Ask The Experts: Money Matters

By Mike Miles

Survivor benefits

Bookmark and Share

Q. My husband and I both work for the Postal Service. He is retiring March 1 under CSRS. I have 25 years in working for the Postal Service and have at least eight years left to retire (FERS). We elected not to take the survivor benefits because I’m still working at the Postal Service and I will have him on my medical plan. We have two insurance policies on both of us in case of death. But I’m not sure if I understand the point of survivor benefits. Do you have any numbers on the pros and cons of survivor benefits, and are we wise for not taking it? We are both healthy and we have no dependents.

A. The survivor benefit will provide a survivor with a guaranteed income that is guaranteed to increase with inflation each year and guaranteed to last for life. These are guarantees that life insurance and retail annuities can’t match. Electing the CSRS or FERS survivor benefit is the safest bet for a survivor and should be considered the default choice until and unless you determine something else to be a better alternative. It is definitely not wise to make such an important decision without the proper analysis and understanding. It is also definitely not wise to trust an insurance agent to conduct this analysis.

Tags: , , , , ,

Calculating tax withholding

Bookmark and Share

Q. I recently retired from federal service. I began receiving my FERS annuity Jan. 1. My annuity is $3,190 gross, plus $1,195 special retirement supplement, minus $190.28 health insurance and $36.34 for dental/vision. I am single with no dependents. I am withholding $641 for federal tax purposes. My state has no income tax.

I want to begin monthly distributions from the Thrift Savings Plan at $4,200 per month. How much should I elect to withhold to ensure that I am not hit with a substantial tax bill for tax year 2014? Assume no itemized deductions.

A. I’m not in a position to calculate your estimated tax liability for the coming year. You can consult a qualified tax preparer for help with this, or review Internal Revenue Service Publication 505 to figure it out for yourself.

Tags: , , , , , ,

Tax implications for TSP withdrawal

Bookmark and Share

Q. Whether I retire sooner or later than the year I turn 55, what kind of tax implications will I have in taking a partial lump sum or the whole balance lump sum for something like a vacation home?

A. If you retire from Thrift Savings Plan-covered employment during or after the calendar year in which you reach age 55, you will be exempt from the Internal Revenue Service 10 percent early withdrawal penalty for any withdrawals you take.

Tags: , , , , ,

Special retirement supplement and TSP

Bookmark and Share

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.

Tags: , , , , , , ,

Adding 401(k) to TSP

Bookmark and Share

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.

Tags: , , ,

Paying taxes at retirement on TSP balance

Bookmark and Share

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.

Tags: , , , , ,

Using TSP withdrawal to pay off debt

Bookmark and Share

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.

Tags: , , , , , ,

Follow-up on TSP withdrawal

Bookmark and Share

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:

Tags: , , , , ,

Avoiding a penalty at age 70 1/2

Bookmark and Share

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.

Tags: , , , ,

Waiting to claim Social Security

Bookmark and Share

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.

Tags: , , , , , ,