Ask The Experts: Money Matters

By Mike Miles

Annuity calculation and TSP collection

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Q. I have a two-part question. I am a federal firefighter and, as of December, I will have 25 years and 10 months on the job and I am 50 years old. What is the salary they will be basing my retirement on: base pay or actual pay? When can I collect my Thrift Savings Plan? I would like to receive checks like a retirement.

A. Mike: You may begin withdrawing your TSP balance, or use it to buy an immediate annuity, as soon as you are separated from service.

Reg: Your annuity will be calculated using your basic pay. To see what’s included and excluded from basic pay, go to www.opm.gov/retirement-services/publications-forms/csrsfers-handbook/c030.pdf and scroll to Section 30A1.1-2.

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TSP allocation

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Q. I am 39. I contribute 12 percent of my salary to the Thrift Savings Plan. I have 50 percent in the L Fund and 10 percent each in G, I, S, C and F. I plan to retire around 62. Is this a reasonable contribution distribution?

A. On its own, it’s not risk-efficient. If you don’t have a good reason to use this allocation, then it’s not reasonable.

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Discontinued service retirement

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Q. I was involuntarily separated under FERS discontinued service retirement with 26½ years of service. I was rehired to a federal job and opted to receive both salary and annuity. I no longer contribute to FERS and understand why I no longer get matching contributions to the Thrift Savings Plan, but why can’t I contribute my own money to TSP and get the tax deferral? I have a TSP account but do not plan on withdrawing money until I permanently retire in several years.

A. The only way that you’re allowed to contribute to the TSP is through payroll deferral or by transferring pretax money in from an IRA, 401(k), 403(b) or other qualified retirement plan.

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Voluntary Contributions Program and rollover

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Q. I am CSRS and eligible to retire now with 30 years at age 56. My salary excludes my wife and I from funding a Roth with more than $6,000 each year (except $22,500 allowable into new Roth TSP).

Let’s say I put $25,000 into the Voluntary Contributions Program with the intention of making a one-time, lump-sum withdrawal as soon as possible and roll the original $25,000 into a private Roth IRA.

I am told that doing so is a way to immediately fund a Roth that is not limited to my current $6,000 amount mentioned above. Do I understand this correctly, and is there a publication that specifically identifies these options? My financial adviser feels this is too good to be true if true.

A. It’s true. Maybe you should find another financial adviser.

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Laid off — Leave money in TSP?

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Q. My husband was a temporary federal employee for the Defense Department for five years. He was laid off in August. He had two years of military service, which he bought that time back, so in essence he has seven years of federal service. He is 60 years old. He put 10 percent of his salary in the Thrift Savings Plan. Should he leave that money in TSP or put it in another vehicle?

Also, when he reaches retirement age (62), will he receive a pension for the seven years of federal service? He left DoD with a sick leave balance — his annual leave he was paid for. Is it true, if he receives another government position within three years, his remaining sick leave will carry over.

A. Mike: He should leave his money in the TSP for as long as possible, and manage it there. Its costs and investment options are superior to those he’ll find anywhere else.

Reg: He would be eligible for an annuity at age 62 if he had five years of full-time service from which retirement deductions were taken and he didn’t take a refund of those deductions when he left. The unused sick leave he had to his credit when he left wouldn’t be included when his annuity was computed. On the other hand, if he returned to work for the federal government, his sick leave would be restored.

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TSP out-of-service withdrawal

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Q. I recently left federal service after three years to pursue grad school in the fall. I am 23, with a little over $15,000 in a Thrift Savings Plan account. I am wondering if I should make an out-of-service withdrawal and transfer the funds to an IRA? Then, once the funds were in an IRA, I could withdraw the funds for education costs without the penalty or 10 percent tax and only face federal income tax, since my state doesn’t have an income tax. I am not receiving financial aid for grad school because of my federal government salary, and will need to take out private loans from a credit union at 7.2 percent or a Federal Graduate Plus loan at 7.9 percent. I am wondering which option makes the most financial sense.

A. Roll over the money, take the withdrawal, avoid the penalty and pay for education. You’ve identified one of the few investment opportunities that is likely to beat the TSP.

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Inheriting a TSP

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Q. I am a FERS employee earning $118,000 per year. My sister is a dental assistant earning about $30,000 per year. (She’s also married and lives in a state with a much lower cost of living, while I’m single.) This question involves inheritance of our parents’ retirement accounts, and I offered our salaries because our tax obligations are vastly different. Our father has a TSP account worth approximately $110,000. Our mother has a 401(k) worth approximately $90,000. Both are retired, and both are very ill with terminal cancer. We’re wondering if our parents should each convert their retirement accounts to cash and pay the upfront taxes and then leave my sister and me as equal co-beneficiaries of the cash account. We can’t seem to figure out how to fairly inherit the retirement accounts, since my mother and father’s accounts aren’t equal, and I am in a higher tax bracket.

I understand if we inherit these accounts, we’d have to roll them into an “inherited IRA” and begin taking distributions based on our life expectancy, and these distributions would increase our respective annual tax obligation. While it would be nice to continue allowing the bulk of these accounts to grow tax-deferred, having two beneficiaries in two different tax brackets complicates future distributions. Right now, my parents are each other’s designated beneficiaries, which will be a nightmare if they die soon after one another. In an ideal world, we’d be allowed to combine these accounts and leave them to continue growing tax-deferred until my sister and I retire, at which time we could each take half the annuity. Is there any way to make this happen, or is there a better option we should be aware of?

A. This is beyond the scope of this forum and can’t be answered from the information provided, anyway. Please let her know that she should engage an estate planning attorney and a CPA if she really wants to work this problem.

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