By Mike Miles
TSP vs. IRA tax burden to spouse and heirs
March 11th, 2013 | Uncategorized
Q. I will retire April 30 under FERS (law enforcement agent; I will be 66½ years old) and have been exploring options available regarding my Thrift Savings Plan account. I read with interest your Feb. 4 Federal Times article “Don’t overlook TSP for lowest-cost investment” but have the following questions concerning what happens to my TSP account funds if I predecease my wife/heirs before or after the required minimum distribution takes effect.
As the annuitant, upon reaching 70½, I would have 10 years to draw down my TSP funds. What happens if I predecease my wife/heirs during this time frame? It is my understanding they will have a 5-year drawdown period, which would subject them to a heavier tax burden. Is this assumption accurate?
If I roll over my TSP into an IRA and I predecease my wife/heirs, then they would have the option of rolling over the funds into their own individual IRAs therefore avoiding a significant tax burden. Is this accurate?
A. The rules for this are complex and depend upon a number of factors. Your questions leave open too many possibilities to cover here. I suggest that you review the notice at https://www.tsp.gov/PDF/formspubs/tsp-776.pdf and then come back with any specific questions that remain unanswered.
Tags: age, FERS, IRA, law enforcement, Required Minimum Distribution, retirement, rollover, survivor benefits, taxes, TSP
TSP to immediate fixed annuity
March 11th, 2013 | Uncategorized
Q. I am a 53-year-old recent retiree (I was offered a Voluntary Early Retirement Authority through the Postal Service and accepted it). Is there a penalty to move my Thrift Savings Plan account to an immediate fixed annuity? If so, what would that penalty be?
Additionally, I heard that within one year of retirement, my TSP account should be transferred to a civilian account (IRA, savings, etc.) What exactly is the time frame for that?
A. The only penalty for using your TSP account to purchase an immediate fixed annuity in retirement is that you’ll be locking in historically low interest rates for life, so be careful. You are not required to roll over your TSP account and may continue it for life. You should do everything you can to keep your money in the TSP for as long as possible, since it is superior to any other investment account you will find. Your TSP should be the last account you tap for retirement income.
TSP vs. IRA
March 5th, 2013 | Uncategorized
Q. According to a letter I received from the Thrift Savings Plan, I’d save in account management fees if I transfer traditional IRA to TSP. I don’t feel comfortable with this transfer. How would we know that the federal government won’t decide to use our funds, like they borrow Social Security funds, and then it won’t be there when we want it? What are your thoughts on this?
A. What you’re worrying about is against the law. I think you are worrying needlessly. Your money is probably at greater risk in an IRA.
Tags: IRA, Social Security, transfer, TSP
TSP, IRA and Roth contribution limits
February 27th, 2013 | Uncategorized
Q. I am over 50, my wife (unemployed) is under 49. In 2013, if I contribute the maximum amount (including catch-up) of $23,000 to my Roth TSP and traditional Thrift Savings Plan, can I also contribute the maximum of $6,000 to a Roth IRA or traditional IRA for a total contribution of $29,000? Can I also contribute the maximum of $5,000 for my wife into a Roth IRA or traditional IRA for a total contribution of $34,000, assuming that I fall within the adjusted gross income limits as addressed by the Internal Revenue Service? If there are limitations on contributing to a Roth IRA or traditional IRA when active in the TSP, what are they?
A. Subject to the income limits outlined in IRS Publication 590, you may contribute to the TSP and an IRA or Roth IRA.
Tags: catch-up contributions, income, IRA, IRS, maximum contribution, Roth IRA, Roth TSP, spouse benefits, TSP
401(k) beneficiary and taxes
February 20th, 2013 | Uncategorized
Q. My husband has a substantial sum in his private company’s 401(k). I am the beneficiary on this account. If he dies and the money goes to me, may I put that money into my Thrift Savings Program, since that money is all pretax?
A. Good question! If it winds up in a 401(k) or IRA solely in your name (not in a beneficiary account), it is eligible to be moved into your TSP account.
Roth contribution and age
February 20th, 2013 | Uncategorized
Q. The Thrift Savings Plan allows contributions this year of $17,500 plus a $5,500 catch-up, whether to Roth or traditional IRA. Internal Revenue Service rules also allow (for certain income brackets) a Roth contribution of $5,000 plus $1,000 catch-up. Can a person over the age of 55 make the $6,000 Roth contribution allowed under IRS rules to a secondary Roth IRA and still make the difference ($13,000) in a contribution to the TSP?
A. You are always free to make the full Roth TSP contribution. It’s your eligibility to make the Roth IRA contribution that may be limited, depending upon your tax filing status and your income. See IRS Publication 590, which includes a worksheet to determine your Roth IRA contribution eligibility, for the rules.
Tags: age, catch-up contributions, income, IRA, IRS, maximum contribution, Roth IRA, TSP
TSP at retirement
February 18th, 2013 | Uncategorized
Q. I appreciated your Feb. 4 article concerning the advantages of the Thrift Savings Plan vs. more costly private products. I am unclear, however, about the options (and their advisability) when it comes time to retire from federal service. Recognizing that rules allow distribution without penalty at 59½ and require some distribution from any IRA at 70, is continuation in the TSP an option which would allow the retiree to access the account as desired, or must the TSP account be moved to a private instrument?
A. I have written about this topic on more than one occasion. You may not access your TSP account at will. But you may maintain your TSP account for life, within the TSP’s rules. As an alternative to rolling the account over to any IRA, which is a painful thing to have to do, you may want to consider a one-time partial withdrawal to create an accessible fund outside of the TSP, and then a series of automatic monthly withdrawals to maintain that fund over time. The amount of the monthly withdrawals may be changed once each year to adjust to changing needs. This method takes some careful planning, but it may be worth the effort in the long run. I manage this system of withdrawals for many of my clients as a usual part of the planning and management process.
Tags: distribution, IRA, one-time partial, penalty, retirement, TSP, withdrawal
RMD and IRA
February 18th, 2013 | Uncategorized
Q. My question regards Required Minimum Distributions and how this Internal Revenue System rule relates to an annuity purchased with IRA funds. If the annuity in question has fixed payment amounts that are less than a calculated RMD, the funds are not available to the account owner for distribution to meet the RMD rules. Does this scenario appear to be a credible reason for not meeting the RMD rules and an exception that IRS should allow?
A. We don’t answer questions about IRAs here, but I will pretend you asked about the Thrift Savings Plan, since the answer is the same in either case. An immediate life annuity always satisfies the minimum distribution requirement for the funds that were used to purchase the annuity. If you use part of your retirement account to purchase the annuity but left some money behind, then the RMD will have to be separately satisfied each year for the remaining funds.
Tags: annuity, IRA, IRS, Required Minimum Distribution, retirement, TSP
Spousal IRA
February 4th, 2013 | Uncategorized
Q. I retired from the federal service in 2012. I understand that I cannot make any further contributions to the Thrift Savings Plan since I am no longer a federal employee, and that I cannot undertake a traditional or Roth IRA in 2013 unless I have wages. What I am not clear about is the spousal IRA. It appears to me that because my spouse is still working, I could contribute to a traditional IRA in 2013 as a nonworking spouse if he and I met the income and joint filing qualifications. If this is true, could I then transfer that spousal IRA to the TSP even though I am a retiree?
A. Yes.
Tags: IRA, Roth IRA, spouse benefits, transfer, TSP
Disability and TSP early withdrawal
February 4th, 2013 | Uncategorized
Q. What is the definition for the Thrift Savings Plan early distribution exclusion “made as a result of total and permanent disability”? Does this mean that a retired military member with a Veterans Affairs Department-certified disability who is under age 55 is excluded from the 10 percent early withdrawal penalty? Specifically, I would like to withdraw my TSP in full upon military retirement at age 42 and will most likely have a portion of VA-certified disability based on injuries sustained on active duty. What justification is needed to report to the Internal Revenue Service when you file your taxes?
A. I can’t speak for the IRS, but here’s what I understand about it: A disability qualifies an account holder for an early withdrawal without penalty if it meets the definition in Section 72(m)(7) of the Internal Revenue Code. According to this stipulation, a disabled person must be unable to engage in substantial gainful activity, namely employment. The disability must be a medical condition, either physical or mental, that most likely will either result in death or continue to affect the individual over the long term. Regardless of the nature of the disability, a person seeking to claim the disability exception for an early IRA withdrawal must provide proof of the condition. According to Section 72(m)(7), a disabled person must supply evidence as dictated by the secretary of the treasury. The Internal Revenue Code does not specify what form of evidence satisfies the requirement, but the general rule is to undergo an examination and receive a diagnosis in writing from at least one physician.
Tags: Disability, distribution, early withdrawal penalty, IRA, IRS, taxes, TSP