By Mike Miles
October 28th, 2013 | Uncategorized
Q. I retired in 2011 and must start required minimum distributions soon. I understand taxation if the Thrift Savings Plan sends me fixed dollar payments or if TSP pays out based on life expectancy. But what if I have TSP buy an annuity with part of my TSP and I leave the balance in the TSP? How are taxes figured?
A. Your annuity income will be taxable as ordinary income and you will be required to take RMD from the remaining TSP balance, which will also be taxed as ordinary income.
October 22nd, 2013 | Uncategorized
Q. I am almost 58 years old and retired from military/federal service after my 55th birthday. I would like to withdraw my Thrift Savings Plan now, in a lump sum. How much will I have to pay in penalties and taxes?
A. You’ll be subject to 20 percent backup federal withholding, no early withdrawal penalty, and your tax liability will be determined when you file your tax return for the year of the withdrawal. The money you withdraw will be taxed as ordinary income, and the rate will depend upon your particulars.
September 30th, 2013 | Uncategorized
Q. My husband is retired for seven years now and is 67 years old. So far, we haven’t needed to use this money. We are trying to keep our income below $70,000 per year to stay eligible for our state property tax freeze, which is a significant saving of $2,000 or more per year.
1. What percentage or dollar amount are we required to take out each year?
2. Did I read correctly on someone’s question that if we set up a 10-year timetable we do NOT have to pay taxes on that money?
A. The required minimum distribution changes each year based on the account’s closing balance for the previous year and the account owner’s life expectancy. See IRS Publication 590 for the rules and a table of RMD factors for use in calculating the RMD for a given year.
There is no way to avoid the taxable income produced by RMD. That’s the point.
September 23rd, 2013 | Uncategorized
The Thrift Savings Plan’s website, www.tsp.gov, has posted a new income calculator. Well, it’s not entirely new, it’s mostly just remodeled. Now, instead of going directly to the old monthly payment calculator or the annuity payment calculator, you must go through a wizard that automatically runs both and compares the results.
As much as I like the TSP and have endorsed its use, I have to say that I find this effort to be misguided and disappointing. I can’t imagine how the cost-benefit analysis was run to produce a green light for expending participant’s resources on what is an entirely cosmetic, and arguably counterproductive, change.
It’s not evident that there has been any real change to the calculator’s mathematics, I found its presentation of results to be confusing, and the addition of some rather elaborate graphics lends an aura of undeserved sophistication to the output.
That last dig is my biggest problem with this new calculator: The newer, slicker packaging will only make the still unreliable results seem more reliable. To me, it’s a lot like putting candy in a medicine bottle. Some people may be fooled into believing that candy will cure their illness, and ultimately suffer the consequences of their delusion.
The new calculator is really two calculators; a monthly payment calculator and an immediate annuity calculator.
The monthly payment calculator asks you to predict things that aren’t reliably predictable, and then uses simple arithmetic to generate an outcome that appears certain. What it’s really saying is that IF you start with a certain amount of money and IF you live to a certain age and IF you earn a certain return on your money each and every year as you go, you may safely expect a certain stream of income from your TSP account.
The fact is that none of these factors that determine the result produced by the calculator can be known, with certainty, in advance. All of them involve probabilities and the relevant probability analysis for this exercise is beyond the capability of the vast majority of TSP participants, if my direct experience is any indicator.
In addition to the unpredictable nature of the factors used in the calculator, one of the factors you’re asked to predict isn’t directly relevant to the purpose of the calculator. Your account’s average rate of return, when money is being contributed to, or withdrawn from it, is not a reliable indicator of its ending value.
This is an important fact overlooked by many investors. If two investors start with identical balances and take an identical series of withdrawals from their accounts over a period of time, it is impossible to know which investor’s account ended with the larger value if all you know is the average, or compounded rate or return earned by each investor over the period. It is possible that the investor who earned the lower rate of return actually ended the race with greater wealth.
So, in addition to being impossible to accurately predict, asking for the “rate of return” you’ll earn isn’t even the right question to ask.
The annuity calculator is an exception to my complaint if, and only if, you are ready to buy an annuity right away and have the necessary purchase price set aside in the G Fund. Otherwise, like the monthly payment calculator, it requires that you predict the unpredictable.
This calculator is useful when you are ready to retire, or are retired, for calculating the amount of guaranteed income your money can produce. Use this information as the benchmark for comparison when considering the other income options available to you.
If you’re still years from retirement, however, this calculator is also unreliable.
The TSP has protected itself from liability by affixing the following disclaimer to the calculator:
“This calculator is provided for informational purposes only. It is not intended to provide retirement income advice or be used as an investment advisory tool or as a guarantee of monthly payment amounts or a final account balance.”
To the uninitiated, “for informational purposes only” means that you should not rely on the object of this phrase — in this case, the calculator — as the basis for your decision-making. This disclaimer is used everywhere in the investment and financial services industry. In fact, it’s harder to find published “advice” without it than with it.
Unfortunately, it is also widely ignored by investors, to their detriment.
For your own, good, I urge you to take it seriously and treat this calculator with the same respect you’d allow a stick of dynamite. Any benefit it might produce should be weighed against the risk that it could explode in your face.
July 24th, 2013 | Uncategorized
Q. I have been in FERS for 16 years. I have been in the Army Reserve for 21 and plan to stay in until after my FERS minimum retirement age (58). I have enough combat time to be eligible for early reserve retirement pay at 58.
I have deployed to combat several times and receive a combat-related injury compensation from the Veterans Affairs Department. I have a FERS Thrift Savings Plan and a military member TSP. I am thinking of buying back four years of active-duty time toward my FERS retirement. I believe former President Bush signed a special combat-related compensation offset to allow for full VA compensation and military retirement. I meet the criteria as I was injured in Iraq.
When I turn 58, would I receive:
My full FERS annuity (34 percent), my full VA compensation check, and my full Army Reserve military pay?
When I turn 59.5, would I receive:
My full FERS annuity (34 percent), my full VA compensation check, and my full Army Reserve military pay + now my TSP annuity + my military member TSP annuity?
When I turn 62, would I receive:
My full FERS annuity (34 percent), my full VA compensation check, and my full Army Reserve military pay + my FERS TSP annuity + my military member TSP annuity and now reduced Social Security?
A. You may purchase an annuity with your TSP money at any time following separation from federal service and that annuity income will continue for as long as you live, regardless of your other income.
July 24th, 2013 | Uncategorized
Q. I retired in 2005 with 30 years in the military. I am 58 years old. If I want to make a full withdrawal now, how much will I pay in taxes? If I wait until I’m 59½, will I pay less?
A. TSP withdrawals are taxed as ordinary income. The amount of income tax you pay will depend upon your tax return for the year in which you take the withdrawal. If you withdraw the money before you reach age 59½, you will likely also have to pay the 10 percent early withdrawal penalty. You’ll avoid this penalty by waiting until age 59½.
July 1st, 2013 | Uncategorized
Q. 1. I have $12,000 in student loans at about 6.5 percent interest rates. I had considered taking a loan from my Thrift Savings Plan account to pay off my balance as the interest rate I would pay back on the TSP loan is lower than my Stafford Loans. What is the maximum amount one can take out on loan from their TSP account? What is the repayment time frame demanded by TSP?
2. If I were able to pay off my Stafford loans with a TSP loan, I am not sure that would be the best decision. I am 26 years old and have approximately $15,000 in TSP. I know that money makes money over time and I can’t make up past years. If I take the funds out, I am losing some potential for the funds to work for me and increase themselves. Do I want to leave the money brewing where it is in the hopes it will bring more for my retirement, or take it out now and be debt-free and save myself some interest from my student loans. Are there any other factors that merit consideration?
3. I am looking into buying a house and want to know if a loan from my TSP account shows as part of my debt-to-income ratio. I have been considering taking out a TSP loan to pay down my student loans to lower my debt-to-income ratio to improve my home loan prequalification odds. Can you tell me if a TSP loan would be part of that ratio even though the loan is paid back to myself?
A. The maximum TSP general purpose loan amount is the smaller of 50 percent of your 12-month rolling average account balance or $50,000. The repayment period is five years, but you may reamortize the balance to extend the repayment term.
Whether or not you take the TSP loan depends upon a number of factors including the cost of the other debt, the cost of the TSP loan and your behavior.
You should check with your lender to see what, exactly, they count in underwriting your mortgage application. I suspect that they’ll want to consider all of your debt.
July 1st, 2013 | Uncategorized
Q. I understand that the lump-sum payment for unused annual leave is treated as wage and salary income and is subject to federal and state (if any) income tax, FICA (Social Security) and Medicare taxes. How is it treated for Thrift Savings Plan purposes? Are individual and government matching contributions made? Can a retiring employee top up their contributions from the lump sum (up to the IRS-determined maximum)?
July 1st, 2013 | Uncategorized
Q. Does the withdrawal of your Thrift Savings Plan annuity affect the amount of your special retirement supplement or Social Security if it exceeds the maximum amount of money you are allowed to make under Social Security?
March 21st, 2013 | Uncategorized
Q. I am 64 years old and will be retiring in a year. I have 15 years with the federal government. Do all of my Thrift Savings Plan contributions have to be withdrawn prior to a specific age?
I also understand that my total TSP account will be charged 20 percent. Am I to understand that after the 20 percent is subtracted from my TSP account, I have to pay income taxes per year for withdrawals I make from my TSP account that will be added to my total gross income?
A. You will be required to begin taking minimum annual distributions from your TSP account when you reach age 70½, but there is no requirement to deplete your TSP account during your lifetime. Under certain circumstances, the TSP may withhold 20 percent from your withdrawal as a deposit against your tax liability for the year of the withdrawal. Your TSP withdrawals are added to your gross income for the year and taxed as ordinary income.