Ask The Experts: Money Matters

By Mike Miles

Starting TSP withdrawals now vs. at 70 1/2

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Q. I retired under FERS two years ago, and I haven’t needed to touch my Thrift Savings Plan account so far. I am receiving Office of Personnel Management, Social Security and military retirements. I am 68½ years old. I just received a 100 percent Veterans Affairs Department disability award, which will change my taxable military retirement to a nontaxable VA retirement. I don’t think this will have any effect on my long-term life expectancy. I have determined that I do not want to elect an annuity on withdrawing from my TSP. I am considering immediately starting a monthly TSP withdrawal based on life expectancy. What are the advantages and disadvantages of starting withdrawals immediately versus waiting until the 70½ mandatory withdrawals? I am a married man, and we declined a survivor benefit plan.

A. Starting withdrawals now will provide you with more income now but will produce a larger taxable income and begin to deplete your account. Waiting will reduce your current taxable income and preserve your account’s value (if you don’t lose it to the markets), but also reduce your current standard of living and increase your taxable income later in life.

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Starting TSP disbursements

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Q. I think I will be retiring Dec. 31, 2015 (under FERS) since my minimum retirement age is 56, and will reach it on Dec. 21, 2015. I will have 31½ years in federal civilian service. Can I start my Thrift Savings Plan monthly allotments right away (I have over $390,000 as a balance as of today) to supplement my 31 percent of salary from FERS retirement and special retirement supplement?

A. Yes, you will be able to begin withdrawing from your TSP account as soon as TSP receives notice from your agency.

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Taxation on transfers

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Q. I am married, 60 years old and a FERS employee. I am not sure when I plan to retire, but I have a Thrift Savings Plan account and other investments. I would like to transfer as much as I can to the TSP account to have the best return. How will I be taxed on the money if it is going from one investment company to my account and then directly into TSP? Will it be taxable income for 2014 even if it was just a transfer?

A. Transfers from a retirement plan account into the TSP are not taxable.

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TSP loan

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Q. I’m planning on retiring this year at age 62 under FERS. I will have an outstanding Thrift Savings Plan loan balance of $16,000 and was not planning on repaying the rest of the balance and was needing to find out if the outstanding balance will be considered income and taxed with my other income for the year at the end of the year, since it will be tagged as taxable distribution?

A. Yes, any loan balance outstanding 90 days after separation will be declared a taxable distribution at that time and reported as ordinary income for that year.

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Depositing post-tax money into TSP

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Q. My wife is a federal employee with 28 years of service and is covered by FERS. She plans on retiring soon, and we have heard that she can take funds (post-tax) and dump them into the Thrift Savings Plan equaling the cumulative difference through the years of what she was unable to put into the TSP. Can you shed any light on this info?

A. You may not ever deposit post-tax money into a TSP account, and, except for Federal Erroneous Retirement Coverage Corrections Act cases, there is no provision to make up past contributions that could have been made but were not.

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Restrictions on TSP withdrawal

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Q. I am 52 (FERS employee with 29 years of service including military buyback) planning on retiring at age 59-60. I have $400,000 in my Thrift Savings Plan account. I’m not sure that I’ll need TSP right away but want to have the option. My coworkers insist I can’t withdraw before 65, but I can’t find anything that indicates such a restriction. Are there any restrictions other than the 59½ rule that would affect me?

A. No.

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Age-based, in-service withdrawal vs. partial withdrawal

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Q. I’m a 32-year FERS employee, 60 years old and about to retire in February 2014. I would like to take out some funds from my Thrift Savings Plan. Should I request an age-based, in-service withdrawal or take a partial withdrawal after I retire?

A. Either will count as your single lifetime partial withdrawal. Will the tax cost for the withdrawal be significantly lower if the money is withdrawn in 2013? If so, you should consider taking the withdrawal now. If not, it will not really matter when you take it in 2014. If you need the money now but would rather have it taxed as 2014 income, you could take a loan now and then fail to repay it after you retire so it will be declared a taxable distribution in 2014.

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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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VERA and TSP

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Q. I have an opportunity to retire under a Voluntary Early Retirement Authority. I have 30+ years of FERS service, non-law enforcement. My age will be 53 years and 11 months if I retire under this VERA offering.

At what age will I have full access to my Thrift Savings Plan without the 10 percent early withdrawal penalty by “taking substantially equal payments over my life expectancy.”

At what age will I have full access to my TSP without the 10 percent early withdrawal penalty by NOT “taking substantially equal payments over my life expectancy.”

If immediately upon retirement I begin collecting TSP funds “paid as substantially equal payments over my life expectancy”:

Do I avoid the 10 percent early withdrawal penalty?

Must I continue this withdrawal option for life, or only until I reach age 55?

Must I continue this withdrawal option for life, or only until I reach age 56, my minimum retirement age?

Must I continue this withdrawal option for life, or only until I reach age 59½?

A. If you retire prior to the calendar year in which you reach age 55, you will not have unrestricted access to your TSP account, without penalty, until you reach age 59½ unless you become totally disabled. This is true whether or not you initiate a Series of Substantially Equal Periodic Payments (SOSEPP) as defined in IRC section 72(t) if you retire prior to the calendar year in which you reach age 55.

If you properly initiate and maintain a SOSEPP, you will avoid the early withdrawal penalty on the SOSEPP withdrawals. The SOSEPP must continue for five years, or until you reach age 59½, whichever is longer. If you disrupt the SOSEPP or otherwise violate the rules for this, the early withdrawal penalty will be assessed on all withdrawals that were protected under the SOSEPP.

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FERCCA

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Q. I retired in 2010 and, at that time, I was informed that I was in the wrong retirement system (FERS). I chose to be put in the proper program (CSRS Offset). I was also told by my human resources manager that, since I was in retirement, I would be able to keep all of my Thrift Savings Plan contributions, including the agency’s matching contributions. On Dec. 3, the agency forfeited about a fourth of the value of my TSP account, without any notification that this was going to happen. Is this a legal action? Why was I not informed with a letter that this was going to happen?

A. I’m not a judge, so I won’t comment on the legality of what has happened, but I have consulted on more than one Federal Erroneous Retirement Coverage Corrections Act case, and this is consistent with my expectation. You would not have been entitled to the FERS employer contributions under CSRS Offset, and so they are typically recaptured when you retroactively switch to CSRS from FERS.

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