By Mike Miles
April 3rd, 2013 | Uncategorized
Q. I am being considered for disability retirement in the coming months. My application is pending consideration from the Office of Personnel Management. I am a GS-14 FERS employee, 54 years old, with about 32 years of service. I have approximately $250,000 in the Thrift Savings Plan, and my allocations are as follows: 15 percent C, 15 percent S and 70 percent I. I realize that is somewhat aggressive, but it has been like that for about seven years or so, and I have been hopeful of the international home run. Regrettably, this hasn’t necessarily come to fruition. I will likely shelter some of my remaining funds in G or F when I find out if my retirement is approved.
If I should retire, I plan to withdraw approximately $150,000 to pay off my mortgage. Therefore, should something happen to me or if the market fails, at least my home is paid for. I will have a reasonable annuity, and my wife draws $1,800 monthly as a service-connected disabled veteran. Combined, I feel we will have adequate income, especially when our mortgage of $1,000 per month is satisfied. Not rich, but with no real debt ($15,000 vehicle loan) consistent income and no mortgage. Sounds OK to me. Or am I off-base?
A. I think that what’s off-base is that, like too many investors, you are willing to gamble — without knowing the odds — with your life savings. If you’re not willing or able to prudently manage the money, then it’s probably your safest bet to use it to pay off your mortgage. At least you won’t lose it overnight. This might mean that later on, however, if you need the money to pay your bills, it won’t be available. There is no easy answer. That’s why I’m in business. If you’d like to discuss your options, you can contact me through www.variplan.com.
January 21st, 2013 | Uncategorized
Q. I am taking the Voluntary Early Retirement Authority from the Postal Service and am trying to decide how to withdraw funds from my Thrift Savings Plan. I have about $300,000 in my account and have a mortgage of $150,000 with about 10 years until payoff. Should I take a lump sum and pay off my mortgage and keep the remaining money in TSP? Or should I just start withdrawing approximately $2,000 monthly to cover mortgage payments? I am afraid if I pay off my mortgage, the tax hit would be to great.
A. I suggest that, as long as your mortgage interest rate is competitive, and unless you can find a good reason to do otherwise, you should make the payments and minimize the withdrawals from your TSP. You might even consider refinancing your mortgage into a 30-year fixed rate, if possible, to reduce your payments and further protect your TSP balance.
January 14th, 2013 | Uncategorized
Q. I turned 62 in December. I am 100 percent disabled from combat wounds. I worked federally for a while and saved $102,000 in a G Fund under FERS. I’m about to start losing my home as my wife will have to retire this year. Without her income, we won’t be able to afford the mortgage (but no credit card or other debt on the house.)
What percentage at age 62 does a 100 percent disabled vet have to pay when withdrawing savings in full? I think it’s stating 20 percent, but that doesn’t seem reasonable. Am I reading it wrong? I want to pay down my home and refinance to lower the payment to keep from going into default and losing it. It’s all we have, and with the market crash, we lost what equity we had in it. We both have AAA credit scores (low 800s) and have held on as long as we can, but the recession and times have finally caught up to us.
Can you explain what would be the best way to pull the money out in full so I can pay off my mortgage and keep my home?
A. While you may wind up owing less when you file your tax return, there will be 20 percent withheld from your distribution against your federal tax liability.
December 3rd, 2012 | Uncategorized
Q. In 2011, following 18 years of government service at age 60, my excepted service position ended unexpectedly. My retirement pension is small: $589. My first payment arrived February. I had $10,000 in savings with Fidelity but used that to live on, considering the lack of income for two to three months and basic living requirements: mortgage, insurance, car payments, son leaving for college, etc.
I paid taxes on that money, approximately $3,000 or more. That money is now gone.
When I retired, I had two Thrift Savings Plan loans that were rolled in as income on my taxes. They are paid in full.
I am still seeking full-time employment. I have a part-time job that has been extending me extra hours.
My TSP account has approximately $80,000 remaining. Should I roll that over to an IRA? Am I able to borrow from that account to pay off bills? I have approximately $13,000 in bills: car, three credit card accounts (none over $3,000). This does not include mortgage/homeowners’ association/condo fees, water, electric, home-car insurance, food, etc.
I hope to work until 66 before applying for Social Security. I have one child in grad school who constantly needs financial assistance. What’s the best for me to do?
A. You should avoid moving your TSP money to an IRA, since you’ll lose it’s low-cost advantage and access to the G Fund. You may not borrow from your TSP account since you are no longer eligible to contribute. You may initiate automatic monthly distributions from your TSP account and then change the amount of those distributions once each year. Visit www.tsp.gov for more information.
September 19th, 2012 | Uncategorized
Q. On June 26, I took out a $22,000 loan against my 401(k) plan for major home improvements. That equaled up to $376 per month taken out of my paycheck to repay this loan. Then, Aug. 1, my hours were temporarily reduced until the end of 2012 to 30 hours per week, which amounts to an additional $620 deducted from my pay monthly. This puts a serious hardship on my ability to pay my monthly obligations. Is there a way to legally stop payments to my 401(k) repayment, seeing as I had no idea my hours would be reduced, whereby affecting my ability to pay my monthly obligations, including my mortgage?
A. You may be able to re-amortize the loan to extend the term and decrease the payments. If you default on the loan, the unpaid balance due will be declared a taxable distribution from your account. While this may not be attractive, it’s not the end of the world.
August 22nd, 2012 | Uncategorized
Q. I’m a FERS retiree, age 64, with a $36,000 annual pension. My spouse has a $40,000 annual salary. We have a rental property that brings us $24,000 a year. And we have a home mortgage balance of $500,000. Our living expenses so far do not require me to withdraw my $600,000 Thrift Savings Plan fund. I plan to live until age 85.
As I approach age 70½ with minimum distribution, what is the best tax strategy for transferring the $600,000 from the TSP into a private investment account? A lump-sum rollover into a Roth account after paying the taxes? A calculated annual withdrawal that would not push me into the next higher tax rate? Should I start withdrawing now at age 64 or wait until age 70? What type of private investment accounts best mirror the TSP accounts?
A. I suggest that your default approach should be to take the required minimum distribution and only take more, or withdraw the money sooner than necessary, if something compels you to do so. Finding a compelling case is up to you and your tax preparer. The closest things you’ll find to TSP funds, outside of the TSP, are Exchange Traded index Funds, or ETFs. iShares is the leader in these, but they are produced by a variety of firms, including Vanguard. iShares comps for the TSP funds are: IVV for the C Fund, IWM for the S Fund, EFA for the I Fund and AGG for the F Fund. Unfortunately, there is no equivalent for the G Fund, which is one of the arguments for sticking with the TSP for as long as possible.
July 2nd, 2012 | Uncategorized
Q. I am 61½ years old. I want to pay my mortgage off. I am losing my contract job and need to lower my debt. I have saved up all but $30,000. If I withdraw that from my Thrift Savings Plan, how much in federal taxes will I have to pay? Would it be better to get a personal loan?
A. Your TSP withdrawal will be added to your income for the year and taxed at your marginal tax rate for the year. You’ll need to prepare a pro-forma tax return to estimate the amount you’ll owe. It’s impossible to say, without more rigorous analysis, whether or not a personal loan would be a better solution.
June 6th, 2012 | Uncategorized
Q. Should I consider paying off the balance of my mortgage (approximately $300,000) using a full withdrawal of my Thrift Savings Plan upon retirement if the mortgage payment is more than the TSP annuity anticipated and the balance is adequate to make the payoff?
A. I can’t tell you if you should, but if I were responsible for managing your retirement plan, I wouldn’t recommend it.
May 14th, 2012 | Uncategorized
Q. I plan to retire from the federal government in the near future (I will have 32 years). I wish to pay my house off ($74,000) with my Thrift Savings Plan earnings. Is this a good idea? The interest rate on my house is 5.75 percent, and I realize that 20 percent will be taxed when I decide to withdraw from TSP. Should I transfer to an outside facility? I do not wish to have a house payment when I retire.
A. It’s impossible to say whether this is a good idea for you without understanding and analysis beyond the scope of this forum. In general, if you can refinance your mortgage into a lower, fixed 30-year rate, it would probably be better to do so and keep your TSP money available to pay your bills, later. I wrote on the subject here: http://www.variplan.com/uploadedDocuments/1277733522Carrying_mortgage_into_retirement_can_pay_off.pdf.
If you’d like decision support on this issue, I can provide it. Visit www.variplan.com to learn more about my practice.
April 2nd, 2012 | Uncategorized
Q. I am 67, retired, and I am considering withdrawing $21,000 from my Thrift Savings Plan to pay off my home mortgage payments of $500 a month. I’m helping two grandchildren with college and the $500 a month is rough. What would my tax liability be on $21,000?
A. The only way to answer this question is to prepare your tax return for the year of the withdrawal.