By Mike Miles
November 18th, 2013 | Uncategorized
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now, I use up the one-time allowance to take part of the balance and incur immediate tax bills for the amount withdrawn.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.”
November 11th, 2013 | Uncategorized
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.
September 16th, 2013 | Uncategorized
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.
September 16th, 2013 | Uncategorized
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.
June 24th, 2013 | Uncategorized
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.
April 2nd, 2013 | Uncategorized
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.
March 11th, 2013 | Uncategorized
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.
March 11th, 2013 | Uncategorized
Q. I retired Dec. 29 at the age of 70 years and five months. I plan to take my Thrift Savings Plan money out, according to the Internal Revenue Service required minimum distribution table, which I understand I must begin no later than April 1, 2014, the year after the year I turn 70½. However, I may decide to take my one partial withdrawal, as well, and at the latest possible time. I’m pretty sure I read that I must make that withdrawal option effective by Dec. 31, 2013, the year I turn 70½, but now I can’t come up with that reference in writing. Can you verify that is the case? And if it is, do I need to begin the monthly payments at the same time?
A. There is no deadline for making the partial withdrawal.
February 20th, 2013 | Uncategorized
Q. I am an air traffic controller who is retiring in two months at age 48. I have an outstanding Thrift Savings Plan loan for about $9,000. What happens if I don’t pay this off before I retire? Do I pay the 10 percent penalty, along with it being shown as income? Does this affect my monthly withdrawal from TSP using the 72(t) rule? Also, can I take a one-time partial lump-sum withdrawal and pay the 10 percent penalty without it affecting my monthly withdrawal?
A. If you don’t repay the loan within the grace period after you retire, it will be declared a taxable distribution and you will owe penalty and taxes on the income. This does not affect your ability to initiate monthly distribution payments to satisfy the 72(t) rules on the remaining balance. Taking a partial withdrawal does not impair your ability to take automatic monthly distributions, which are considered a form of full withdrawal.
February 18th, 2013 | Uncategorized
Q. I appreciated your Feb. 4 article concerning the advantages of the Thrift Savings Plan vs. more costly private products. I am unclear, however, about the options (and their advisability) when it comes time to retire from federal service. Recognizing that rules allow distribution without penalty at 59½ and require some distribution from any IRA at 70, is continuation in the TSP an option which would allow the retiree to access the account as desired, or must the TSP account be moved to a private instrument?
A. I have written about this topic on more than one occasion. You may not access your TSP account at will. But you may maintain your TSP account for life, within the TSP’s rules. As an alternative to rolling the account over to any IRA, which is a painful thing to have to do, you may want to consider a one-time partial withdrawal to create an accessible fund outside of the TSP, and then a series of automatic monthly withdrawals to maintain that fund over time. The amount of the monthly withdrawals may be changed once each year to adjust to changing needs. This method takes some careful planning, but it may be worth the effort in the long run. I manage this system of withdrawals for many of my clients as a usual part of the planning and management process.