Ask The Experts: Money Matters

By Mike Miles

TSP withdrawal

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Q. I retired a few years ago under the VSIP/VERA program under the MRA +13 years of government service.
Can I take a withdrawal of my TSP funds out before I turn 59½? If so, what are the tax penalties and is there a 20 percent federal income tax I have to pay ? Also, is this income that will be reported on my federal and state taxes for that year?

A. Your questions are too complicated for a simple answer, since they depend upon circumstances not explained in your message. You’ll find the information you need in the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

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TSP early withdrawal penalties

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Q. I just turned 57 in January and am planning on retiring on June 1, 2014. I am CSRS and currently working with the U.S. Postal Service. I was hired by the Postal Service in March 1982 and have met my minimum retirement age and time in service. I also have 4 years prior military service in the Navy from 1976 to 1980 on active duty. Will I be penalized if I make a TSP withdrawal prior to turning age 59 1/2 years of age?

A. No. You will have retired after the calendar year in which you reached age 55 and, therefore, qualify for one of the exceptions to the early withdrawal penalty.

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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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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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Avoiding early withdrawal penalty

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Q. I am under FERS and my minimum retirement age is 56. I plan to take regular retirement at age 58 with 34 years of service. I would like to take level monthly payments, rather than a Thrift Savings Plan annuity, as my TSP withdrawal choice starting immediately upon retirement. Can I do this without incurring the 10 percent penalty for being under age 59½?

A. If you retire from federal service at age 58, you will be exempt from the early withdrawal penalty for TSP withdrawals of any kind.

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Special retirement supplement and TSP withdrawal

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Q. I am retiring the end of June with 30 years at my minimum retirement age (57). I will be collecting the special retirement supplement. Does any money I take out of my Thrift Savings Plan affect the SRS limit I can make that year?

A. The offset to the SRS is for earned income, not TSP withdrawals, so there will be no effect.

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When to collect TSP

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Q. I am a federal air technician with the Air National Guard. I have 34 years in the Guard and 27 years as a federal full-time technician. I am in FERS and have a minimum retirement age of 56. I will be 53 this year.

It has been communicated to me that I will probably not be retained this year, meaning that Dec. 31, 2014, I will be involuntarily retired, thus losing my full (technician) and part-time (traditional Guard) employment. When can I begin collecting my retirement pay, Social Security, Thrift Savings Plan? Are there any penalties if I was forced to retire?

A. Mike: You may begin collecting your TSP money as soon as you retire.

Reg: Because you have enough years and civilian service (50 and 20), you’d be able to retire immediately and receive a discontinued service annuity. You would also be entitled to the special retirement supplement, which approximates the amount of Social Security benefit you earned while a FERS employee. The SRS would continue to be paid until you reach age 62 and are eligible for a Social Security benefit.

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Drawing TSP annuity before 59 1/2 without penalty

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Q. I remember reading an article on ways to retire at eligibility of 56 years old and being able to draw my tsp before age 59½ without a penalty. Is there a way to do this? There is no disability involved in my retirement.

A. Yes. If you retire from federal employment at age 56, you will be exempt from the early withdrawal penalty.

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Starting TSP disbursements

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Q. I think I will be retiring Dec. 31, 2015 (under FERS) since my minimum retirement age is 56, and will reach it on Dec. 21, 2015. I will have 31½ years in federal civilian service. Can I start my Thrift Savings Plan monthly allotments right away (I have over $390,000 as a balance as of today) to supplement my 31 percent of salary from FERS retirement and special retirement supplement?

A. Yes, you will be able to begin withdrawing from your TSP account as soon as TSP receives notice from your agency.

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Early withdrawal penalty and deferred annuity

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Q. I am 50 years old and plan to resign in within two years. I will more than 10 years of service, but my minimum retirement age is 56. Sometime after I turn 56, I plan to submit for a deferred retirement, even though I know I will take a penalty of 5 percent each year under age 62. The Thrift Savings Plan states that “if you are age 55 or older in the year you separate or retire, the 10 percent early withdrawal penalty tax does not apply.” Does this apply to deferred retirements, as well?

A. There is no such thing as “deferred retirement.” You’ll be separating from service and then claiming a deferred annuity. It’s the separation date that counts for the early withdrawal penalty.

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