Ask The Experts: Money Matters

By Mike Miles

SEPP

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Q. I am retiring from the Army after 22 years of service and I am 45 yrs. old. Can I start withdrawing from the Thrift Savings Plan and avoid the early withdrawal penalty by taking a series of Substantially Equal Periodic Payments? How does that work? My life expectancy is 37.7 more years, according to the Internal Revenue Service, so is that the number of years my funds can be distributed? If so, do I then divide what I saved by 37.7 and again divide by 12 to see what my monthly payments would be?

A. You may avoid the penalty by taking a series of Substantially Equal Periodic Payments, but the rules are complicated and strict, with the penalty for violating them potentially large. I suggest that you consult with a CPA or other qualified tax preparer, who will prepare and stand behind your returns during the distributions, to run the calculations for you. There are actually three options for calculating the distribution amounts, and they typically produce a wide range of values. If you insist on doing it yourself, you can start the learning process by conducting an Internet search on “72t distributions,” but the IRS won’t care if you relied on bad information or methods that led to mistakes.

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Military service and Roth TSP

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Q. I am 25 and now have the option to contribute to a Roth TSP. I have four years left on my military contract before I have the opportunity to get out. Seeing that my future with the military is somewhat questionable, would the Roth TSP still be a favorable option?

A. Except for tax-free pay earned in a combat zone, I don’t see any reason to expect that contributions to the Roth TSP are somehow better than contributions to the traditional TSP. In fact, I recommend that you favor the traditional TSP over the Roth TSP unless your circumstances make the Roth contribution more attractive.

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Transfer to L Fund?

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Q. I have 10½ years of combined federal and military service and roughly $15,000 in my Thrift Savings Plan, 100 percent allocated to G Fund. I am 33 years old and nowhere near retirement. I plan on working another 22 years for the federal government and do not plan to start using my TSP until I am in my 60s. What would be the best way to allocate my contributions? I’ve had a few friends tell me to shift over to L funds.

A. If you’re not sure what to do, then I recommend that you use the L Fund that most closely corresponds to your life expectancy. For you, this will mean using the L 2050 fund.

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Keep money in L Fund?

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Q. I retired from the Air Force in 2004 after 30 years of service. I was rehired into the civil service ranks in November 2004 and immediately started investing into the Thrift Savings Plan’s L2020 account. I just turned 58 and plan on retiring when I hit 60, maybe 62 if my health holds up. How long should I keep my investments in the L2020 account? As I get closer to retirement date, should I move it from L2020 to one of the individual funds?

A. If you’re not sure about what to do, to support you goals with a minimum of risk, I suggest that you consider keeping your TSP money in the L Fund that most closely corresponds to your life expectancy — that is, the age that you think would be a reasonably long life for you or your spouse, whichever is longer.

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TSP rollover

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Q. I recently retired from the military. I had $30,000 in the Thrift Savings Plan. I have no plans on returning to federal service. I have Roth IRAs with two other private companies, each with less than what I had in the TSP. I want to remove these from TSP and place into either a new Roth or one of my existing accounts, which makes more sense as a larger pot of money will earn me more since I can continue to contribute. This opens a new concern as the limitations of combined income and contributing to a Roth. I am about to exceed that income level. So I am faced with either a TSP account to which I can no longer contribute, or an existing Roth account that I can no longer contribute to, but that pot would be larger.

1. Will I be penalized for moving funds from my TSP in complete withdrawal to placing them into an existing Roth IRA?

2. Does the same apply for a traditional IRA?

3. What about the company 401(k) for where I work now?

Ultimately, I will make the decision on what is best for this $30,000. It appears there is no scenario where I can withdraw without a penalty (I contemplated buying land with it). I am concerned that whatever I do, I will be taxed with a penalty and/or this will be added to my gross income for that tax year, which will spiral me into the second-highest tax bracket, causing me significant financial distress.

A. You may roll over your TSP account to a Traditional IRA without penalty. You may also covert your TSP balance to a Roth IRA without penalty, but you will owe the tax for converting.

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Want to retire this year

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Q. Current age: 56

Entered U.S. Navy active duty: May 1978

Active-duty military time: 11 years, four months

Retired reservist after 26 years as an O-5

Entered civil service: November 1997

Current paygrade: GS-9, Step 8

Received a $30,000 severance pay when released from active duty in January 1989

Points accumulated, active and reserve, for retirement: 5,245

What do I need to do to retire at the end of this year? I know you can’t tell me what I should do, but if you could give me guidance as to what I need to do so I can make an informed decision I would greatly appreciate it.

A. The analysis needed to make this determination can be quite complex since there are multiple variables and probabilities involved. Mistakes can be costly and irreversible, so you need to get it right the first time. I suggest that, if you’re not a professional pension fund manager, or have equivalent expertise, you find a trustworthy, affordable person to help you with the decision.

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Withdrawing to invest in hard assets

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Q. I have 19 years of federal service (counting the 10 years active duty I bought back). I am 51, and I fall under FERS. I don’t trust the government retirement system with what is going on in the economy and would like to invest in gold or silver, but I don’t trust it being in some IRA in another state, that if everything were to go south, I wouldn’t get anything anyway. Is there any way of withdrawing some or all of my funds without penalties to invest in hard assets?

A. Not until you reach age 50½ or have separated from service during or after the calendar year in which you reach age 55, if sooner. You could take a TSP loan, but you’d need to repay it over time.

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TSP

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Q. I have six more years of active duty in the military. I have approximately $62,000 in my Thrift Savings Plan, 100 percent is in the G Fund. What would be the best fund for investment for my age and retirement in six years?

A. It’s impossible to say from this information. The correct answer depends upon how and when you plan to use the money.

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Start Roth TSP at age 54?

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Q. I am 54 years old and I have 30 years of federal service under FERS. Should I start a Roth TSP at age 54? I was born in March 1958. I plan to work until I hit full Social Security, which, I think, is 67 or maybe 66. Bottom line: If I were to start the Roth TSP until retirement at age 67 or 66, which is 13 or 14 years from now, is it worth my time and effort?

My current Thrift Savings Plan is about $230,000 as of July. Six years from now, about March 2018, I will be drawing an estimated $3,500 monthly taxable from my time in the Army Reserve. So, again, should I start a Roth TSP or stick with the current TSP?

A. I think that you’re approaching the question the right way — by asking if there’s a compelling reason to complicate your investment program by adding Roth TSP contributions. I can’t come up with one.

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Contact for TSP

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Q. I served six years in the military and was honorably discharged in 2005. I can’t remember if I had a Thrift Savings Plan or not. Who can I contact? I’m receiving disability benefits through the Veterans Affairs Department. Would they know?

A. Start by contacting the TSP (www.tsp.gov).

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