By Mike Miles
September 18th, 2013 | Uncategorized
Q. I contribute 5 percent to my Thrift Savings Plan, ensuring that I get the full matching. I would like to contribute more to my retirement and am not sure whether to increase my TSP contributions or contribute to my IRA. Aside from the low overhead of the TSP, are there any fundamental differences between contributing to either one? Are there other particular benefits to investing in the TSP or the IRA that I should take into account?
A. The TSP’s low cost and the availability of the G Fund make it the best retirement investment vehicle you’ll find. Without a good reason to do otherwise, I recommend that you maximize your TSP contributions before you consider saving for retirement anywhere else.
September 16th, 2013 | Uncategorized
Q. I took out all of my money from my Thrift Savings Plan and put it in an IRA. Now I have lost a lot of money. I retire in January. Can I have the bank put my money back in my TSP account? If so what do I need to do to make this happen?
A. You should be able to do this if your TSP account is still open. If you emptied it earlier, this is no longer an option for you. You could, however, move the money to a discount broker and use Exchange Traded Index Funds to emulate the TSP’s five basic funds. Since four of the funds are index funds, you’ll find nearly exact duplicates, at slightly higher cost, in the retail market. You won’t be able to come close to the G Fund outside of the TSP, and the best you’ll be able to do is a cash equivalent like money market or certificates of deposit.
September 10th, 2013 | Uncategorized
Q. I have not worked since fall 2011. I’m on leave without pay with the Postal Service. Currently on disability retirement approved by Social Security and the Postal Service. The Office of Personnel Management has until November to finalize the disability retirement. On Sept. 23, I default on my Thrift Savings Plan personal loan ($5,300).
I am entitled to agency retirement pay of $1,645 per month but cannot be paid until OPM acts. Social Security is roughly ¼ pay, and I cannot realistically pay the catch-up amount and the two monthly loan payments for at least two months. At that time, I should be in a position to repay the entire loan (due to the situation explained below).
If I default on the outstanding balance BUT in November, OPM approves my lump-sum payment due for the time not worked and entitled to pay (which depending on what they say will either be September 2011, when I last worked, or March 2012, when I exhausted my annual time and sick days) and I then repay the outstanding balance in its entirety prior to year end, thereby negating the loan default, would the default status then be changed to paid and the taxable distribution then be nullified?
In my mind, if I repay the loan after default but before year end, I should prevent any Internal Revenue Service action regarding the early withdrawal penalty. I have no issues with extra interest or costs associated with my problem but don’t wish to throw away $500 if I can avoid it.
I have an appointment with a tax attorney to try to sort this out, but if you have had any experience in this, I would appreciate a response so I know what to prepare for.
A. I can’t advise you on your specific situation, and what an attorney may or may not be able to accomplish for you. But in general, once the loan is declared a taxable distribution, it cannot be repaid. You may be able to roll the declared distribution amount over to an IRA to defer the tax and avoid any early withdrawal penalty, however.
September 9th, 2013 | Uncategorized
Q. I am retired military, drawing Social Security. I am planning on retiring from the federal government soon. If I take all of my Thrift Savings Plan, how much will be taken out? I owe $10,000 on a TSP loan and know I should pay it off. If I pay the loan before taking money and I roll into an IRA, will my money then be tied in the IRA and I can’t use it? Also, I heard you can combine military pay with federal retirement. How does that work?
A. Mike: If you withdraw your entire TSP balance after you retire, 20 percent will be withheld as a deposit against your federal income tax liability. If you request a direct rollover into an IRA, there will be no withholding. If you are retiring from TSP covered service between the ages of 54 and 59, inclusive, rolling your TSP money into an IRA may affect your ability to withdraw the money without penalty before you reach age 59½, so be careful if this is the case.
Reg: You can make a deposit to get credit for your active-duty service. That tie will be used to determining your total years of civilian service and in the computation of your annuity when you retire. However, because you are retired military, you’ll have to waive your military retired pay when you retire from your civilian job. If you don’t, your deposit will be returned to you and you won’t get any credit for that time.
September 9th, 2013 | Uncategorized
Q. I am a civilian federal employee with 24+ years in FERS. Is there information as to whether or not there will be a reduction in force for the Defense Department in the next six to 12 months? I am considering retirement but would like to qualify for a buyout if it becomes available.
What options are there for my Thrift Savings Plan at retirement? I’d like to roll over into more than one IRA, at separate financial institutions, if possible.
How long does it take to process retirement paperwork? I also need to apply for Social Security benefits.
A. Mike: You may continue your TSP for life, or you may roll your balance over to one or more IRAs.
Reg: No, there isn’t any information about whether DoD will announce a RIF in the next six to 12 months nor, if it does, which activities would be affected, and if buyouts would be offered.
The processing of paperwork for retirement occurs in two places, your agency and the Office of Personnel Management. While I have no idea how efficient your agency is, everyone knows that OPM has fallen behind in meeting its targets. How far behind is anyone’s guess.
August 27th, 2013 | Uncategorized
Q. If I withdraw my Thrift Savings Plan earlier than age 59, I will be penalized 20 percent at the time of withdrawal and have to pay 10 percent in taxes at the end of the year. What if I transfer the money into a traditional IRA and withdraw it a year later? Will I save on taxes?
A. Your premise is incorrect. Rolling over the money to an IRA doesn’t help you avoid taxes or penalties on your withdrawals. It may work against you, depending upon when you retire.
August 27th, 2013 | Uncategorized
Q. Why would you recommended keeping money in TSP, when, with the possible exception of the G Fund, you can replicate the S, I and C via the use of low-cost exchange-traded funds. The IRA provides much more flexibility regarding withdrawal of funds and many more investment choices — stocks, ETFs, MLPs, real estate investment trusts, to name a few.
A. To reap the benefits of the strategic use of the G Fund and the much lower costs. I know the benefit of these. You haven’t specified the benefit of the securities you mention. There may be times when you must leave the TSP to meet your income needs, but this can often be avoided with some good planning. I manage lots of retirement plans for federal clients and rarely do they need to abandon the TSP.
August 19th, 2013 | Uncategorized
Q. I turned 70 years old in July and have been a CSRS retiree since 1997. I started the required minimum distributions in September 2012 from the Thrift Savings Plan and an IRA with DWS Scudder. Monies were invested in the G Fund with TSP and the DWS GNMA S Fund, which are very low risk. Before retirement, I felt more comfortable taking risk. I started withdrawing RMD only because I had to avoid penalty. My main concern at this stage in my life is to face as little risk as possible and to at least maintain my balance with minimum losses. My IRA over the past year has taken a heavy hit. Although both funds are invested in the GNMA, the fund with DWS Scudder with the highest balance has suffered the most and the shares are valued a little higher in cents.
I was thinking of transferring my DWS Scudder account to my TSP. Since I am not in desperate need of the money, how do I allocate my allotments to minimize my losses? What is a very safe investment with the RMD money received? My TSP is paid in monthly installments and DWS Scudder once a year. The TSP account doesn’t seem to change it value other than the amount of money that is being deducted for the RMD. The account doesn’t appear to show gain or loss. Am I noticing more loss with DWS Scudder because of maintenance fees and higher balance? What is your advice on this matter?
A. Mistakes can be costly, and you’ve made several of them. First: Your initial RMD is not due until April 1, 2015, so you have not been taking required withdrawals — you have been taking needless withdrawals! Second: You’ve subjected yourself to risk for no apparent reason. Third: You’ve invested in things and taken risks you clearly don’t understand. Fourth: You’ve incorrectly concluded that the G Fund has produced no gain in your investment’s value.
Based on the information you’ve provided here, I suggest that you transfer your IRA to the TSP account, if possible, and maintain your entire account in the G Fund. The G Fund bears no risk of loss and always produces a positive return on your investment. In fact, it’s the best risk-adjusted rate of return you’ll find anywhere. You’ll have to continue your monthly withdrawals from the TSP, but you may be able to reduce them until your RMD becomes due.
Unfortunately, there’s no way to recover the damage that’s been done. The time to get things right is when the decisions are being made, not after the fact. We’re all operating in a world where there are lots of very smart people doing everything they can to profit from our decisions. To get the most of what you want out of what you have, you must:
1. Clearly know and understand the rules of the game, and
2. Figure out how to use those rules to your best advantage.
August 19th, 2013 | Uncategorized
Q. I have power of attorney for my military retired son who is not employed and only receiving retirement benefits, as well as undergoing a divorce. There is just not enough money to go around. I am paying what I can with his funds, but there is one large debt that there is no way to make payments on (they’ve refused what little is available) since he is only getting half of his retirement income due to the pending divorce. He has an IRA and a Thrift Savings Plan account. Would the creditor be able to take the TSP monies?
A. TSP assets are protected from creditor claims in cases of bankruptcy and civil suit.
August 8th, 2013 | Uncategorized
Q. I understand why you defend leaving your money in the Thrift Savings Plan because of low expenses, security, protection from lawsuits, etc. However, how do you address the issue of “locking in losses” when withdrawing money in retirement from the TSP? For example, in an IRA, I can have (for a basic portfolio) a cash fund, an income fund and an equities fund. I know I can do this in the TSP, as well, G/F/C or S, but the primary difference is when I go to withdraw my money, in the TSP it comes out of all of these funds equally vs. an IRA which I can take money just from my cash fund and, if the stock market had a bad year, don’t touch that money for that year. I can’t do that in the TSP and I would immediately lock in my losses when I take out the money from the TSP. Please furnish your opinion.
A. Add to the list of pros the fact that the G Fund is likely much better than your IRA’s cash fund. The disadvantage you perceive is an illusion. There is no such problem as “locking in losses.” The real issue is whether your portfolio is in or out of balance. You should be establishing a cash reserve to fund your withdrawal needs and then rebalancing the remaining portfolio to the asset allocation model you’ve selected each time you rebalance. For example, suppose that your account contains $105,000 at the beginning of the year, you plan to withdraw $5,000 during the coming year, and you’ve settled on an asset allocation of 30 percent C Fund, 20 percent S Fund, 10 percent I Fund, 20 percent F Fund and 20 percent G Fund. You would rebalance your account at the beginning of the year to $30,000 C Fund, $20,000 S Fund, $10,000 I Fund, $20,000 F Fund and $25,000 G Fund. Notice that the G Fund is overweight by $5,000 to support the cash reserve. Each time you rebalance, you simply set aside the next year or two’s worth of withdrawal needs as cash reserves and then rebalance what’s left to the appropriate percentages, adding the cash reserves to the G Fund target. This approach can be used in the TSP account or any IRA, and there is no problem of locking in losses.