Ask The Experts: Money Matters

By Mike Miles

TSP withdrawal and Social Security

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Q. I will retire at the end of this month. Already set the Social Security deal and retirement paperwork. If I retire now (tax year 2013) and ask for a big chunk of my Thrift Saving Plan in February (tax year 2014), will it affect my Social Security payment (as a windfall or any other way)?

A. Not directly, but it can affect the cost of Medicare Part B. You should consult a tax adviser (who will prepare your return) before you proceed, if you’re not sure.

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Taxation of lump-sum annual leave payment

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Q. I understand that the lump-sum payment for unused annual leave is treated as wage and salary income and is subject to federal and state (if any) income tax, FICA (Social Security) and Medicare taxes. How is it treated for Thrift Savings Plan purposes? Are individual and government matching contributions made? Can a retiring employee top up their contributions from the lump sum (up to the IRS-determined maximum)?

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Q. Overview:  I began in the Air Force Non-Appropriated Fund in 1996, enrolled in NAF retirement plan in 2000, ported to GS in 2005 with deferral of my NAF retirement (calculated at 5.27 yrs) and entered FERS. My current GS position will be abolished in 2014 (at nine years FERS). I have the potential of porting into a NAF position. I wish I had just retained NAF retirement, but lack of research and misguided human resources recommendations led me to where I am with a split retirement outlook.

Given my FERS time will total only nine years at abolishment, if I move to NAF:

* Will I have the option of re-entering the NAF retirement system, or am I required to remain in FERS?

* If I can switch back to NAF retirement, will I have to wait until 62 to draw any FERS retirement since I only achieved nine years, versus reaching MRA+10?

* Will I be able to retain Thrift Savings Plan in nonactive status (until draws begin at 59½) and begin contributing into the NAF 401(k), or will I have to roll TSP into 401(k)?

* Are there any conflicts with drawing two annuities at retirement (both APF and NAF)?

* Does AF NAF retirement pay the full amount of the retirement calculation (less 4 percent for each year before age 62) until I reach age 62? And is the only reduction at 62 the annuity reduction calculated at 2.5 percent of Social Security (x) # of NAF years?

* At age 65, do the health benefits automatically roll to supplementary when Medicare starts?

* What is the current cost for full family coverage and also the current cost for just the supplementary insurance?

* If, at 65, full coverage reduces to supplementary and my spouse is not yet 65 years old, can I elect to continue full coverage?

* If the NAF position is abolished via business-based action (after 2016) is there the possibility of being offered a Voluntary Early Retirement Authority/Voluntary Separation Incentive Pay retirement based on my service computation date providing 20 years of combined continuous service without a break since 1996?

A. Mike: You may maintain your TSP account.

Reg: I wish I could be of help but I don’t know anything about the rules that cover someone transferring from FERS to a NAF position. You’ll have to check with the NAF personnel office.

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Social Security and tax deductions from annuity and TSP

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Q. When I retire, I will be 59½ and will have 30 years of service at the Postal Service. I will not have any earned income from that point on. I understand federal and state taxes will be taken out of my FERS annuity and any money I take out of my Thrift Savings Plan. Will I also have Social Security deducted from these two sources? Also, will my special retirement supplement and — when I turn 62, my SSI benefit — also be subject to federal and state taxes?

A. Mike: Your TSP withdrawals are subject to income taxation, but no employment taxes, like Social Security, Medicare or unemployment insurance.

Reg: Your special retirement supplement will be treated as ordinary income. To find out to what extent your Social Security will be taxable, see IRS Publication 721.

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12 questions on VERA

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Q. I am a letter carrier, age 52, started in 1985 and have 28 years of creditable service.

If I understand what I’ve gleaned from the posts here and the Postal Service were to offer me a Voluntary Early Retirement Authority this year,

1.  Would I begin my annuity immediately?

2.  Would I have no reductions in calculations of my annuity? (average high-3 x 1 percent x 28)

3.  Would I receive credit for half of my sick leave and all of my annual leave? (How are these applied?)

4.  Would I receive the special retirement supplement beginning at age 56 (my minimum retirement age), and receive it until I reach age 62?

5. Would I be able to continue carrying my current health and life insurance at non-USPS rates? (I couldn’t find how long these could be carried. Until death?)

6.  Could I begin receiving Social Security as early as age 62?

7. Any withdrawal from my Thrift Savings Plan prior to age 59½ would be penalized 10 percent as per Internal Revenue Service regulations? (Can I continue to contribute to TSP after retirement?)

8. As a FERS annuitant, is there no limit to what I can earn after separation from the Postal Service as it pertains to my annuity payment?

9. At age 56 (my MRA), the special retirement supplement from Social Security would begin and would be subject to yearly income limits. Would supplement payments be reduced by approximately $1 for every $2 I earned above that year’s Social Security income limit?

10. At age 65, I’d be eligible for Medicare parts A and B? (Would this affect my health insurance coverage through Federal Employees Health Benefits?)

11.  Would there be cost-of-living increases at any point for my annuity?

12.  Is there a date during the year that maximizes the benefits of retirement?

Did I get this right, and are there any other things I should know before considering a VERA if it is offered?

A. Reg: 1. Yes.

2. Yes.

3. Yes. Half of your unused hours of sick leave would be added to any hours of service that were left over when your annuity was computed. Any additional months created would increase the amount of your annuity. Any unused annual leave would be paid to you in a lump sum at your current hourly rate.

4. Yes.

5. Yes. And those enrollments would continue until your death.

6. Yes.

Mike: 7. You will be subject to the early withdrawal penalty until you reach age 59½ unless you can qualify for one of the exceptions listed on Page 7 of the notice: You may not contribute to the TSP after you retire, but you may transfer eligible balances into the TSP from other retirement accounts such as IRA, 401(k), 403(b), etc.

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Long-term care insurance

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Q. If I have Medicare and Blue Cross/Blue Shield, is there any need to obtain long-term care insurance?

A. There might be a need since Medicare and BC/BS medical insurance provide very limited benefits for long-term custodial care.

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Taxes on a TSP lump-sum payout

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Q: I recently retired from the federal government. If I take my money out of the Thrift Savings Plan in a lump sum, will I have to pay Social Security and Medicare taxes?

A: No.

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