By Mike Miles
May 13th, 2013 | Uncategorized
Q. I have been a federal employee for 27 years, just long enough to have been one of the first forced into FERS. About seven years ago, I looked at my Thrift Savings Plan statement and learned that the prediction was that if I retired at age 62 and bought an annuity, I would have a pretty good monthly salary. Now, I notice that the prediction is that if I use my TSP savings, with about the same amount predicted for me at age 62, to buy a monthly annuity, that annuity will be about one-third of what was predicted seven years ago. Not a very good deal now.
My belief is that the years of low interest rates are responsible for the change in what the same amount of money will buy now. I wonder if that is true. I also wonder if these annuity companies that agreed to pay the larger amounts when they signed people up seven or more years ago are going to have to have massive bailouts by the federal government if interest rates continue to remain where they are. Finally, if I retire soon, I will not want to buy an annuity at that time, but if interest rates go up in five years, how much more attractive are monthly annuities going to be? If the interest rates go back to where they were 10 years ago, will the price of annuities go back to where they were, or have annuity companies learned a lesson and are likely to be more conservative in pricing?
This also might be a good topic for one of your columns for other FERS feds who have to decide about using some of their savings to buy annuities.
A. I have written columns about the pros and cons of using your savings to buy an annuity, and about the dangers of using the calculators provided by the TSP. You’re a witness to the problems. There was never a promise by the insurance company to provide a certain payout for a future annuity purchase. The payout is always calculated at the time of purchase. Annuity payouts are dependent upon the prevailing interest rates at the time of purchase, and those rates are now at historic lows. Same with the payout rate. If interest rates increase in the future, the payout you will be offered should also increase. In addition, as you age, the payout will go up since the number of payments the insurer expects to make will decrease.
May 9th, 2013 | Uncategorized
Q. I was recently informed that I fell under the Federal Erroneous Retirement Coverage Corrections Act and had an option to select CSRS Offset. I was also told that the 1 percent and matching in my Thrift Savings Plan would be removed if I selected CSRS Offset. My human resources office told me that it would be the exact amount that was put into my TSP. If it made money, I would be able to keep the difference; if it lost money, I would have to make up the difference. So I selected CSRS Offset. Now they are beginning to remove the 1 percent by pay period, but they are removing the amount plus interest. I also have a colleague who was told the same, but they are only removing the actual amount and not interest. What are they supposed to be removing from the TSP if you switch from FERS to CSRS Offset under FERCCA?
A. It’s not that simple. In fact, the FERCCA rules for this are pretty complex. The answer depends upon your particular circumstances.
May 9th, 2013 | Uncategorized
Q. Is F Fund performance based just on the principal amount, or does it pay a percentage or dividend at quarter end or year end?
A. TSP funds do not distribute earnings. Dividends and interest earned increase the share price.
April 5th, 2013 | Uncategorized
Q. Should I keep my money in the Thrift Savings Plan after I retire or put it in an IRA? What would be best to make the most interest?
A. Stick with the TSP. You can’t beat the G Fund for risk-free interest.
March 26th, 2013 | Uncategorized
Q. Many experts are indicating that there is a bond market bubble growing. In addition, The Wall Street Journal survey report indicates that interest rates will be going up about a point in 2014. For the next year or two, would it be best to move money out of the F Fund and place it in the G Fund, or move monies out of both funds and place them in market funds like C, S or I? Since both G and F are invested in bonds, will increasing interest rates affect invested funds negatively?
A. I have been substituting G Fund for part of the F Fund allocation in my client portfolios for the past two years.
March 18th, 2013 | Uncategorized
Q. I will be retiring very soon. Can I withdraw some of the money in the Thrift Savings Plan and leave the rest there to buy an annuity later when the interest rate is better?
January 9th, 2013 | Uncategorized
Q. I took out my Thrift Savings Plan lump sum, mainly to pay off my house. My lump sum was approximately $340,000, with about $68,000 in taxes taken out. Is the lump sum considered ordinary income? If so, this puts me in a high tax bracket for this year and has me owing about $40,000 to the government in taxes. Is this right? If so, this isn’t something they warn you about when you take it out.
A. Yes, a TSP distribution is taxed as ordinary income and you’ve provided an excellent example of why you should not make such a large financial decision without understanding the rules of the game you’re playing and carefully working through the implications. For what it’s worth to others, this is a terrible idea, particularly with today’s historically low interest rates.
October 9th, 2012 | Uncategorized
Q. Someone asked you online Oct. 8 if they could deposit funds into the Voluntary Contributions Program and transfer “the whole amount” into a Roth TSP. You said “yes.” The poster said they thought they could only transfer interest to TSP.
By asking if they could transfer “the whole amount,” I believe they were wondering if they could transfer both contributions and interest. You have said as recently as an answer given on Sept. 24 that “You’ll have to use a Roth IRA for the after-tax portion of the VCP account,” and gave a corrected answer to a question posted on May 14 that “The Internal Revenue Code permits designated Roth accounts to accept transfers or rollovers only from another designated Roth account. Roth TSP balances are designated Roth accounts (or are treated like designated Roth accounts). The VCP is not a designated Roth account. Therefore, the TSP cannot accept a transfer or rollover from the VCP into a TSP Roth balance.”
It sounds from your most recent answer that something’s changed. Has it? Is it now possible to move VCP contributions to the Roth TSP?
A. Thank you. You’re correct. I made a mistake in the most recent answer — incorrectly reading the question to be about a Roth IRA rather than the Roth TSP. A rollover into the Roth TSP is not allowed, and I have corrected the error.
October 8th, 2012 | Uncategorized
Q. I’m CSRS. If I deposit funds in my Voluntary Contributions Program, I thought I could only transfer interest gain to TSP. Can I transfer the whole amount if I choose Roth TSP?
A. You may not transfer or convert money into the Roth TSP. You could roll the money over to a Roth IRA, however.
September 19th, 2012 | Uncategorized
Q. I want to help my daughter reduce her $120,000 graduate student loan, which she will repay at 6.5 percent interest when she finishes next year. I am 58 years old, a foreign service officer, and planning to work until I am 65. Given that Thrift Savings Plan general loans are at 1.2 percent interest, I am considering asking for a $50,000 loan to help my kid jump-start payments. In your opinion, would this be wise?
A. Wise is not really the issue here. It’s certainly generous. But, is it affordable? That’s really the question.