Ask The Experts: Money Matters

By Mike Miles

TSP annuity?

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Q. My father died with $90,000 in a Thrift Savings Plan annuity. How do I collect?

A. There is no such thing as a “TSP annuity.” Your father used his TSP assets to buy an annuity from an insurance company. You’ll need to file your claim with the insurance company that issued the annuity contract and was making his payments.

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Directed reassignment

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Q. I am 46 with 22 years of service, and have been told that I will soon receive a letter of directed reassignment to a job in my same grade far outside my commuting area. When the letter arrives, if I should decline to move to the new position, what are my options for drawing retirement? How about insurance? Severance pay? What about my 401(k) in the Thrift Savings Plan? My performance ratings are not an issue.

A. Mike: Your circumstances will not affect the usual rules that apply to your TSP account. As long as you remain employed, you will be subject to the in-service withdrawal rules described at https://www.tsp.gov/planparticipation/inservicewithdrawals/basics.shtml. If you separate from service, the rules described at https://www.tsp.gov/planparticipation/withdrawals/accountOptions.shtml will apply. If you separate from service before the calendar year in which you reach age 55, you will be subject to the Internal Revenue Service’s early withdrawal penalty unless you meet one of the exceptions specified on Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

Reg: Because you wouldn’t meet the age and service requirements to retire, you’d only have one option. If you didn’t take a refund of your retirement contributions, you could apply for a deferred annuity at age 60.

You would be entitled to severance pay only if you lost your job through no fault of your own. However, if you were to resign or decline a reasonable offer, you wouldn’t. A reasonable offer is defined as one that is in the same agency, in the same commuting area, of the same tenure and work schedule, and not more than two grades or pay levels below your current position. Note: If you are covered by a mobility agreement, the reasonable offer exception wouldn’t apply.

You would be given a month of free Federal Employees Group Life Insurance and Federal Employees Health Benefits insurance coverage. At the end of that period, you could elect private life insurance coverage at your own expense. You could also elect to continue your health insurance coverage for up to 18 months under the temporary continuation of coverage provision. For that coverage you would pay 100 percent of the premiums, plus 2 percent for administrative expenses.

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Paying insurance premiums

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Q. What factors determine whether it is better to pay insurance premiums with pretax dollars or waive that and pay with after-tax money? My thought is that by paying with after-tax money, taxable income is increased, thereby increasing the Social Security entitlement. How do you determine if that is more beneficial than the reduced tax liability now?

A. The answer depends on your circumstances and a number of assumptions about the future. The issue is discussed on the Office of Personnel Management website at www.opm.gov/insure/archive/health/pretaxfehb/qanda/23.asp.

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Roll TSP into IRA?

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Q. In 2011, following 18 years of government service at age 60, my excepted service position ended unexpectedly. My retirement pension is small: $589. My first payment arrived February. I had $10,000 in savings with Fidelity but used that to live on, considering the lack of income for two to three months and basic living requirements: mortgage, insurance, car payments, son leaving for college, etc.

I paid taxes on that money, approximately $3,000 or more. That money is now gone.

When I retired, I had two Thrift Savings Plan loans that were rolled in as income on my taxes. They are paid in full.

I am still seeking full-time employment. I have a part-time job that has been extending me extra hours.

My TSP account has approximately $80,000 remaining. Should I roll that over to an IRA? Am I able to borrow from that account to pay off bills? I have approximately $13,000 in bills: car, three credit card accounts (none over $3,000). This does not include mortgage/homeowners’ association/condo fees, water, electric, home-car insurance, food, etc.

I hope to work until 66 before applying for Social Security. I have one child in grad school who constantly needs financial assistance. What’s the best for me to do?

A. You should avoid moving your TSP money to an IRA, since you’ll lose it’s low-cost advantage and access to the G Fund. You may not borrow from your TSP account since you are no longer eligible to contribute. You may initiate automatic monthly distributions from your TSP account and then change the amount of those distributions once each year. Visit www.tsp.gov for more information.

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TSP and hackers

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Q. I am concerned about the stolen data from a TSP-contracted computer that’s been in the news recently. I know TSP is assuring everyone the information has not been used, and they are offering those affected a credit monitoring service for one year free. That does little to comfort me that the money in my Thrift Savings Plan (or IRAs in mutual fund companies elsewhere) is secure. Banks have FDIC. Savings and loans and credit unions also have insurance to protect depositors from theft. Is there anything out there we can rely on to assure reimbursement if our TSP or mutual fund accounts are cleaned out by hackers — like insurance of some type?

A. Your TSP investment assets are not segregated from the rest of the plan’s assets, so they can’t really be stolen from you. What you really own is a record of your entitlement to a certain value. As long as that record exists, the government guarantees the value. If the record is wiped away by hackers, what good would insurance do? To file a claim, you’d have to produce proof that you were entitled to the value, and if you can produce the proof, you haven’t lost the value. Your TSP investment is as safe as any investment you’ll find.

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TSP withdrawal

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Q: If I take an age-based withdrawal before I retire, to pay off the house, and start monthly withdrawals from the balance of my TSP funds after I retire, will I be allowed to stop the payments at a later date and purchase an annuity?

A: No, but you could roll the final payment from your account into an IRA and then buy a retail annuity from an insurance company from there.

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Pension Max

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Q: What is Pension Max? Some people say it’s good while others say it’s not. I can’t seem to find any information on it.

A: Pension Max is a term used to describe substituting a life insurance policy on a pensioner’s life for a pension survivor benefit. In the case of a federal annuitant, it’s a bad idea. It favors the pensioner at the expense of the survivor. Of course it pays off very well for the insurance agent who sells it to you.

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Long-term vs. universal life insurance

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Q: At a recent retirement seminar I attended the speaker mentioned advantages to having a universal life policy that could be converted to a disability policy over paying for a long term care insurance policy. One of the advantages mentioned is the fact that any unused money would go to beneficiaries, whereas under a long-term policy you either use the money or it goes when you go. Why buy a long-term care policy when you can have this benefit?

A: It costs more.

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Life insurance

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Q: If I have five times my pay life insurance or any amount and I die, will there be taxes taken from the total paid out to my survivor? Or do they receive the full benefit?

A: FEGLI benefits are paid tax-free.

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Long-term insurance vs whole life

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Q: What can you tell me about the benefits (and drawbacks) of a universal life policy that can be converted to cover a disability compared to a long-term disability insurance policy? I found the idea that a beneficiary could receive death benefits appealing if one never uses or only used some small portion of the amount of the policy, rather than have all the funds placed into a long-term care disability plan just disappear upon your death.

A: A general comparison is impossible since each policy is different. You are, however, buying and paying for what are effectively two insurance policies — long-term care and life insurance. You should compare the cost and benefits of the combined policy with its equivalent combination of two similar policies.

In my experience, the insurance industry rarely rewards you for selecting the most convenient solution to a problem, however.

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