Ask The Experts: Money Matters

By Mike Miles

Holding on to capital

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Q. I’ve just been flying straight with the L2030 plan until I can get some reliable advice. I would like to keep my capital I have in the Thrift Savings Plan, receive a monthly or quarterly check, and reinvest the amount I don’t need back into my capital. When I turn 70½ (in four years) I’ll have to start receiving the required minimum distribution, which I can’t reinvest. I don’t want to get an annuity because I’d have to give up my capital. How can I hold on to my capital, reinvest in it and possibly leave that money to my children or even my grandkids?

A. I don’t see a problem. The money in your TSP carries a tax liability that must be paid, eventually. There is no requirement that you spend the RMD. You can just move it from the TSP to a similar investment in a taxable discount brokerage account.

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RMD

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Q. I am a FERS employee who turned 71 in September. I plan to retire in January 2015. When do I need to start taking my required minimum distribution?

A. Under the current rules, and these circumstances, your first RMD, for tax year 2015, will be due by April 1, 2016.

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RMD

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Q. I turn 70½ in April 2014. My required minimum distribution can be taken anytime during 2014. Is it calculated on the balance in my IRA for 2013 or 2014? If I take it in 2014, the year I turn 70½, will I also have an RMD taken out Dec. 31, 2014, on the balance in my IRA in 2014? Will I have two RMDs in 2014?

A. Your RMD amount for each tax year is calculated for each account that is subject to the RMD, and is based on the preceding year’s ending account value.

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Mandatory TSP withdrawal

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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.

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Minimizing the tax burden of RMDs

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Q. I am 70 years old and have about $100,000 in my Thrift Savings Plan accounts. Can you guide me toward the best options to withdraw the amount? I would prefer to pay the least in taxes to Uncle Sam.

A. To minimize the tax burden from required minimum distributions, you should request distributions based on your life expectancy under IRS rules. For the first distribution — the one due for the year you reach age 70½ or retire, whichever comes last) — you should consult a tax adviser to determine whether it is better to take it in that year, or defer it into the following year. If you’re not sure, it’s probably best to take in the first year.

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Life annuity vs. TSP monthly payments

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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.

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RMD and taxes

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Q. I retired in 2011 and must start required minimum distributions soon. I understand taxation if the Thrift Savings Plan sends me fixed dollar payments or if TSP pays out based on life expectancy. But what if I have TSP buy an annuity with part of my TSP and I leave the balance in the TSP? How are taxes figured?

A. Your annuity income will be taxable as ordinary income and you will be required to take RMD from the remaining TSP balance, which will also be taxed as ordinary income.

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TSP and IRAs

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Q. I will turn 70½ next year and understand I need to take withdrawals from my retirement accounts. Can I add all of my accounts together — IRA and Thrift Savings Plan — compute the required minimum distribution, and then withdraw from one account which is not doing as well as the others, as I can if I have only IRAs? I want to withdraw my entire minimum from one IRA. Or must I take a minimum withdrawal from my TSP separately from my IRAs?

A. You must compute the required minimum distribution for each account separately, but you may take your RMD from any account or accounts you wish. You should leave your TSP account untapped for as long as possible, unless there is good reason to do otherwise. I don’t see what historical performance has to do with the choice of account for withdrawals.

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TSP withdrawal option

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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.

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RMD and still working at 70 1/2

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Q. I am 70 years old and still employed by the federal government. When I am 70½, I understand I must take a required minimum distribution from my traditional IRA/401s, but not clear if this applies to my Thrift Savings Plan account. Can you please tell me what the rules are for those who are 70 and over but still working for the government insofar as taking a required distribution from my TSP account? Can I wait until I retire from government?

A. You may wait until you retire. You may also be able to transfer your IRA/401k balances into the TSP to avoid or delay future RMD. Consult your tax preparer and www.tsp.gov for information and advice.

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