Ask The Experts: Money Matters

By Mike Miles

TSP withdrawals without penalty

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Q. I am a FERS employee with a retirement date of May 2018. I will reach my minimum retirement age of 56 at that time, with 36 years of service. Am I eligible, at that point, to receive nonpenalized withdrawals, either payments or lump sum from my Thrift Savings Plan account? Or do I have to wait until I reach age 59½ to not be penalized?

A. You will be exempt from the early withdrawal penalty under those circumstances.

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Lump-sum and monthly TSP withdrawals

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Q. I anticipate starting monthly withdrawals from the Thrift Savings Plan in the near future. Sometime after this, I would like to make a one-time lump-sum withdrawal from TSP to pay for my daughter’s wedding. Can I do this? Can I make a lump-sum withdrawal while taking monthly payments, or am I limited to one or the other?

A. You can take the lump-sum partial withdrawal before starting the monthly payments, but not after.

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Tax implications for TSP withdrawal

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Q. Whether I retire sooner or later than the year I turn 55, what kind of tax implications will I have in taking a partial lump sum or the whole balance lump sum for something like a vacation home?

A. If you retire from Thrift Savings Plan-covered employment during or after the calendar year in which you reach age 55, you will be exempt from the Internal Revenue Service 10 percent early withdrawal penalty for any withdrawals you take.

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Special retirement supplement and TSP

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Q. I am looking at retiring in January 2015. I will be 56 years old Oct. 15. I will have 30 years in as of Dec. 24. Waiting until the end of leave year to cash in all available annual leave. I am looking at cashing out my Thrift Savings Plan in a lump sum to pay off all debts. Will that income be considered part of earned income so that the special retirement supplement is reduced?

If so, would it be in my interest to retire at the end of 2014 so that my annual leave hits that year instead of 2015? I will have more than 1,800 hours of sick leave accrued by the end of 2014. Can that be used to offset the age so that I could perhaps retire earlier so that the TSP lump sum is counted in 2014?

A. Mike: No, the TSP distribution will not be considered earned income. It is considered ordinary income.

Reg: Unused sick leave is only added after you have met the age and service requirements to retire. Therefore, to avoid the 5 percent-per-year age penalty imposed on those retiring under the MRA+10 provision, you’ll have to wait until you reach your MRA and have 30 years of actual service. Regardless of whether you retire at the end of 2014 or the beginning of 2015, you wouldn’t receive a lump-sum payment for your unused annual leave until 2015. It will be considered to earned income, so the annual Social Security earnings limit would apply. Depending on how much annual leave you’ll be cashing in, it could reduce or eliminate the special retirement supplement for 2015.

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TSP withdrawal

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Q. I am 70½ and separated from federal service since 2008. I need to make a withdrawal election (my Thrift Savings Plan has $180,000). I was told I have three options: withdraw the account as a single payment, monthly payments or an annuity (or a combination). Assuming I do not need the money right now, what is the best option to maximize the interest I am getting and paying taxes on what I’ll be withdrawing?

A. If you don’t need the money, I suggest that you begin fixed monthly distributions in an amount that will satisfy or nearly satisfy your required minimum distribution for the year.

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TSP monthly withdrawal, then lump sum 2 years later

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Q. Could you clarify for me the following:

I wish to withdraw funds from my Thrift Savings Plan account (by submitting Form TSP 70, as I am told). To get monthly payments, in section IV, I fill No. 23c: 100% for monthly payments, fixed amount (greater than my RMD).

Suppose two years from now, I want to withdraw the remainder of my TSP funds in one lump sum. Am I allowed to do so? How? By submitting another TSP70?

A. Yes, you may terminate the monthly payments and request a final distribution using Form TSP-79.

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Waiting to claim Social Security

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Q. I retired in July 2013 and have $500,000 in my Thrift Savings Plan. I need more money to support retirement and would like to take a lump sum of $30,000 out of TSP. I was thinking about taking the rest of the money as an allotment. Does this make sense? I have delayed my Social Security until I am 66 (I’m 64 now). My wife is taking her Social Security.

A. Waiting to claim Social Security is probably a good idea unless you have a shorter than average life expectancy and are single. If your only other source of income until you reach age 66 is your TSP account, then I think it’s reasonable to consider using it to fill the gap. If you have other resources, I encourage you to leave your TSP account for last.

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Mortgage and C Fund

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Q. I retired Jan. 31, 2013. I have more than four years left on my mortgage. I owe about $25,000 on my loan. I was thinking of taking a lump sum from my Thrift Savings Plan for about $20,000 and use my tax refund to make up the difference I would owe. I have about $120,000 in my TSP. I’ve had it in the C Fund, which is doing very well. Do you think it’s a good idea to take a lump-sum withdrawal to pay off my mortgage? It would save me $900 per month, which is what I’m paying for my mortgage.

A. If you plan to leave all of your money in the C Fund going forward, it might be smart to use some of it now to pay off your mortgage before you lose it. You should note that the C Fund isn’t “doing very well,” it has done very well. Those are two different things. The question you should asking is: “What could it do in the future?” Since 2000, it has lost half of its value – twice.

The best decision about your mortgage will depend upon a number of factors, including your tax returns, how you will manage the money going forward if it’s not used to pay off your mortgage, the terms of your current mortgage and the demands you will place on your TSP account in the future.

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TSP withdrawal

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Q. I retired from the federal government under CSRS. I turned 70½ years old in May. I have $40,000 in my Thrift Savings Plan account. I am thinking about withdrawing all of my funds in a lump sum. Is this a good idea? How will this affect my tax obligations? What do you recommend?

A. The money you withdraw from your TSP account will be counted as ordinary income for tax purposes. If you need the money, then fine. If not, you should leave it in the TSP for as long as possible.

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Taxable distribution vs. paying off TSP loan

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Q. I have separated from federal service with an existing Thrift Savings Plan loan. My intent is to take a lump-sum withdrawal and take a taxable distribution versus paying off the loan. In the end, will I end up paying more or less tax if I were to pay off the loan versus taxable distribution?

A. It’s impossible to say what you’ll pay “in the end,” but if you repay the loan on time, your tax on the money owed will be zero until it is ultimately withdrawn.

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