrift Savings Plan contributions) will be made from my re-employment salary. I understand further that I would earn a supplemental annuity upon termination of re-employment if I am re-employed for more than a year, and that I could alternatively elect a redetermined annuity if I am re-employed for at least five years.
However, if my re-employment terminates before I reach age 59½ (but well after 55), and I wish to make withdrawals from my TSP account at that time, how will the Internal Revenue Service calculate my “separation from service” date? That is, will the IRS consider that I “retired” in 2013, prior to age 55, and thus apply the 10 percent penalty for early TSP withdrawals? (That would effectively force me to lock myself into the life expectancy withdrawal option for a full five years after the termination of my re-employment period.) Or, would the IRS determine that I “retired” on the date of the termination of my period of re-employment – after age 55 – enabling me to withdraw from my TSP account penalty-free?
A. To the best of my knowledge, your TSP account, if it is kept going through the transition in federal employment, will be eligible, in its entirety, for penalty-free withdrawal under the “age 55 exemption.” But, you should consult a qualified tax accountant before you make any plans.
Tags: age, annuity, contributions, early withdrawal penalty, FERS, IRS, law enforcement, TSP
Using TSP money for military buyback
April 22nd, 2013 | Uncategorized
Q. I am making payments to buy back my military deposit, and I will also be making a redeposit of FERS funds. Can I transfer funds from the Thrift Savings Plan to military buyback and FERS? After all, these are both accounts for retirement and not money I’d be using now.
A. This is not allowed since your TSP money is pretax and your deposits must be made with post-tax money.
Tags: FERS, military buyback, taxes, transfer, TSP
Social Security and tax deductions from annuity and TSP
April 22nd, 2013 | Uncategorized
Q. When I retire, I will be 59½ and will have 30 years of service at the Postal Service. I will not have any earned income from that point on. I understand federal and state taxes will be taken out of my FERS annuity and any money I take out of my Thrift Savings Plan. Will I also have Social Security deducted from these two sources? Also, will my special retirement supplement and — when I turn 62, my SSI benefit — also be subject to federal and state taxes?
A. Mike: Your TSP withdrawals are subject to income taxation, but no employment taxes, like Social Security, Medicare or unemployment insurance.
Reg: Your special retirement supplement will be treated as ordinary income. To find out to what extent your Social Security will be taxable, see IRS Publication 721.
Tags: age, annuity, deduction, FERS, IRS, Medicare, Postal Service, Social Security, taxes, TSP, withdrawal
TSP and CSRS
April 22nd, 2013 | Uncategorized
Q. When was the Thrift Savings Program added to CSRS? I have CSRS and FERS retirement components. And I don’t recall a TSP for CSRS during the late 1970s and early ’80s.
A. TSP was established by Congress in the Federal Employees’ Retirement System Act of 1986.
RMD at 70 1/2 if still working?
April 9th, 2013 | Uncategorized
Q. I am a FERS employee who will turn 70 in September. I fully expect to be working at 70½. Will I be required to take the minimum withdrawal from my Thrift Savings Plan account if I’m still working?
A. As long as you are still working for the federal government, distributions from your TSP account will not be required.
Tags: 70 1/2, FERS, Required Minimum Distribution, TSP, withdrawal