By Mike Miles
November 11th, 2013 | Uncategorized
Q. I am a federal employee who will be retiring Jan. 3 after 40 years of service at age 58½. I took a necessary loan on my Thrift Savings Plan and will still have a balance on my loan when I retire. I understand I have 90 days to pay back the loan or I will be taxed for the money owed.
I do not need my TSP money now. I would like to keep it there or invest somehow, not sure yet. I do not want to pay the money back, which makes no sense to me since I can take money from my TSP anytime now once I retire without a penalty. Do you think I will be better off to pay the money back to myself to avoid the taxes?
A. I generally recommend that you leave your money in the TSP and invest it there for as long as possible and practical. If you don’t repay the loan, you will not be able to return the money to the TSP later. You should repay the loan unless there is a good reason not to.
October 28th, 2013 | Uncategorized
Q. I am 61 years old and have a Thrift Savings Plan loan of $24,000 and over $60,000 remaining in my TSP account. I applied for a Voluntary Early Retirement Authority/Voluntary Separation Incentive Pay at my human resources office awaiting approval. What happens to my TSP loan and to my remaining balance in my account if I request a full withdrawal when my retirement is approved? Does the remaining balance of my TSP loan gets paid up from my remaining balance and incur penalty for the full withdrawal?
A. If you don’t repay your loan within 90 days of the day your agency notifies the TSP of your separation from service, the outstanding balance due will be declared a taxable distribution. If you request a lump-sum withdrawal of your entire TSP balance at retirement, you’ll pay tax on the remaining balance and the un-repaid loan amount due.
October 17th, 2013 | Uncategorized
Q. I am a civilian employee. I have FERS and the Thrift Savings Plan. Is there any provision that would allow me to cash out my TSP for it to be applied directly to my federal student loans without any type of penalty?
A. Check the list of exceptions on Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf. Student loan repayment is not the basis for an exception to the early withdrawal penalty.
October 16th, 2013 | Uncategorized
Q. I have seen quite a few questions (and answers) about how to request that Thrift Savings Plan loan payments be suspended during the government shutdown, but no detailed information about exactly how to continue to make payments should one want to do that. When during the regular pay cycle should one send in a payment check with the appropriate form? When we go back to work, and if back pay is given, will the loan payments for the entire period of furlough, or perhaps the last pay period only, be taken out? How long of a period of nonpayment may there be before the tax penalties kick in?
A. If you are in nonpay status for reasons other than active military service:
The maximum period that the TSP can suspend loan payments is one year.
If your nonpay period exceeds one year, your loan will be automatically reamortized and you must make payments from your personal funds to avoid being in default.
Interest on your loan accrues while your payments are suspended.
If you want to continue making loan payments while in nonpay status, you can do so by sending a personal check or money order to the TSP. Use Form TSP-26, Loan Payment Coupon, when sending in your payments. Your payments will be taken into account when the loan is reamortized upon your return to pay status.
When you begin your period of nonpay status, you or your agency must submit one of the following forms of documentation to the TSP:
Form TSP-41, Notification to TSP of Nonpay Status; or
Form SF-50, Notification of Personnel Action; or
A letter on agency or service letterhead, signed by an appropriate agency official or your commander or adjutant, that contains your name, date of birth and Social Security number; the beginning date of the nonpay status; and the signature and title of the agency or service representative providing the information; or
A copy of your military orders.
When you return from nonpay status, you must notify the TSP of your date of return. You can use any type of documentation described in the above section. Once your agency notifies the TSP of your return, your loan will be reamortized to place it in good standing.
Note: If your agency reports you as separated from civilian service to perform military service, you will be required to repay your loan in full within 90 days. If you don’t, the outstanding loan balance and any unpaid interest will be reported to the Internal Revenue Service as a taxable distribution.
September 30th, 2013 | Uncategorized
Q. I have a loan balance of $18,366. I’m 56 years old and plan to retire in three months. Am I subject to the 10 percent penalty if I do not repay the loan?
September 23rd, 2013 | Uncategorized
Q. I’m eligible to retire CSRS Offset in a few months. I was considering a Thrift Savings Plan loan prior to retiring to pay off other bills. I understand that upon retirement/separation, I would receive a Form 1099 for taxable income. Is this something I should consider?
A. If you don’t repay your outstanding loan balance within 90 days of separation from service, the amount due will be declared a taxable distribution and will be treated as though you took the money from your account on the date of the declaration. I believe that you should always consider all reasonable options when it comes to making important financial decisions.
September 18th, 2013 | Uncategorized
Q. I have to retire in 18 months. I plan on taking a lump sum and monthly allotment from my Thrift Savings Plan at retirement. I understand both of these will be taxed at 20 percent. I am thinking of taking a TSP loan for the amount I had planned on requesting as my lump sum prior to my retirement date, with the understanding that I won’t have the time to pay it back in full and that the amount I don’t pay back will be considered disbursed income. My reasoning is that having the funds now will allow me to begin the process to purchase my retirement home, and allow me to at least pay a portion of the loan back. Is there a downside to this plan?
A. You should consult your tax preparer for testing and advice about the potential impact on your tax returns. The only general implications of this strategy that come to mind are:
1. If the distribution is declared before the calendar year in which you reach age 55, it will be subject to the early withdrawal penalty and
2. There will be no tax withholding in the case of a declared distribution.
September 16th, 2013 | Uncategorized
Q. How long after I retire do I have to repay my loan? Is there time to take a partial payment from the Thrift Savings Plan at retirement to pay the loan?
A. You have 90 days following your separation to repay the loan. It doesn’t make sense to take a partial withdrawal to repay the loan, since any unpaid balance will be declared a taxable distribution when the deadline is reached but won’t count against your once-in-a-lifetime limit on partial withdrawals.
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.