Ask The Experts: Money Matters

By Mike Miles

Workers’ comp and TSP withdrawal

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Q. I am below the age for Thrift Savings Plan withdrawal without penalty (soon to be 50), but it looks like I will be out on workers’ compensation under permanent disability shortly. Due to the impact on my income and an ongoing issue, I need to make a withdrawal or close my TSP to continue meeting my obligations. I have thoroughly researched the issue of using a TSP but have little choice. A loan is not an option (I’m paying one off and, if I’m on disability, I can’t take one out). And I’ve looked into other avenues, to include financial planners, with no success. Without focusing on the 10 percent penalty, how can I submit for my account funds? Although I am vested with more than 22 years, do the age criteria prohibit access to any funds that are not your own contributions? Due to the previous loan, is it impossible to access these funds to avoid a more onerous financial situation? I have an amount that would make us able to live on the disability funds. Is this a simple matter of age and letter of the law?

A. As soon as you are separated from federal service, you may request a distribution of some or all of your TSP funds. Before you separate, you may request a hardship withdrawal if you can qualify, or you could take a loan and then fail to pay it back, which will result in a distribution.

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TSP partial withdrawal after tax distribution declared

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Q. I have a general purpose loan and am planning to retire soon. If I choose not to repay the loan and take a tax distribution, will I still be entitled to make one partial withdrawal after retirement? Or will the unpaid balance of the loan be considered my one-time partial withdrawal?

A. The unpaid loan does not count as your partial withdrawal.

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Early TSP withdrawal and tax penalty

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Q. My understanding is if I withdraw using a loan from my Thrift Savings Plan (say a residential loan) shortly before I retire and under 59½ years old, and then I retire or turn 59½, I get a 10 percent tax penalty because the loan was taken when I wasn’t eligible for a withdrawal without penalty. It seems a little contradictory because I could pay off the outstanding amount and then take an unpenalized withdrawal after retirement or 59½. Am I reading this rule correctly?

A. No. If your unrepaid loan balance is declared a taxable distribution, it is counted as a distribution during the year it in which it is declared, not retroactively to the year in which you took the loan.

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TSP loan to jump-start daughter’s grad school payback?

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Q. I want to help my daughter reduce her $120,000 graduate student loan, which she will repay at 6.5 percent interest when she finishes next year. I am 58 years old, a foreign service officer, and planning to work until I am 65. Given that Thrift Savings Plan general loans are at 1.2 percent interest, I am considering asking for a $50,000 loan to help my kid jump-start payments. In your opinion, would this be wise?

A. Wise is not really the issue here. It’s certainly generous. But, is it affordable? That’s really the question.

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TSP residential loan

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Q. Can a TSP residential loan be taken out to pay off a mortgage on a primary residence?

A. No.

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Age-based withdrawal

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Q. I am going on 72, working for the Postal Service, contributing to the Thrift Savings Plan and paying off a loan. Do I have to start the age-based withdrawal? If I do, how do I contribute and withdraw at the same time? My health is good, and I don’t feel like quitting at this time.

A. You don’t have begin taking Required Minimum Distributions from your TSP account until after you’ve retired.

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TSP loan request and military orders

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Q. At the beginning of a pay period, an employee’s military orders begin. But in the middle of the pay period, it will be the 60th day after paying off a Thrift Savings Plan loan. If the employee wants to initiate a new TSP loan, what should the employee do? The orders are for several months.

A. The employee cannot take a loan from his/her civilian account if the employee is in nonpay status with respect to his/her civilian employment while performing military service. However, the employee may be eligible to request a TSP loan from his/her uniformed services account.

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TSP loan for retired active duty

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Q. I retired from active duty in December 2011. I accepted an appointment to a government service position in October 2011 and established a FERS Thrift Savings Plan account. I did not move any of my TSP account balance accumulated during my time on active duty into my FERS TSP account, so I currently have two accounts. Am I eligible to take out a loan against the TSP account balance still residing in my [previously] active-duty account? If not, can I transfer all or part of my [previously] active-duty account into my FERS TSP account with the goal of taking out a loan against my FERS TSP balance?

A. You must be in pay status to request a loan. Since you are no longer in pay status with respect to your uniformed services account, you cannot request a loan from your uniformed services account.

You may transfer your active-duty TSP account to your FERS TSP account subject to the following rules:

(a) An account balance can be combined with another once TSP is informed (by the participant’s employing agency) that the participant has separated from government service.

(b) Tax-exempt contributions may not be transferred from a uniformed services TSP account to a civilian TSP account.

(c) A traditional balance and a Roth balance cannot be combined.

(d) Funds transferred to the gaining account will be allocated among the TSP Funds according to the contribution allocation in effect for the account into which the funds are transferred.

(e) Funds transferred to the gaining account will be treated as employee contributions and otherwise invested as described at 5 CFR Part 1600.

(f) A uniformed service member must obtain the consent of his or her spouse before combining a uniformed services TSP account balance with a civilian account that is not subject to FERS spousal rights. A request for an exception to the spousal consent requirement will be evaluated under the rules explained in 5 CFR part 1650.

(g) Before the accounts can be combined, any outstanding loans from the losing account must be closed as described in 5 CFR Part 1655.

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‘Intent not to repay’

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Q. I just separated from the military and have an outstanding loan. I recently mailed in the “intent not to repay” form. How long will it take for the Thrift Savings Plan to claim a taxable distribution and close out the loan? Also, if the entire sum of the loan was accrued in a tax-free combat zone, will they still tax the remaining balance?

A. I checked with the TSP, and it should take one to two weeks for TSP to declare a taxable distribution once it receives an “intent not to repay” notice. Only the outstanding loan principal and interest will be reported to the Internal Revenue Service as income. To the extent that the loan principal is attributable to combat-zone contributions, that portion is not taxable. However, the interest on the amount of the loan principal that is attributable to combat-zone contributions is taxable. Loans are distributed pro rata from taxable and nontaxable amounts. The only way that the entire sum of a loan could be attributed to combat-zone contributions is if the account balance consisted only of combat-zone contributions and no interest had accrued.

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TSP withdrawal or personal loan?

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Q. I am 61½ years old. I want to pay my mortgage off. I am losing my contract job and need to lower my debt.   I have saved up all but $30,000. If I withdraw that from my Thrift Savings Plan, how much in federal taxes will I have to pay? Would it be better to get a personal loan?

A. Your TSP withdrawal will be added to your income for the year and taxed at your marginal tax rate for the year. You’ll need to prepare a pro-forma tax return to estimate the amount you’ll owe. It’s impossible to say, without more rigorous analysis, whether or not a personal loan would be a better solution.

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