Ask The Experts: Money Matters

By Mike Miles

Adding 401(k) to TSP

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Q. I am a retired CSRS annuitant. What is the procedure to add external qualified 401(k) funds to the Thrift Savings Plan?

A. Use Form TSP-60, which includes thorough instructions.

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Paying taxes at retirement on TSP balance

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Q. Is it possible to pay all taxes on the Thrift Savings Plan at retirement and then still keep money in a Roth TSP? If not, is there any way to convert money in TSP before I turn 70 to avoid having to take minimum distribution? I do not want to pay taxes again on money that I may not need if it is paid out as a minimum distribution.

A. You may not convert a traditional TSP balance to a Roth TSP balance. You should also reconsider the logic of what you’re trying to do, which is electing to pay tax on a large sum now rather than pay tax on a series of much smaller sums later. There is no risk of double taxation, and you’re likely to wind up paying a higher rate using your proposed strategy.

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Using TSP withdrawal to pay off debt

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Q. I am soon to be 65 and plan to retire within the year and have debt in the amount of $67,000. This is not including my home, car, etc. I have been considering withdrawing a large amount from my Thrift Savings Plan to pay this debt. With my pension and Social Security benefits, if I figured correctly, I would be bringing home about what I do now after taxes. I know it’s personal preference, but is it a wise decision?

A. I can’t say if it’s the best course of action, but the debt needs to be paid. The issue is whether it’s better to take the tax hit for a lump-sum withdrawal to avoid the interest on the debt or to take monthly withdrawals to reduce the taxable income in any one year and pay the debt down over time. The correct answer will depend upon the cost of the debt and your tax returns. If you won’t significantly increase the amount of tax you’ll pay on the withdrawn TSP money by taking it all at once, it’s probably a good idea to go ahead and retire the debt.

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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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Waiting to claim Social Security

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Q. I retired in July 2013 and have $500,000 in my Thrift Savings Plan. I need more money to support retirement and would like to take a lump sum of $30,000 out of TSP. I was thinking about taking the rest of the money as an allotment. Does this make sense? I have delayed my Social Security until I am 66 (I’m 64 now). My wife is taking her Social Security.

A. Waiting to claim Social Security is probably a good idea unless you have a shorter than average life expectancy and are single. If your only other source of income until you reach age 66 is your TSP account, then I think it’s reasonable to consider using it to fill the gap. If you have other resources, I encourage you to leave your TSP account for last.

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TSP-to-IRA rollover

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Q. During the retirement process, how do you move the Postal Service Thrift Savings Plan account to a private, individual IRA so that there are no taxes?

A. After you’ve retired, you use Form TSP-70 to request a direct rollover to an IRA.

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VCP and Roth IRA conversion

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Q. I’m a CSRS employee nearing retirement. I have read numerous articles touting the advantages of opening a Voluntary Contributions Program account with up to 10 percent of your lifetime civil service earnings and then converting it to a Roth IRA at retirement. In your professional experience, would you recommend qualified individuals follow this approach? Are there potential pitfalls I’m unaware of?

A. I certainly recommend that you consider it. I don’t know of any pitfalls other than botching up the transactions and violating some rule. I suggest that you pursue it with the help of a qualified tax adviser — the one who will prepare your return for the year.

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TSP withdrawal

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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.

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Starting TSP withdrawals now vs. at 70 1/2

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Q. I retired under FERS two years ago, and I haven’t needed to touch my Thrift Savings Plan account so far. I am receiving Office of Personnel Management, Social Security and military retirements. I am 68½ years old. I just received a 100 percent Veterans Affairs Department disability award, which will change my taxable military retirement to a nontaxable VA retirement. I don’t think this will have any effect on my long-term life expectancy. I have determined that I do not want to elect an annuity on withdrawing from my TSP. I am considering immediately starting a monthly TSP withdrawal based on life expectancy. What are the advantages and disadvantages of starting withdrawals immediately versus waiting until the 70½ mandatory withdrawals? I am a married man, and we declined a survivor benefit plan.

A. Starting withdrawals now will provide you with more income now but will produce a larger taxable income and begin to deplete your account. Waiting will reduce your current taxable income and preserve your account’s value (if you don’t lose it to the markets), but also reduce your current standard of living and increase your taxable income later in life.

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