By Mike Miles
November 25th, 2013 | Uncategorized
Q. I am in FERS (age 57 with 30 years). I have been offered the buyout and will have to be off the roll Jan. 31. How should I go about having a portion of my lump-sum annual leave payment go directly into my Thrift Savings Plan account?
A. This is not allowed.
November 19th, 2013 | Uncategorized
It’s easy to make mistakes when you are planning to retire. Some of the biggest mistakes apply to all employees; a few apply only to CSRS or FERS retirees. All can be costly. Here they are and what you can do to avoid them:
Retiring on the spur of the moment. It can be disastrous, for two reasons. First, if you hand in your retirement application at the last minute, it may contain errors that delay processing or even cause it to be rejected. Second, decisions made in haste often come back to bite you. Once committed to a course of action, it’s hard to undo it if you change your mind. If you do change your mind before you actually retire, you won’t be able to withdraw your application if your job has been abolished or it’s been offered to someone else. If you’ve already retired and want to cancel your retirement, your agency has no obligation to bring you back on board.
Confusing a salesperson with an adviser. The two are not the same. Actually, they’re opposites. One is paid to convince you to buy what they have to sell; the other is paid a fee to conduct analysis and provide you with decision support. One is your ally. The other is your adversary. Why would you trust an adversary for advice? Be skeptical of any source of “advice” that might be influenced by a conflict of interest. This is single mistake probably costs the American public more than any other when it comes to financial decision making.
Losing your health or life insurance. Make sure you are enrolled in the Federal Employees Health Benefits or Federal Employees’ Group Life Insurance programs for the five consecutive years before you retire. If you aren’t, with few exceptions, you won’t be able to carry that coverage into retirement. Here are the exceptions: you are covered by your spouse’s FEHB policy; you have been covered by Tricare of CHAMPVA, enroll in the FEHB program before retiring and the total equals five years; you enrolled in the FEHB at your first opportunity and retire in less than five years; or you accept an early retirement offer and were enrolled before the latest offer of early retirement was made by your agency.
Before you retire, check with your personnel office to be sure that you’ve met either the five-year rule or one of its exceptions.
Not getting credit for active-duty service in the military. If you served on active duty in the military, you can get credit for that time in determining your years of civilian service and have it used in the computation of your annuity. If you are a FERS employee, you’ll have to make a deposit to get credit for that time. If you are a CSRS employee, the rules differ depending on when you were first hired. If it was before Oct. 1, 1982, you will only have to make a deposit if you retire and are eligible for a Social Security benefit at age 62 (or when you retire, if it’s after age 62). If you were hired on or after that date, you’ll get credit for that time only if you make a deposit for that service. Whether you are a CSRS or FERS employee, if you’ll be eligible for or receiving military retired pay, in most cases you’ll have to waive that pay when you retire from your civilian job. You won’t have to do that if you are eligible for or receiving reserve retired pay.
Check with your personnel office to make sure that any active-duty service is recorded in your Official Personnel Folder and find out if a deposit will be required to get credit for that time.
Getting caught by “Catch-62.” If you are a CSRS employee who served on active duty in the armed forces after Dec. 31, 1956, and haven’t made a deposit for that time, you could be in for a rude awakening. If you retire and are eligible for a Social Security benefit at age 62 (or when you retire if it’s after age 62), your annuity will be reduced by 2 percent for each of those years of military service for which you haven’t made a deposit.
Determine whether you’ll be eligible for a Social Security benefit at either of those points in time. If you will, you may want to make a deposit for that time. If you won’t, don’t waste your money. Your CSRS annuity won’t be affected.
Rolling over Thrift Savings Plan assets. This mistake is usually caused by either trusting the wrong source for advice or failing to think “outside the box” a little when it comes to planning for your cash flow needs. Financial salespeople generally have to gain custody of your assets in order to be paid their commissions or fees, so naturally, their advice always includes rolling over any significant TSP sums into an IRA or other investment vehicle with higher costs. This is a formula for diminished investment performance. If the reason for leaving the TSP isn’t to enrich a financial salesperson, it’s often to gain more freedom in withdrawing TSP assets. While this is sometimes a valid reason to leave, it can often be dealt with through a combination of a lump-sum withdrawal or a series of fixed monthly distributions that will create and maintain a slush fund outside the TSP that is sufficient to meet your cash flow needs.
Focusing on wealth instead of cash flow. Speaking of cash flow, this mistake is propagated by financial professionals and journalists all the time. Much of what you’ll read and hear from financial and investment experts is aimed at maximizing economic wealth — basically your net worth. The mistake is in assuming this is your retirement goal. It’s probably not. And managing to this goal can cause serious problems for you in retirement. Paying off a fixed-rate, low-interest-rate mortgage is an example. It is often proposed that saving the interest over 10, 20 or 30 years will dramatically increase your net worth. While the validity of this proposal will vary from case to case, and is certainly debatable, it also completely misses the point that your retirement standard of living is not dependent upon your net worth but rather on your ability to generate cash flow. Having massive amounts of equity in a piece of real estate is of little use to you in making a car payment or paying for a cruise if you can’t sell the property or borrow against the equity on attractive terms.
Getting hit by the windfall elimination provision. If you are a CSRS retiree who will be eligible for a Social Security benefit, it may be reduced by the windfall elimination provision. That will happen if you have fewer than 30 years of “substantial earnings” under Social Security. The difference between the amount needed to earn four credits under Social Security and the amount considered to be substantial earnings is significant. In 2013, you would only need to earn $4,640 to get four credits; however, you would have to earn $21,075 for it to be considered substantial. (Since the Social Security Administration doesn’t know which retirement system you are in, if you are a CSRS employee, any estimate of future Social Security benefits they give you will very likely be wrong, often very wrong.)
If you’ll be affected by the WEP, know in advance how much less your Social Security benefit will be. You can get started by reading the Social Security Administration’s publication at ssa.gov/pubs/EN-05-10045.pdf.
Getting hit by the government pension offset. If you will be receiving a CSRS annuity, any spousal Social Security benefit you may be entitled to will be reduced or eliminated by the government pension offset. The GPO will reduce those Social Security benefits by $2 for every $3 you get in your CSRS annuity.
If you’ll be affected by the GPO, you need to find out how great the impact will be. That’s because it isn’t uncommon for the GPO to wipe out those benefits. You can learn more at ssa.gov/pubs/EN-05-10007.pdf.
Relying on emotion instead of reason. This mistake is so common, it’s the norm. It also has the potential to cause disaster. There have been books written about this mistake and how to avoid it, yet the behavior continues to be rampant. If you’re going to get the most of what you want from what you have, you need to realize that markets have evolved to take advantage of your fear and greed, which are amazingly predictable, and turn them against you. The investment markets aren’t fair; they’re like poker games, and trust me, you’re not the best player in the game. If you want to survive and, better yet, enjoy the game, you need to rely on a strategy that acknowledges the odds you face, accepts them and uses reason to turn them to your favor.
Failing to account for inflation. Inflation is a pervasive threat to any retirement plan. Not so much inflation in general, but differential rates of inflation among the various incomes and outflows that affect your plan. Your expenses will inflate, over time, at varying rates, while your income may or may not keep pace with that inflation. CSRS annuity and Social Security income increase with the Consumer Price Index (for now), FERS annuity income increases less than the rate of inflation, and many other pension and annuity income streams either don’t increase at all or increase at a fixed rate. Differences in these inflation rates can have a profound impact on your financial picture in retirement and failing to properly account and plan for this impact can leave you without the resources you’ll need to live the life you’ve been expecting years, or decades, down the road.
November 18th, 2013 | Uncategorized
Q. I am a federal employee considering retiring at age 64. I want to withdraw my Thrift Savings Plan funds in one lump sum, which by then will be approximately $400,000. At what tax rate can I expect to be hit upon withdrawal?
A. Your withdrawal will be subject to 20 percent federal tax withholding. Read the document at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for more information.
October 30th, 2013 | Uncategorized
Q. I am reading TSP-775 (6-2013) concerning important tax information about TSP withdrawals. First paragraph (Deadline for withdrawing your TSP Account) states that “By April 1 of the year following the year you become age 70.5 and are separated from Federal Service, the TSP requires that you withdraw your entire account balance in a single payment.” It goes on to give options about monthly payments, life annuities. This leaves me perplexed. I thought I only needed to withdraw the required minimum distribution after becoming age 70½. Also, I thought if I have other IRAs, I could take the RMD from those and leave my Thrift Savings Plan unscathed. If I withdraw the entire account balance from my TSP, I will have to pay federal tax on whole amount. Can you clarify?
A. Here’s what you read:
By April 1 of the year following the year you become age 70½ and are separated from Federal service, the TSP requires that you withdraw your entire account balance in a single payment, begin receiving monthly payments, purchase a life annuity, or use a combination of these withdrawal options.
The requirement is that you do one of the three basic options separated by commas (full lump-sum withdrawal, monthly payments, purchase a life annuity), or elect some combination of them by the required beginning date.
Unfortunately, the TSP does not allow you to waive the RMD for your TSP balance. It must be taken from your TSP account.
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 an air traffic controller who will be forced to retire in May 2016 when I turn 56 with 28½ years of service time. If I retire anytime between Jan. 1, 2015 (the year I turn 55) and May 2016, will I be able to take out a lump sum and monthly payments from my Thrift Savings Plan without the 10 percent tax penalty? Do I have to follow the life expectancy requirement for receiving monthly payments, or am I free to set the payment amount as I wish and adjust it once a year?
A. Since you are separating from service during or after the calendar year in which you reach age 55, your TSP withdrawals after you separate will be exempt from the early withdrawal penalty.
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. I’m a Defense Department firefighter (special category). At what can I withdraw my Thrift Savings Plan without incurring any penalties?
A. If you’ll settle for specific monthly payments, you can withdraw it any time after you separate from service without penalty. If you want a lump sum or monthly payments that don’t fall within the limits imposed by Internal Revenue Code section 72(t), then you’ll have to wait until you reach age 59½ unless you separate from federal service during or after the calendar year in which you reach age 55. In the latter case, any withdrawal you make will be exempt from penalty.
July 24th, 2013 | Uncategorized
Q. If the lump-sum payment is considered earned income for tax purposes but is not eligible to Thrift Savings Plan deferral nor does it serve as the base for automatic agency contributions, wouldn’t it make better sense not to cash in the leave? Rather, wouldn’t it be more lucrative to continue working, take the earned vacation over the year, collect matching funds for TSP, matching funds for health insurance, and on top of that, continue to accrue more annual leave, more sick leave, and enjoy the vacation time off? I understand no supervisor/manager would approve a single vacation of 5+ weeks, but spreading a vacation out over a period of time can’t be denied.
A. Yes, financially, it would be better.
July 22nd, 2013 | Uncategorized
Q. I am a contractor in between jobs and would like to withdraw my Thrift Savings Plan. If there are any owed monies to the government, will that be taken from my TSP? How much tax will be taken from me if I do a lump sum? And is there a difference in taxes if I do a monthly payment? Lastly, is there a hardship exemption rule if unemployed? I am retired from active duty (20 years) and 42 years old.
A. There is an “it depends” at the beginning of the answer to each of your questions and I can’t provide simple answers with the information you’ve provided. I suggest that you review the information covering withdrawals after leaving federal service at www.tsp.gov, including the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf. After that, if you still have questions, submit them and I’ll try to answer them.