Ask The Experts: Money Matters

By Mike Miles

Canceling a TSP age-based withdrawal

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Q. We have applied for an age-based withdrawal from our Thrift Savings Plan account (husband works for the Postal Service) in the amount of $16,000. However, we found out that the tax was simply too high. We have already received the check, but we are now considering canceling it. Is this allowed?

A. You can ask the TSP to be sure, but I don’t think it can be canceled. You have constructively received the payment. You may be able to roll the money over to an IRA to further defer the tax, however. There is a window of 60 days for this. Consult your tax preparer for further guidance.

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RMD from TSP and IRAs

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Q. My first required minimum distribution at age 70½ was made in August, when I took the total RMD required for both my IRA and Thrift Savings Plan accounts from one IRA fund. However, I have just received my notice from TSP stating I must make a withdrawal by April 1 from the TSP account to avoid dire circumstances. I am not clear on whether what I have already done meets my obligations for the first withdrawal, based on two of your answers concerning this matter.

Q: “Also, I thought if I have other IRAs, I could take the RMD from those and leave my Thrift Savings Plan unscathed. If I withdraw the entire account balance from my TSP, I will have to pay federal tax on whole amount. Can you clarify?
A: Unfortunately, the TSP does not allow you to waive the RMD for your TSP balance. It must be taken from your TSP account.”

Q: “Can I add all of my accounts together — IRA and Thrift Savings Plan — compute the required minimum distribution, and then withdraw from one account?”
A: “…but you may take your RMD from any account or accounts you wish. You should leave your TSP account untapped for as long as possible.”

If the original RMD I made in 2013 meets the requirement for the TSP account, should I notify TSP in some way that this has been done so they do not withdraw it again on April 1 and mail to me? I have made my one withdrawal allowed back in 2009 and do not wish to change to monthly withdrawals, an annuity or a total lump-sum transfer to another IRA. Are yearly RMD withdrawals allowed?

A. I’m sorry for the confusion. You must take your TSP RMD from your TSP account. You will have to begin monthly withdrawals, and I suggest that you use fixed monthly withdrawals since they may be changed in the future and the TSP will send you an extra payment, if necessary, to make sure that your RMD is taken each year. Annual withdrawals are not allowed.

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Rollover and TSP matching

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Q. I am a 56-year-old federal employee with six years of service. I have traditional and Roth Thrift Savings Plans. I also have a traditional IRA with TIAA-CREF. Since my budget is too tight to take advantage of the full federal matching amount, can I use my TIAA-CREF IRA funds to maximize my federal match? If I roll over TIAA-CREF funds into my traditional TSP, will these funds receive federal matching?

Also, I understand early withdrawal of traditional TSP funds is subject to income tax, but if I roll over TIAA-CREF funds into my traditional TSP, are withdrawals at age 56 penalized?

A. Your transfers into the TSP will not be matched. If you transfer the IRA into the TSP, it will, from that point forward, be treated just like your other TSP money. Any exemption to the early withdrawal penalty for which you may qualify will apply to all of your TSP money, regardless of its original source.

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MetLife

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Q. My mother’s plan was purchased by MetLife. She wants to make a withdrawal but is told she can’t, or she needs a higher monthly payment. It’s only $300 due to a paperwork mistake, but she was told she could only submit this one time this year. Is there anything to do?

A. If she bought an annuity, her monthly payments from that annuity are fixed for life. If she has a balance left in her Thrift Savings Plan account, she has the option of terminating her monthly payments with a final, lump-sum distribution of the remaining balance in her account, which she can roll over to an IRA, which will allow her to withdraw money as she likes.

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Military TSP vs. civil service TSP

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Q. I retired from active duty two years ago and have worked in civil service for one year.  I am contributing 10 percent of my civil service base pay and have a fairly good amount in my active-duty military Thrift Savings Plan. I am entertaining the idea of consolidating my TSP plans for a couple of reasons. First, simplicity of managing one account.  Secondly I believe, from what I have read on numerous sites, I will have greater control of current and future funds using the civil service side of TSP versus the active-duty military side. By this, I mean in-service withdrawals, loans, rolling over to another employer’s 401(k) plan (certainty of employment with civil service is at an all-time low), etc. Has my research misled me, or am I partially correct?

A. Convenience is an advantage. The basic rules for the accounts are the same, although you’re separated from military service and an active employee for the civilian account. This means that you may not take a loan from the military account but can take one from the civilian account. You could roll over the military account to an IRA or 401(k) now, but can’t roll over the civilian account. Whether the differences matter to you, or not, will depend upon your circumstances, but everything you need to know is available at www.tsp.gov.

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Is TSP considered ‘traditional IRA’ for tax purposes?

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Q. I own both a Thrift Savings Plan account and several non-TSP IRAs with other institutions and am approaching the age at which I must begin to withdraw the required minimum distribution from both the TSP and the non-TSP IRAs.

I am withdrawing enough money from the TSP to cover the required distribution from all of my accounts combined. Must I withdraw any additional monies from my non-TSP IRAs to comply with the tax laws? The answer may depend upon whether the TSP is considered a “traditional IRA” for tax purposes. I can’t find any information on this point.

A. The TSP is not considered an IRA for any purpose. From the Internal Revenue Service website:

“An IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts.
However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts.”

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72(t) distributions

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Q. I’m about to retire at age 47 after 25 years as a federal law enforcement officer. I plan to roll my 401(k) (TSP) over to a traditional IRA and begin taking substantially equal periodic payments per 72(t) from the IRA, which, as I understand, once I start, I have to continue until age 59 ½. I plan to use the annuitization method to make equal monthly withdrawals, but I would like to take the first year’s withdrawal in a lump sum to help pay off some debt. Will the IRS allow that without the 10 percent penalty, or do I have to consistently stick to either monthly or annual payments?

A. The IRS only cares about the annual requirement being met. They don’t care about how the money is distributed. Monthly payments are not required, and as long as you meet the annual 72(t) requirements, there should be no penalty.

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TSP-to-IRA withdrawal

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Q. I retired early with more than 20 years of service due to work-related injuries. I am 50. I have more than $314,000 in my Thrift Savings Plan. I want to withdraw either a partial or full amount but also want to avoid the 10 percent penalty tax. If I transfer my money to an IRA, then make a withdrawal, will I be able to avoid the penalty? What are my options?

A. You should consult IRS Publication 590 for the exceptions to the early withdrawal penalty that apply to IRAs. See Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for exceptions that apply to withdrawals from the TSP. And consider engaging a CPA for guidance to make sure that you don’t make a costly mistake in getting to your money.

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Reversal of TSP action

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Q. I sent TSP Form 77 to the Thrift Savings Plan requesting that funds be withdrawn from my account and sent to a non-TSP IRA. When I returned from overseas, I discovered that a mistake had been made on the forms and instead of all of the requested funds going to the IRA, TSP sent 50 percent of the funds to the IRA and 50 percent to me less a hefty amount to the Internal Revenue Service. I asked for a reversal of the action, but the Federal Retirement Thrift Investment Board turned me down, saying that TSP had not made a mistake. How can I get them to reverse the action and send 100 percent to the IRA?

A. I can’t tell you how you can force the TSP to correct your mistake. If you can manage it, you may want to make up the tax withholding with other funds and roll over the gross distribution to the IRA within the 60-day time limit to do so. You’ll recover the tax withholding when you file your 2013 tax return. It would be smart to seek the help of a CPA to make sure don’t make any costly mistakes.

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Simple IRA and rollover

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Q. I am retired at age 63 from the Postal Service. Can I roll over my Thrift Savings Plan funds to a simple IRA without any penalties before I reach 70½?

A. Only simple IRA money can be rolled into a simple IRA.

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