Ask The Experts: Money Matters

By Mike Miles

USAA Roth and TSP contributions

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Q. I took my tax info to a professional to have them done this year. I’ve maxed out my Roth IRA with USAA. I’ve also contributed about $2500 to a traditional TSP as a uniformed service member. I’m being told I’ll be penalized for my contributions to my Roth account since I have an employer-based retirement plan. Is this accurate? Can I only contribute a total of $5500 for both accounts? I’ve always been told to contribute to both.

A. The TSP contribution limit is fixed and not contingent on any other factor. Your eligibility to contribute to a Roth IRA might be limited if your income is sufficient. In the future, I suggest that you max out your TSP contributions before you save to a Roth IRA, and then check with your tax accountant before you attempt to make any IRA contributions since your eligibility depends upon your tax return for the year. See IRA Publication 590 for the limits on IRA contributions.

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IRS penalty on partial TSP withdrawal

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Q. I am a FERS employee (6c law enforcement coverage) planning to retire in January 2015 after 31 years in federal law enforcement. I plan to build my retirement home soon after and have need of a partial withdrawal from my Thrift Savings Plan at retirement. Is this partial withdrawal subject to the 10 percent IRS tax under the one time withdrawal provision, and if so, do I have any option to avoid that penalty while still accessing about a third of my account?

A: If you retire during or after the year in which you reach age 55, you will be exempt from the early withdrawal penalty on any kind of withdrawal. If you retire before that point, you’ll be subject to the penalty until you reach age 59 1/2 unless you qualify for one of the exceptions listed on page 7 of the notice at: https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

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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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Follow-up on TSP withdrawal

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Q. The following question/answer was recently posted. Where can I find the full information to support the answer? Are there penalties involved?

Q. I will be 55 this month and plan to retire in November with 33 years of service under CSRS. Do I have to wait until I am 59½ to withdraw from my Thrift Savings Plan?

A. Not if you wait until you’re retired to request the withdrawal.

A. Check Page 7 of this notice: https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

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Avoiding a penalty at age 70 1/2

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Q. I will turn 70½ after Feb. 19, and will retire from my full-time position at the end of the month. I have notified Social Security, the state retirement funds in two states where I worked, and my fund in a private approved pension fund with accounts from two other universities of my intention to retire at the end of February and to start receiving distributions in March 2014. Is there anything else that I need to do to avoid being hit with that horrid 50 percent penalty?

I received an unsavory email from the Wisconsin Employee Trust Fund scolding me for not filing at age 69½ and hinting that I would owe a 50 percent penalty for distributions not taken in 2013. I see no federal information that indicates that I needed to act at age 69½, or that I needed to begin withdrawals before age 70½. I have relied on the information posted at the Internal Revenue Service website to guide my action, but it seems to contradict the information now being sent to us prospective retirees. I hope that I have done nothing wrong to merit any penalty.

A. Your first required minimum distribution is due by April 1 of the year following the year in which you reach age 70½. Subsequent RMDs are due by the end of the calendar year. You are not required to take a distribution from an employer-sponsored retirement plan while you are still working, however.

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TSP withdrawal

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Q. I retired from the Army Reserve in 2010. My 55th birthday was in 2010. Can I withdraw now (2014) from the Thrift Savings Plan without incurring the 10 percent penalty? I won’t be 59½ until 2016.

A. Yes, since you retired during the calendar year in which you reached age 55.

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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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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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Overcontribution to TSP

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Q. My agency, according to my W-2, overcontributed to my Thrift Savings Plan by $4 on the last pay period of the year. So, with total contributions, I have contributed $17,504 regular contributions and $5,500 in catch-up contributions for a total 2013 amount of $23,004. Is this a problem with the additional $4 being sent to my TSP account? If so, what do I have to do to fix it?  Also, are there IRS penalties I am now responsible for due to my agency’s negligence?

A. You may want to make sure that the TSP returns the $4 in overcontribution, which I think they should do automatically. Consult with your tax preparer for advice.

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TSP-to-IRA withdrawal

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Q. I retired early with more than 20 years of service due to work-related injuries. I am 50. I have more than $314,000 in my Thrift Savings Plan. I want to withdraw either a partial or full amount but also want to avoid the 10 percent penalty tax. If I transfer my money to an IRA, then make a withdrawal, will I be able to avoid the penalty? What are my options?

A. You should consult IRS Publication 590 for the exceptions to the early withdrawal penalty that apply to IRAs. See Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for exceptions that apply to withdrawals from the TSP. And consider engaging a CPA for guidance to make sure that you don’t make a costly mistake in getting to your money.

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