By Mike Miles
October 30th, 2013 | Uncategorized
Q. I am reading TSP-775 (6-2013) concerning important tax information about TSP withdrawals. First paragraph (Deadline for withdrawing your TSP Account) states that “By April 1 of the year following the year you become age 70.5 and are separated from Federal Service, the TSP requires that you withdraw your entire account balance in a single payment.” It goes on to give options about monthly payments, life annuities. This leaves me perplexed. I thought I only needed to withdraw the required minimum distribution after becoming age 70½. Also, I thought if I have other IRAs, I could take the RMD from those and leave my Thrift Savings Plan unscathed. If I withdraw the entire account balance from my TSP, I will have to pay federal tax on whole amount. Can you clarify?
A. Here’s what you read:
By April 1 of the year following the year you become age 70½ and are separated from Federal service, the TSP requires that you withdraw your entire account balance in a single payment, begin receiving monthly payments, purchase a life annuity, or use a combination of these withdrawal options.
The requirement is that you do one of the three basic options separated by commas (full lump-sum withdrawal, monthly payments, purchase a life annuity), or elect some combination of them by the required beginning date.
Unfortunately, the TSP does not allow you to waive the RMD for your TSP balance. It must be taken from your TSP account.
October 28th, 2013 | Uncategorized
Q. I am retired and turn 70 this month. Even though I do not want to begin distribution of my Thrift Savings Plan investment, I understand that by law I must select a required minimum distribution program. My dependent spouse is 76 and also retired.
I am healthy and, with my family genetics, could expect to live to age 100. I do not need the TSP to live on and want to maintain it in the TSP investment form for as long as possible.
Under these circumstances, what is the best RMD to select: a life annuity or a TSP monthly payment? Should it be a single, or joint with survivor benefits? What is the tax exposure for the recommended way to go?
A. You should request automatic monthly payments based on your life expectancy. This will minimize the size of the payments.
October 22nd, 2013 | Uncategorized
Q. I am planning to retire at 65½ years of age. Can I withdraw monthly a certain amount between 65½ and 69½ and change to the life expectancy option at 70?
A. This is not allowed, but if you reduce your fixed monthly withdrawal to an amount that does not meet your required minimum distribution for the year, the Thrift Savings Plan will issue a payment to make up the difference and ensure that your RMD for the year is met.
October 17th, 2013 | Uncategorized
Q. I am an air traffic controller who will be forced to retire in May 2016 when I turn 56 with 28½ years of service time. If I retire anytime between Jan. 1, 2015 (the year I turn 55) and May 2016, will I be able to take out a lump sum and monthly payments from my Thrift Savings Plan without the 10 percent tax penalty? Do I have to follow the life expectancy requirement for receiving monthly payments, or am I free to set the payment amount as I wish and adjust it once a year?
A. Since you are separating from service during or after the calendar year in which you reach age 55, your TSP withdrawals after you separate will be exempt from the early withdrawal penalty.
September 30th, 2013 | Uncategorized
Q. Are monthly Thrift Savings Plan withdrawals counted against the earnings limit for the special retirement supplement?
September 23rd, 2013 | Uncategorized
The Thrift Savings Plan’s website, www.tsp.gov, has posted a new income calculator. Well, it’s not entirely new, it’s mostly just remodeled. Now, instead of going directly to the old monthly payment calculator or the annuity payment calculator, you must go through a wizard that automatically runs both and compares the results.
As much as I like the TSP and have endorsed its use, I have to say that I find this effort to be misguided and disappointing. I can’t imagine how the cost-benefit analysis was run to produce a green light for expending participant’s resources on what is an entirely cosmetic, and arguably counterproductive, change.
It’s not evident that there has been any real change to the calculator’s mathematics, I found its presentation of results to be confusing, and the addition of some rather elaborate graphics lends an aura of undeserved sophistication to the output.
That last dig is my biggest problem with this new calculator: The newer, slicker packaging will only make the still unreliable results seem more reliable. To me, it’s a lot like putting candy in a medicine bottle. Some people may be fooled into believing that candy will cure their illness, and ultimately suffer the consequences of their delusion.
The new calculator is really two calculators; a monthly payment calculator and an immediate annuity calculator.
The monthly payment calculator asks you to predict things that aren’t reliably predictable, and then uses simple arithmetic to generate an outcome that appears certain. What it’s really saying is that IF you start with a certain amount of money and IF you live to a certain age and IF you earn a certain return on your money each and every year as you go, you may safely expect a certain stream of income from your TSP account.
The fact is that none of these factors that determine the result produced by the calculator can be known, with certainty, in advance. All of them involve probabilities and the relevant probability analysis for this exercise is beyond the capability of the vast majority of TSP participants, if my direct experience is any indicator.
In addition to the unpredictable nature of the factors used in the calculator, one of the factors you’re asked to predict isn’t directly relevant to the purpose of the calculator. Your account’s average rate of return, when money is being contributed to, or withdrawn from it, is not a reliable indicator of its ending value.
This is an important fact overlooked by many investors. If two investors start with identical balances and take an identical series of withdrawals from their accounts over a period of time, it is impossible to know which investor’s account ended with the larger value if all you know is the average, or compounded rate or return earned by each investor over the period. It is possible that the investor who earned the lower rate of return actually ended the race with greater wealth.
So, in addition to being impossible to accurately predict, asking for the “rate of return” you’ll earn isn’t even the right question to ask.
The annuity calculator is an exception to my complaint if, and only if, you are ready to buy an annuity right away and have the necessary purchase price set aside in the G Fund. Otherwise, like the monthly payment calculator, it requires that you predict the unpredictable.
This calculator is useful when you are ready to retire, or are retired, for calculating the amount of guaranteed income your money can produce. Use this information as the benchmark for comparison when considering the other income options available to you.
If you’re still years from retirement, however, this calculator is also unreliable.
The TSP has protected itself from liability by affixing the following disclaimer to the calculator:
“This calculator is provided for informational purposes only. It is not intended to provide retirement income advice or be used as an investment advisory tool or as a guarantee of monthly payment amounts or a final account balance.”
To the uninitiated, “for informational purposes only” means that you should not rely on the object of this phrase — in this case, the calculator — as the basis for your decision-making. This disclaimer is used everywhere in the investment and financial services industry. In fact, it’s harder to find published “advice” without it than with it.
Unfortunately, it is also widely ignored by investors, to their detriment.
For your own, good, I urge you to take it seriously and treat this calculator with the same respect you’d allow a stick of dynamite. Any benefit it might produce should be weighed against the risk that it could explode in your face.
September 18th, 2013 | Uncategorized
Q. I have to retire in 18 months. I plan on taking a lump sum and monthly allotment from my Thrift Savings Plan at retirement. I understand both of these will be taxed at 20 percent. I am thinking of taking a TSP loan for the amount I had planned on requesting as my lump sum prior to my retirement date, with the understanding that I won’t have the time to pay it back in full and that the amount I don’t pay back will be considered disbursed income. My reasoning is that having the funds now will allow me to begin the process to purchase my retirement home, and allow me to at least pay a portion of the loan back. Is there a downside to this plan?
A. You should consult your tax preparer for testing and advice about the potential impact on your tax returns. The only general implications of this strategy that come to mind are:
1. If the distribution is declared before the calendar year in which you reach age 55, it will be subject to the early withdrawal penalty and
2. There will be no tax withholding in the case of a declared distribution.
August 13th, 2013 | Uncategorized
Q. After entering my Thrift Savings Plan earnings in the Employee Benefits Information System profile, it shows my TSP annuity is $2,000 per month if I retire at age 56 (my minimum retirement age). What is the $2,000 based on? Is it $2,000 until I die, or only until I reach a certain age?
A. It could be your life, your joint life with a partner, or a minimum of 10 years, depending upon which annuity option you choose.
June 24th, 2013 | Uncategorized
Q. I am a 50-year-old 6(c). I am eligible to retire on an immediate unreduced annuity this year and plan to do so. I plan to eventually access my Thrift Savings Plan funds, and I understand that I am able to do 72(t)-type withdrawals and avoid early withdrawal penalties. But I’m not interested in 72(t) systematic payments. I also know I could roll over the account to an IRA, but that is not my desired intention. Since I am retiring at age 50, what is the first date that I could begin to access my TSP via lump sum or monthly withdrawals without the 10 percent penalty: age 55 or 59½?
A. Age 59½.
June 17th, 2013 | Uncategorized
Q. I am under FERS. I want to purchase a Thrift Savings Plan annuity. After I retire, is it possible for me to add funds to my TSP savings to increase my monthly TSP annuity?
A. The only way to add funds to your TSP account after you retire is to transfer money in from a qualified IRA or employer-sponsored retirement plan. This will have no effect on a TSP annuity that has already been purchased, however.