Ask The Experts: Money Matters

By Mike Miles

Roth TSP

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Q. Should I put some or all my TSP money into a Roth TSP? I’m almost 30, make around $59,000 a year and want to make aggressive choices so my money can grow. What should I do?

A. The answer depends entirely upon your predictions about your future income tax rates.

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Yearly TSP withdrawals?

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Q. I am 56 years old and plan on retiring in October with 35 years of service. I am a civil service employee. Can I make yearly withdrawals from my Thrift Savings Plan with only taxes to pay on it? Or would I be better off taking all of it out and putting it into a bank account? I will need it for the next three years to make my house payment?

A. You may not make yearly withdrawals from your TSP, but you could move your money into the G Fund and then set up monthly payments that are large enough to meet your expected needs. You may change the amount of the payments once each year, in January, and you will not owe early withdrawal penalties on the distributions — only income taxes.

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Postal disability retirement

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Q. I am a 55-year-old postal worker of 27 years who has a work-related medical problem. Last year, I was let go on “no work available status” and have been on workers’ compensation since. I have applied for postal disability and am waiting to see what happens with that. So far, I’ve received no letter of separation nor postal job offer. Will I be able to access my Thrift Savings Plan without penalty if I become separated from the Postal Service and am granted disability retirement?

A. The answer depends upon your specific circumstances. If you separate from service during the calendar year in which you reach age 55 or are totally and permanently disabled, you will be exempt from the early withdrawal penalty. Or, you may avoid the penalty by taking a series of Substantially Equal Periodic Payments.

The details are explained in the notice available at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf

Following is an excerpt from that notice:

If you receive a TSP distribution before you reach age 59½, in addition to the regular income tax, you may have to pay an early withdrawal penalty tax equal to 10 percent of any taxable portion of the distribution not transferred or rolled over. The additional 10 percent tax generally does not apply to payments that are:

* Paid after you separate from service during or after the year you reach age 55;

* Annuity payments;

* Automatic enrollment refunds;

* Made as a result of total and permanent disability;

* Made because of death;

* Made from a beneficiary participant account;

* Made in a year you have deductible medical expenses that exceed 7.5 percent of your adjusted gross income;

* Ordered by a domestic relations court; or

* Paid as substantially equal payments over your life expectancy.

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TSP withdrawals and tax brackets

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Q. I am currently a GS-9, Step 1. So let’s say that when I retire, I would be a GS-15. How will my Thrift Savings Plan withdrawals be affected by the tax bracket based on my current 15 percent and, let’s say, 28 percent.

A. Your TSP withdrawals will not be affected by your tax bracket. Your tax bracket may be affected by your TSP withdrawals, however. When you withdraw money from TSP, the amount withdrawn during the year is added to your gross income for that year. It is considered ordinary income. If you withdraw enough money to increase your total income to the point where it puts you in a higher tax rate bracket, you will pay a higher marginal income tax rate on the money that is in the higher bracket. This is not a tax education forum, so I’m not going to start running through hypothetical examples. If you don’t understand what I’m talking about, I suggest that you visit a tax preparer to help you with your return.

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Double-taxed on CSRS payback?

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Q. I am under Civil Service Retirement System Offset. When I took the break in service, I withdrew my CSRS funds (about $50,000; probably $60,000 or more by now). That was in 1998, so I will have to redeposit if I want it to count toward my retirement. I will be 58 next month and am considering retiring in 2013. I have been putting $600 in my Thrift Savings Plan account every payday. I can withdraw money at 59½ and not pay penalties, but it seems like I will be double-taxed. When I withdraw the money from my TSP to pay back the CSRS account, I will have to pay income tax. Then I will be taxed again when I receive my retirement check. 

My TSP is the single largest amount of money that I have access to even though I have another 401(k). I understand from another post on your website that I can’t roll over the funds in my TSP to pay back my CSRS withdrawal avoiding taxes. Is there a better way to do this to eliminate some of the tax expense?  I talked to a financial planner but really didn’t seem to get any guidance other than to save some money, which is what I thought the TSP was doing.

A. You could consider a TSP loan if you could pay all or most of it back before you retire. Otherwise, if you want to use TSP money to make the redeposit, you’ll have to pay the tax. You won’t be double-taxed, however, since the return of your CSRS contributions is prorated over your life expectancy and a part of each payment is exempt from taxation until all of your contributions have been returned to you.

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Taxes, penalties for cashing in TSP

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Q: I plan to retire at the end of December 2009, and am thinking about cashing in some or all of my Thrift Savings Plan in 2010. I am on the Federal Employees Retirement System and I turned 62 this year. How much will I be penalized by TSP? I know I will pay income taxes on it in 2010, but I am wondering if I’ll get penalized, as well.

A: You’ll pay taxes, but no penalties.

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