Ask The Experts: Money Matters

By Mike Miles

TSP withdrawal

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Q. I am 64 years old and will be retiring in a year. I have 15 years with the federal government. Do all of my Thrift Savings Plan contributions have to be withdrawn prior to a specific age?

I also understand that my total TSP account will be charged 20 percent. Am I to understand that after the 20 percent is subtracted from my TSP account, I have to pay income taxes per year for withdrawals I make from my TSP account that will be added to my total gross income?

A. You will be required to begin taking minimum annual distributions from your TSP account when you reach age 70½, but there is no requirement to deplete your TSP account during your lifetime. Under certain circumstances, the TSP may withhold 20 percent from your withdrawal as a deposit against your tax liability for the year of the withdrawal. Your TSP withdrawals are added to your gross income for the year and taxed as ordinary income.

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Figuring out required minimum distributions

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Q: I have a question concerning the following paragraph from your Feb. 20 column in Federal Times:

I find it disappointing that it appears that you will not be able to manage, or withdraw, money selectively between the two options. Your contribution allocation and any interfund transfers you direct will apply to both options. Any withdrawals will be taken, pro rata, from both options. You may, however, split a rollover distribution between traditional and Roth IRA accounts.

Specifically, I am puzzled by the statement in the second sentence. As I understand the general concept with “tax deferred” individual retirement accounts and 401(k) plans, mandatory minimum withdrawals begin not later than April 1 of the year following the depositor reaching age 70 1/2.  As I understand the general concept with “tax paid” — i.e., Roth IRAs and 401(k) plans — no mandatory minimum withdrawal is required earlier than the death of the contributor/owner of the tax-paid account.

If I understand the meaning of the language in the paragraph in your column, and assuming a Thrift Savings Plan participant has made both “tax deferred” TSP contributions and “tax paid” (Roth) contributions to the TSP, any mandatory minimum withdrawal from the tax-deferred segment of the TSP will result in a pro rata withdrawal from the tax-paid (Roth) option of the TSP.

Do I understand that the allocation mix in the non-Roth and the Roth segments of the plan must be identical?  Given the option, I would elect to allocate greater risk to the Roth segment in order to avoid being forced to make mandatory minimum withdrawals after taking a “financial hit” similar to that which occurred during the period beginning in late 2007. Surely Congress could not have intended to impose a mandatory minimum withdrawal on “tax paid” (Roth) contributions to the TSP when it authorized the Thrift Savings Board to offer a Roth option to the TSP.

A: I based the comments in my column on the following excerpt from the TSP’s brochure: “A New TSP Element”

You will be able to take loans, in-service withdrawals, and partial withdrawals from your account as before. They will come out of your account on a pro rata basis — with a proportional amount from your traditional and Roth balances.

Details on how required minimum distributions will be handled have yet to emerge.

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Social Security and TSP rollover

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Q. I am a Civil Service Retirement System employee, hired in 1979 and contemplating retiring April 3, 2013.

1. I will be subject to the windfall elimination provision because I earned 40 credits of Social Security eligibility prior to my federal employment. But my spouse is also eligible for Social Security and started receiving Social Security benefits of more than $1,900 a month (gross) starting last month (January 2012), whereas the Social Security Administration has estimated that my Social Security benefits would be approximately $385 a month (gross). Would I be eligible for spousal Social Security benefits?

2. A financial planner has recommended that I roll over my substantial Thrift Savings Plan account balance prior to age 70½ (October 2017), but I do not consider this wise because the administrative costs of TSP are so low compared to other options (and I’m doing fine in the TSP). Do you see any advantages to an early rollover from TSP?

3. This same financial planner advised that I must take the entirety of my TSP account balance out by age 70½, either as a taxable distribution or as a rollover (or combination). Can I not maintain my TSP account after age 70½, and simply start taking periodic distributions?

A. Your financial planner is either a fraud or a fool. Find another financial planner — one who knows what he/she is talking about! Leave your TSP intact as long as possible. You can request automatic minimum distributions from the TSP. Visit www.tsp.gov.

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TSP, RMD and private accounts

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Q: I am 75 and still working under the Federal Employees Retirement System. I have two tax shelter plans. One of them is with my Thrift Savings Plan account, and I learned from the TSP website that I do not have to take a required minimum distribution from them until I retire. My other plan started when I worked for Georgia Tech, but is now managed by a brokerage firm. My question is: Must I take an RMD from the plan managed by the brokerage firm if I am still working? I don’t understand why I should have to take such a distribution because I could transfer the funds in this plan into my TSP account, except for some tough penalties imposed by the firm if I do so within the next few years. 

A: The fact that you are still working for the federal government will only allow you to delay the RMD from your TSP account (your active employer-sponsored retirement plan). Your other retirement accounts are subject to the usual RMD requirements.

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