Ask The Experts: Money Matters

By Mike Miles

TSP loan

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Q. The Air Force is going through a drawdown because of sequestration. If a person has a current Thrift Savings Plan loan and is involuntary retired earlier than the minimum 20 years for military service, what are their TSP loan options? Are they required to immediately pay this back, or will they still have the option to pay the loan back over time? Also, how does joining the civil service affect the TSP account?

A. You will be required to repay any outstanding loan balance within 90 days of separation, or the unpaid balance will be declared a taxable distribution.

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TSP withdrawal payment options

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Q. I am an air traffic controller who will be forced to retire in May 2016 when I turn 56 with 28½ years of service time. If I retire anytime between Jan. 1, 2015 (the year I turn 55) and May 2016, will I be able to take out a lump sum and monthly payments from my Thrift Savings Plan without the 10 percent tax penalty? Do I have to follow the life expectancy requirement for receiving monthly payments, or am I free to set the payment amount as I wish and adjust it once a year?

A. Since you are separating from service during or after the calendar year in which you reach age 55, your TSP withdrawals after you separate will be exempt from the early withdrawal penalty.

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Taxable distribution vs. one-time partial withdrawal

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Q. I’m nearing retirement and have a Thrift Savings Plan loan. If I decide not to pay off the loan but to pay the taxes on the taxable distribution, am I still eligible for the one-time partial withdrawal after I retire?

A. A declared taxable distribution does not violate the TSP’s eligibility requirements for taking a partial withdrawal after separating from service.

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Withdrawing from TSP without penalty

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Q. I’m a Defense Department firefighter (special category). At what can I withdraw my Thrift Savings Plan without incurring any penalties?

A. If you’ll settle for specific monthly payments, you can withdraw it any time after you separate from service without penalty. If you want a lump sum or monthly payments that don’t fall within the limits imposed by Internal Revenue Code section 72(t), then you’ll have to wait until you reach age 59½  unless you separate from federal service during or after the calendar year in which you reach age 55. In the latter case, any withdrawal you make will be exempt from penalty.

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TSP loan repayment

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Q. How long after I retire do I have to repay my loan? Is there time to take a partial payment from the Thrift Savings Plan at retirement to pay the loan?

A. You have 90 days following your separation to repay the loan. It doesn’t make sense to take a partial withdrawal to repay the loan, since any unpaid balance will be declared a taxable distribution when the deadline is reached but won’t count against your once-in-a-lifetime limit on partial withdrawals.

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VERA/VSIP, annuity, TSP withdrawals and SRS

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Q. How will Voluntary Early Retirement Authority/Voluntary Separation Incentive Pay affect my retirement benefits (annuity supplement, pension and Thrift Savings Plan withdrawals)? I am a Defense Department civilian, age 58, with 21 years of service under FERS.

A. Mike: You will have access to your TSP account, under the usual rules, without penalty following your separation.

Reg: Your annuity would be computed under the standard formula: .01 x your high-3 x your years and full months of service. There wouldn’t be any age penalty because you were retiring before age 62. And, since you have already reached your minimum retirement age, you’d immediately be entitled to the special retirement supplement.

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Terminal cancer and TSP early withdrawal

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Q. I will most likely be medically separated from the military next year after 25 years of service.  I have bone cancer that is incurable but manageable — 50 percent life expectancy is 10 years. I am 47, so if I live 10 years, I would be 57 and still ineligible to withdrawal my Thrift Savings Plan. Are there exceptions for terminal disease that allow you to withdraw early without penalty?

A. The list of available exemptions appears on Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

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Workers’ comp and TSP withdrawal

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Q. I am below the age for Thrift Savings Plan withdrawal without penalty (soon to be 50), but it looks like I will be out on workers’ compensation under permanent disability shortly. Due to the impact on my income and an ongoing issue, I need to make a withdrawal or close my TSP to continue meeting my obligations. I have thoroughly researched the issue of using a TSP but have little choice. A loan is not an option (I’m paying one off and, if I’m on disability, I can’t take one out). And I’ve looked into other avenues, to include financial planners, with no success. Without focusing on the 10 percent penalty, how can I submit for my account funds? Although I am vested with more than 22 years, do the age criteria prohibit access to any funds that are not your own contributions? Due to the previous loan, is it impossible to access these funds to avoid a more onerous financial situation? I have an amount that would make us able to live on the disability funds. Is this a simple matter of age and letter of the law?

A. As soon as you are separated from federal service, you may request a distribution of some or all of your TSP funds. Before you separate, you may request a hardship withdrawal if you can qualify, or you could take a loan and then fail to pay it back, which will result in a distribution.

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Directed reassignment

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Q. I am 46 with 22 years of service, and have been told that I will soon receive a letter of directed reassignment to a job in my same grade far outside my commuting area. When the letter arrives, if I should decline to move to the new position, what are my options for drawing retirement? How about insurance? Severance pay? What about my 401(k) in the Thrift Savings Plan? My performance ratings are not an issue.

A. Mike: Your circumstances will not affect the usual rules that apply to your TSP account. As long as you remain employed, you will be subject to the in-service withdrawal rules described at https://www.tsp.gov/planparticipation/inservicewithdrawals/basics.shtml. If you separate from service, the rules described at https://www.tsp.gov/planparticipation/withdrawals/accountOptions.shtml will apply. If you separate from service before the calendar year in which you reach age 55, you will be subject to the Internal Revenue Service’s early withdrawal penalty unless you meet one of the exceptions specified on Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

Reg: Because you wouldn’t meet the age and service requirements to retire, you’d only have one option. If you didn’t take a refund of your retirement contributions, you could apply for a deferred annuity at age 60.

You would be entitled to severance pay only if you lost your job through no fault of your own. However, if you were to resign or decline a reasonable offer, you wouldn’t. A reasonable offer is defined as one that is in the same agency, in the same commuting area, of the same tenure and work schedule, and not more than two grades or pay levels below your current position. Note: If you are covered by a mobility agreement, the reasonable offer exception wouldn’t apply.

You would be given a month of free Federal Employees Group Life Insurance and Federal Employees Health Benefits insurance coverage. At the end of that period, you could elect private life insurance coverage at your own expense. You could also elect to continue your health insurance coverage for up to 18 months under the temporary continuation of coverage provision. For that coverage you would pay 100 percent of the premiums, plus 2 percent for administrative expenses.

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TSP upon separation

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Q. I have five years at the Veterans Affairs Department and 4½ years at the Transportation Security Administration and am about to be suspended/terminated (FERS). Being non-military, can I leave my Thrift Savings Plan and FERS with the government without penalty or roll over to Vanguard since I am not 56? I have more work time in the private sector than with the government.

A. You may maintain and manage your TSP account for as long as you live. You may also roll your TSP money over to an IRA and close your account after you separate, without penalty, regardless of your age.

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