Ask The Experts: Money Matters

By Mike Miles

TSP loans and furlough

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Q. I have seen quite a few questions (and answers) about how to request that Thrift Savings Plan loan payments be suspended during the government shutdown, but no detailed information about exactly how to continue to make payments should one want to do that. When during the regular pay cycle should one send in a payment check with the appropriate form? When we go back to work, and if back pay is given, will the loan payments for the entire period of furlough, or perhaps the last pay period only, be taken out? How long of a period of nonpayment may there be before the tax penalties kick in?

A. If you are in nonpay status for reasons other than active military service:

The maximum period that the TSP can suspend loan payments is one year.

If your nonpay period exceeds one year, your loan will be automatically reamortized and you must make payments from your personal funds to avoid being in default.

Interest on your loan accrues while your payments are suspended.

If you want to continue making loan payments while in nonpay status, you can do so by sending a personal check or money order to the TSP. Use Form TSP-26, Loan Payment Coupon, when sending in your payments. Your payments will be taken into account when the loan is reamortized upon your return to pay status.

When you begin your period of nonpay status, you or your agency must submit one of the following forms of documentation to the TSP:

Form TSP-41, Notification to TSP of Nonpay Status; or

Form SF-50, Notification of Personnel Action; or

A letter on agency or service letterhead, signed by an appropriate agency official or your commander or adjutant, that contains your name, date of birth and Social Security number; the beginning date of the nonpay status; and the signature and title of the agency or service representative providing the information; or

A copy of your military orders.

When you return from nonpay status, you must notify the TSP of your date of return. You can use any type of documentation described in the above section. Once your agency notifies the TSP of your return, your loan will be reamortized to place it in good standing.

Note: If your agency reports you as separated from civilian service to perform military service, you will be required to repay your loan in full within 90 days. If you don’t, the outstanding loan balance and any unpaid interest will be reported to the Internal Revenue Service as a taxable distribution.

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IRA distribution

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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.

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Furlough and cashing IRA without penalty

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Q. My husband happens to be one of the 800,000 who got furloughed. I have an IRA of $3,400. Would I be able to cash that in without a penalty to get us by for, say, a month or so, depending on how long the furlough lasts?

A. There is no exception to the early withdrawal penalty for a government furlough. You will be subject to the penalty unless you are age 59½ or meet one of the other exceptions to the penalty described in Internal Revenue Service Publication 590.

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TSP loan and furlough length

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Q. I want to take a loan from my Thrift Savings Plan account to cover my bills during the shutdown.  According to the TSP loan booklet, as long as the furlough last less than 30 days, this is not a problem. If the furlough lasts more than 30 days, the loan becomes a disbursement and is taxed, plus additional penalties assessed (10 percent) by the Internal Revenue Service. Is this true? How can one prepare for a furlough that lasts longer than 30 days?

A. I don’t know where you read this, but it’s not true. If you’re in nonpay status, you are ineligible to initiate a TSP loan, so the question is not applicable. If you have a loan and go into approved nonpay status, you may suspend loan payments for up to one year. After that, your loan will be reamortized and you will have to make loan payments by check to avoid default. See pages 13-15 of the TSP loan booklet at https://www.tsp.gov/PDF/formspubs/tspbk04.pdf for the facts.

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$5,000 windfall

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Q. To preface, I am a twenty-something Defense Department civilian who will be furloughed the 11 days if Congress does not act. In June, I will have a $5,000 windfall from CD at maturity. I wanted to know the best possible option for this money. So far, I thought of fully funding my Roth IRA and saving the rest, adding to my emergency fund savings (which stands at about $25,000), funding my Thrift Savings Plan, or just investing in a taxable account (mutual fund, ETF, etc.) What do you recommend?

A. Your question is like telling me that you’re flying an airplane and need to know which switch you should throw next. If you’re flying the plane, you’re in the best position to judge. If you’re not qualified to fly the plane, then worrying about which switch is best isn’t really the key issue.

The answer to your question depends entirely upon you financial plan and your strategy for achieving your goals. If your cash reserves are too low, then this is the first solution to correct. If you’re carrying expensive debt, this might be the best use for the money. If the money is to be earmarked for retirement savings, then the TSP is the best choice. Whoever is responsible for designing and managing your lifetime financial plan should make the call, since they are responsible for the outcomes produced by the decision.

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Furlough and TSP hardship withdrawal

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Q. I am facing furlough soon. I already have one Thrift Savings Plan loan. Can I withdraw money from my TSP on a hardship withdrawal basis because of the furlough? I realize, if I did, I would have to pay taxes on it, etc.

A. The furlough alone does not qualify you for a hardship withdrawal. To qualify for a financial hardship withdrawal, you must have a financial need for at least one of the following reasons:

* Negative monthly cash flow.

* Medical expenses (including household improvements needed for medical care) that you have not paid and that are not covered by insurance.

* Personal casualty loss(es) that you have not paid and that are not covered by insurance.

* Legal expenses (that you have not yet paid) for separation from your spouse or divorce.

Read the booklet at https://www.tsp.gov/PDF/formspubs/tspbk12.pdf for more details.

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Increasing monthly TSP contributions

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Q. I am a GS-04, Step 10. My account balance as of Dec. 31 would provide me with a lifetime Thrift Savings Plan monthly amount of $451. As of this time, I contribute $300 every pay period to TSP. Let’s say my goal is to have a lifetime TSP monthly amount of $1,000. By how much would I have to increase my TSP amount each pay period? I am 52 years old. I am under FERS. If I was offered an early retirement, should I take it? Or should take the chance of getting furloughed for an uncertain amount of time?

A. Unfortunately, it is impossible to answer your question, since the answer will depend upon a number of factors including the rate of return on your TSP investment between now and the time of you buy your annuity, the sequence of the returns and how they align with your savings contributions, the way you manage your TSP account and the annuity payout rate in effect at the time of purchase. You should consider seeking the help of a trustworthy and cost effective investment adviser.

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TSP contributions

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Q. I have been contributing to the Thrift Savings Plan for a number of years. I am a GS-4. I will have 28 years of federal service in June. In the beginning, I started contributing $10 (twice a year), then $25 (a year). Beginning last May, I started contributing $50 to the TSP out of my paycheck each pay period. At this time, I have no plans on retiring. I was hired under FERS. However, with furloughs, cutbacks and early retirements, should I keep increasing my TSP by $50 each year, or should I increase it by either $75 or $100?

A. You should contribute as much to the TSP as you can afford to commit to retirement savings.

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Would furloughs mean relaxed TSP rules?

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Q: If Congress is slow to approve a raise in the debt ceiling and the government decides to furlough employees in order to pay other loans, what are my options to use Thrift Savings Plan funds to put food on the table? Can I only make early withdrawals that are subject to penalty and tax, or can I get a hardship loan with delayed repayment when my checks start again?

A: Unless an exception is offered, you should assume that you will still be considered “in-service” during the period and will be subject to the in-service withdrawal limitations. This means that you’ll have access through a loan, a hardship withdrawal, or an age-based in-service withdrawal, if qualified.

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