Ask The Experts: Money Matters

By Mike Miles

Partial TSP withdrawal

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Q. I will be retiring in May with 25 years of federal law enforcement service. I will be 50 years old and subject to penalties and taxes on a one-time, age-based partial withdrawal from my Thrift Savings Plan. If I withdraw $20,000 to take care of bills and home repair, how much should I request from my TSP account to cover the taxes and penalties?

A. Your withdrawal will be subject to 20 percent minimum mandatory federal tax withholding, so to receive $20,000 from the TSP, you’ll need to request $25,000. The actual federal income tax, early withdrawal penalty and state tax you’ll owe for the withdrawal won’t be computed until you file your tax return for the year of the withdrawal.

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Age-based, in-service withdrawal vs. partial withdrawal

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Q. I’m a 32-year FERS employee, 60 years old and about to retire in February 2014. I would like to take out some funds from my Thrift Savings Plan. Should I request an age-based, in-service withdrawal or take a partial withdrawal after I retire?

A. Either will count as your single lifetime partial withdrawal. Will the tax cost for the withdrawal be significantly lower if the money is withdrawn in 2013? If so, you should consider taking the withdrawal now. If not, it will not really matter when you take it in 2014. If you need the money now but would rather have it taxed as 2014 income, you could take a loan now and then fail to repay it after you retire so it will be declared a taxable distribution in 2014.

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Q. I’m unsure of what to do with my Thrift Savings Plan account. I understand that I could leave it in the account as it is until I’m 70½. I can also make a full or partial withdrawal.  Full withdrawal is not an option for me. A TSP life annuity (both single or joint life) option is based on life expectancy or until the money runs out. Also there is the TSP annuity vendor (MetLife) where I could get the annuity but money used to purchase this annuity goes to the insurance company if you die before it’s used up.

I’m thinking of purchasing a fixed index annuity with my TSP. This fixed index annuity guarantees that I will receive at least the minimum guaranteed interest (3 percent to 7 percent) credited to the contract. Taxes are deferred until you receive money from the contract. I can choose from several different payout options based on personal needs, including option for lifetime income, guaranteed. I’m wondering what to do with my TSP. I don’t need the money right away. I don’t want to lose money when the market falls. I would like to make as much as possible.

A. 1. Your assumptions about the options available to you are incorrect. You need to review the information available at more carefully or seek guidance.

2. You don’t need the money now, so why would you consider converting it to income now? Don’t.

3. You don’t want to lose money but want to make as much as possible. The only investment option that meets both of these requirements is the G Fund. Use it.

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TSP residential loan

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Q. I am a longtime CSRS employee with a pretty good Thrift Savings Plan balance. I plan to retire in two years and move to another city when I retire. My spouse is planning to retire in eight months, and we are planning to buy a house in the new city. We would like to buy the new house and begin the transition to the new city without selling our existing home until I retire. We are looking at a number of ways to finance the purchase of the new home and afford a mortgage payment on that house, a mortgage that we should be able to substantially pay off with the proceeds of the sale of our existing home two years from now. I am looking at ways to keep the payments lower and am considering either taking an over-59½ withdrawal from my TSP account or taking a loan. I am considering withdrawing or borrowing an amount equal to about 25 percent of the balance. If I take the withdrawal now, I use up the one-time allowance to take part of the balance and incur immediate tax bills for the amount withdrawn. If, instead, I take an equal amount out as a loan, I do not lose the ability later to withdraw part of my TSP and I don’t create an immediate tax liability.

Because I am CSRS, the loan wouldn’t affect a TSP match that would come if I were a FERS employee.  The question is really whether or not I am eligible for a residential loan from TSP. The loan requirements are that it be for a “primary residence.” I assume this means I can’t use this loan program for a vacation home.  The house that we would purchase using this loan as part of the down payment will be our principal home two years from now. Would the fact that we are not immediately selling our existing home mean that we cannot use this loan provision? Or does the fact that this will be our principal home in the future allow us to use this loan provision?

A. Like everyone who’s requesting a residential loan, you will be requesting the loan for the purchase of a house that will become your primary residence. How many people are living in the house they’re trying to buy when they request their loan?

The question is really about the timing, and I think you’ll have to submit a loan application to find out for sure. If you’re planning to rent the new home between now and the time you take occupancy, you may have a harder time justifying your application. If practical, you can fall back to a general purpose loan as your “Plan B.”

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TSP withdrawal strategy

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Q. My wife and I are FERS employees. We are both considering retiring early if offered Voluntary Early Retirement Authority at ages 50+/- (both with more than 25 years of service). With children still in the picture for some time, access and flexibility with our Thrift Savings Plan accounts are crucial to any plan. I would like to accomplish two things:

1). 72(t) withdrawals until 59½ in one account.

2). Flexibility to roll over funds currently in TSP into a Roth IRA held at another institution (from an IRA as I see no method to do that while the funds are in TSP).

My plan would be to roll over just enough to “fill up” a certain tax bracket, say 15 percent, especially while we have many deductions related to children.

So, my thinking would be to have substantially equal payments out of one account soon after early retirement but not immediately. For the other TSP account, make a one-time partial withdrawal and transfer that to an IRA currently held at another institution. I’m assuming I can make that transfer/withdrawal at age 50 with no penalties, correct? This would allow me to each year assess our taxes and determine what amount of the IRA I would like to convert to my Roth IRA. I would only do a partial withdrawal as I appreciate the low expenses of the TSP, but the inflexibility to convert to a Roth is too limiting.

Does this make sense? And is everything I’ve laid out reasonable and doable?

A. What you’ve proposed is doable, but I’m not sure I see the value in the Roth IRA conversions.

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Taxable distribution vs. one-time partial withdrawal

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Q. I’m nearing retirement and have a Thrift Savings Plan loan. If I decide not to pay off the loan but to pay the taxes on the taxable distribution, am I still eligible for the one-time partial withdrawal after I retire?

A. A declared taxable distribution does not violate the TSP’s eligibility requirements for taking a partial withdrawal after separating from service.

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TSP loan repayment

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Q. How long after I retire do I have to repay my loan? Is there time to take a partial payment from the Thrift Savings Plan at retirement to pay the loan?

A. You have 90 days following your separation to repay the loan. It doesn’t make sense to take a partial withdrawal to repay the loan, since any unpaid balance will be declared a taxable distribution when the deadline is reached but won’t count against your once-in-a-lifetime limit on partial withdrawals.

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One-time TSP withdrawal at 59 1/2?

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Q. I am 59½ and would like to take advantage of the opportunity to take a one-time withdrawal. What are the tax consequences of taking a withdrawal of, say, $50,000? Does it have to all be rolled to an IRA to avoid a tax penalty, or can it come out as cash and part of it be put into an IRA and part put into a spending account for paying down bills/mortgage?

A. Taking a withdrawal from your TSP account after reaching age 59½ will not generate a penalty. Any amount withdrawn and not rolled over will be treated as ordinary, taxable income when you file your tax return. You may roll over all or part of your withdrawn amount (as long as it is not considered a Required Minimum Distribution) to an IRA to further defer taxation.

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One-time TSP withdrawal

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Q. I am 60 years old and, for seven years, have been separated from 21 years of federal service. I have never made any withdrawals from my Thrift Savings Plan account. I am interested in making a partial withdrawal for home improvement projects. I understand a one-time partial withdrawal leaving the rest in TSP for later is allowed, but does one-time mean that if I make a one-time partial withdrawal now, I will not be allowed to make a full withdrawal of the remaining money later when I am fully retired to perhaps pay off the mortgage? Will I only be allowed monthly payments?

A. You are allowed one partial withdrawal and one full withdrawal, which may be taken as a lump sum of your entire remaining balance or as a series of monthly payments, which may then terminate in a withdrawal of the remainder.

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TSP partial withdrawal after tax distribution declared

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Q. I have a general purpose loan and am planning to retire soon. If I choose not to repay the loan and take a tax distribution, will I still be entitled to make one partial withdrawal after retirement? Or will the unpaid balance of the loan be considered my one-time partial withdrawal?

A. The unpaid loan does not count as your partial withdrawal.

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