Ask The Experts: Money Matters

By Mike Miles

What’s considered earned income

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Q. Can you please provide a citation to your assertion that an annual leave payout is not considered earned income and cannot serve as the basis for IRA contributions?

A. See the sections on what is, and what is not, compensation on Page 8 of IRS Publication 590. I believe it is considered deferred compensation, but in the end, how you should proceed is a question for your tax preparer.

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TSP allocation

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Q. I work for the Defense Department. I have $75 biweekly going into the G Fund. I am in my early 30s and want to build my money. I don’t see it moving much in the G Fund, and I have been investing for four years. I can afford to invest $100 biweekly but don’t know what fund to put my money in for it to grow. My annual income is $38,780.

A. Given your circumstances, I suggest that you invest all of your Thrift Savings Plan money in the L 2050 Fund for the foreseeable future.

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Using TSP withdrawal to pay off debt

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Q. I am soon to be 65 and plan to retire within the year and have debt in the amount of $67,000. This is not including my home, car, etc. I have been considering withdrawing a large amount from my Thrift Savings Plan to pay this debt. With my pension and Social Security benefits, if I figured correctly, I would be bringing home about what I do now after taxes. I know it’s personal preference, but is it a wise decision?

A. I can’t say if it’s the best course of action, but the debt needs to be paid. The issue is whether it’s better to take the tax hit for a lump-sum withdrawal to avoid the interest on the debt or to take monthly withdrawals to reduce the taxable income in any one year and pay the debt down over time. The correct answer will depend upon the cost of the debt and your tax returns. If you won’t significantly increase the amount of tax you’ll pay on the withdrawn TSP money by taking it all at once, it’s probably a good idea to go ahead and retire the debt.

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Special retirement supplement and taxes

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Q. I received a 1099R from the Internal Revenue Service. They do not differentiate the annuity income from the supplement income. I’ve read the IRS Publication 721 tax guide to U.S. Civil Service Retirement benefits. There is no mention of the special retirement supplement. I called the IRS; they said they never heard of the supplement being treated like Social Security. They also advised me to report the income on the 1099R as is (do not separate the supplement from the regular annuity). If it is indeed to be reported like Social Security, how do I go about it without raising red flags?

A. The special retirement supplement is paid out of the Civil Service Retirement and Disability Fund and, as ordinary income, is treated no differently than an employee’s annuity.

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Roth TSP vs. TSP income limits

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Q. I’m a little unclear on the Roth IRA vs. Roth TSP differences. I’ve been told that I can’t contribute to a Roth IRA since my adjusted gross income (married, filing jointly) is too high. Does that same rule apply to the Roth TSP? It seems to me, if I can go with the Roth TSP and max it out at the 2014 maximum of $17,500, I can also max out the Veterans Affairs Department contribution (which goes to my traditional TSP).

A. The Roth IRA contribution limits do not apply to Roth TSP contributions. Separate and distinct rules apply to each.

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TSP partial withdrawal and taxes

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Q. I did a partial withdrawal from my Thrift Savings Plan last year at age 60. How do I report the income on my tax return? Is it strictly income? Are there no capital gains to report? If there are gains, how do I determine what the gains were?

A. You will receive a 1099 reporting the distribution, which will be taxed entirely as ordinary income.

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Special retirement supplement and TSP withdrawal

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Q. I am retiring the end of June with 30 years at my minimum retirement age (57). I will be collecting the special retirement supplement. Does any money I take out of my Thrift Savings Plan affect the SRS limit I can make that year?

A. The offset to the SRS is for earned income, not TSP withdrawals, so there will be no effect.

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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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Exceeding Roth IRA qualifications

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Q. If, during the course of my federal career, my income (filed either individually or jointly with my spouse) exceeds the maximum allowed under the Roth IRA rules, do I have to convert my Roth to a traditional IRA? Can you maintain an existing Roth regardless of your income?

A. This limit only applies to new money contributions. It does not affect your ability to maintain an existing account.

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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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