By Mike Miles
October 28th, 2013 | Uncategorized
Q. I am 70 years old and have about $100,000 in my Thrift Savings Plan accounts. Can you guide me toward the best options to withdraw the amount? I would prefer to pay the least in taxes to Uncle Sam.
A. To minimize the tax burden from required minimum distributions, you should request distributions based on your life expectancy under IRS rules. For the first distribution — the one due for the year you reach age 70½ or retire, whichever comes last) — you should consult a tax adviser to determine whether it is better to take it in that year, or defer it into the following year. If you’re not sure, it’s probably best to take in the first year.
October 22nd, 2013 | Uncategorized
Q. I’m separated from federal service due to disability. I’m waiting on a federal disability decision. In 2011, I took money out of my Thrift Savings Plan while still employed due to a decline in pay stemming from my disability, and I knew I would be going out under disability. In 2012, I again took a withdrawal because I did not have any income, was waiting on a decision, and was told that the next withdrawal would deplete the account. Unfortunately, I had to take the last withdrawal this week due to lack of income and no decision on the disability filing.
I am not tax-savvy, and I file my own taxes using an online tax preparer. I put disabled not employed, and never claimed the TSP money in any of the cases. Now, the Internal Revenue Service is coming forward asking for me to pay taxes on the 2011 withdrawal. Is there a form I need to submit showing it was due to disability? Do I need to contact the TSP office for the form? As I understood it, if monies was withdrawn for disability, they wouldn’t/shouldn’t be taxed.
A. I suggest that you carefully read the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf. I don’t know of any exception to the tax liability for disability. But as your tax preparer, you are responsible for the contents of your return.
October 16th, 2013 | Uncategorized
Q. As a current furloughed government employee, can I withdraw money from my IRA and not be taxed the additional 10 percent under the exception: being unemployed and paying for health insurance premiums?
A. From IRS Publication 590:
Even if you are under age 59½, you may not have to pay the 10 percent additional tax on distributions during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply:
* You lost your job.
* You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job.
* You receive the distributions during either the year you received the unemployment compensation or the following year.
* You receive the distributions no later than 60 days after you have been re-employed.
October 9th, 2013 | Uncategorized
Q. My husband happens to be one of the 800,000 who got furloughed. I have an IRA of $3,400. Would I be able to cash that in without a penalty to get us by for, say, a month or so, depending on how long the furlough lasts?
A. There is no exception to the early withdrawal penalty for a government furlough. You will be subject to the penalty unless you are age 59½ or meet one of the other exceptions to the penalty described in Internal Revenue Service Publication 590.
October 7th, 2013 | Uncategorized
Q. I want to take a loan from my Thrift Savings Plan account to cover my bills during the shutdown. According to the TSP loan booklet, as long as the furlough last less than 30 days, this is not a problem. If the furlough lasts more than 30 days, the loan becomes a disbursement and is taxed, plus additional penalties assessed (10 percent) by the Internal Revenue Service. Is this true? How can one prepare for a furlough that lasts longer than 30 days?
A. I don’t know where you read this, but it’s not true. If you’re in nonpay status, you are ineligible to initiate a TSP loan, so the question is not applicable. If you have a loan and go into approved nonpay status, you may suspend loan payments for up to one year. After that, your loan will be reamortized and you will have to make loan payments by check to avoid default. See pages 13-15 of the TSP loan booklet at https://www.tsp.gov/PDF/formspubs/tspbk04.pdf for the facts.
September 30th, 2013 | Uncategorized
Q. I am a federal law enforcement officer. I recently read an article that discussed the downside of the Roth TSP for federal law enforcement officers and firefighters. Is this true?
Many of you are probably unaware of the serious pitfalls you will encounter if you opt to contribute to the Roth TSP. For a federal law enforcement officer or firefighter, the Roth TSP is a poor choice. It wasn’t until this week that a reader posed a question to me that caused me to realize what a bad idea the Roth TSP is for many of us.
The idea behind the Roth TSP is that you contribute after-tax monies and when you withdraw funds from the account in retirement, the earnings are tax-free. The trick here is that the withdrawal must be a “qualified withdrawal” for the earnings to be tax-free. In order for the withdrawal to be considered a “qualified withdrawal” by the IRS, “five years must have passed since January 1 of the calendar year when you made your first Roth TSP contribution AND you are at least 59½, permanently disabled (or deceased).”
Here’s the problem: As a law enforcement officer or firefighter, you can retire as early as 50 years of age and are mandatorily retired at age 57. If you decide to take post-retirement withdrawals from the TSP (under the life expectancy option or the age 55 exemption), you will not meet the age test for the Roth TSP withdrawal to be considered “qualified.” (You may also not meet the five-year rule as the Roth TSP has only been an option since May 2012.) Since your withdrawal is not “qualified,” you will be taxed on the portion of your withdrawal that represents the attributable earnings. This eliminates the tax-advantaged nature of the Roth TSP. You’d be just as well off having a regular post-tax investment account outside of the TSP. You’re contributing after-tax dollars and paying taxes on the earnings generated by the post-tax investment.
The TSP will not allow you to specify that your post-retirement withdrawals come only from your traditional TSP balance, nor will the TSP allow you to roll over/transfer out only the Roth TSP portion of your account. When you make any withdrawal from the TSP, the withdrawn amount will be taken ratably from both your traditional and Roth balances under TSP rules.
If you roll over/transfer both your traditional TSP and Roth TSP to another custodian, then you lose your eligibility under the age 55 exemption, as that requires the funds to be left in your employer-sponsored account. If you retire between age 50 and 59½, at retirement, you could roll over/transfer your traditional TSP and Roth TSP to another custodian and withdraw only the funds that came from the Traditional TSP account using an IRS Section 72(t) withdrawal plan and wait until age 59½ to start to withdraw the portion that came from the Roth TSP funds.
Please consider these facts when deciding if the Roth TSP is right for you. If you already jumped into the Roth TSP, you can always stop and change your contributions to be 100 percent traditional TSP and limit the tax damage.
Even folks who aren’t covered under the special provisions get affected by these rules if they retire at their MRA.
A. The issue you raise is valid. You can get around it by transferring the Roth portion of a distribution to a Roth IRA. I realize this isn’t ideal, but it is an option to avoid the penalty.
September 30th, 2013 | Uncategorized
Q. My husband is retired for seven years now and is 67 years old. So far, we haven’t needed to use this money. We are trying to keep our income below $70,000 per year to stay eligible for our state property tax freeze, which is a significant saving of $2,000 or more per year.
1. What percentage or dollar amount are we required to take out each year?
2. Did I read correctly on someone’s question that if we set up a 10-year timetable we do NOT have to pay taxes on that money?
A. The required minimum distribution changes each year based on the account’s closing balance for the previous year and the account owner’s life expectancy. See IRS Publication 590 for the rules and a table of RMD factors for use in calculating the RMD for a given year.
There is no way to avoid the taxable income produced by RMD. That’s the point.
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.
August 8th, 2013 | Uncategorized
Q. I have a Thrift Savings Plan account as a CSRS retiree. I also turned 70½ this year and have non-Roth IRAs. Can I take a distribution from one of the IRAs that will satisfy the required minimum distribution calculation for my TSP account and all non-Roth IRAs? If so, would I still have to take a distribution from my TSP account just because I turned 70½?
A. According to the Internal Revenue Service rules, you should be able to satisfy your entire RMD requirement using one or more withdrawals from any covered account or accounts. The TSP will automatically distribute its share of your RMD each year, however.
July 22nd, 2013 | Uncategorized
Q. I am expecting to receive a payment from a pension plan for which I am expecting to be charged the 10 percent early withdrawal penalty. What is the best method to pay that penalty and avoid any additional penalties for not withholding sufficient taxes when I file my annual returns in April? Can I send the money to the Internal Revenue Service ahead of my regular tax filing? If so, what form do I use to remit it?
A. This is a question for your tax preparer.