By Mike Miles
November 11th, 2013 | Uncategorized
Q. My wife and I are FERS employees. We are both considering retiring early if offered Voluntary Early Retirement Authority at ages 50+/- (both with more than 25 years of service). With children still in the picture for some time, access and flexibility with our Thrift Savings Plan accounts are crucial to any plan. I would like to accomplish two things:
1). 72(t) withdrawals until 59½ in one account.
2). Flexibility to roll over funds currently in TSP into a Roth IRA held at another institution (from an IRA as I see no method to do that while the funds are in TSP).
My plan would be to roll over just enough to “fill up” a certain tax bracket, say 15 percent, especially while we have many deductions related to children.
So, my thinking would be to have substantially equal payments out of one account soon after early retirement but not immediately. For the other TSP account, make a one-time partial withdrawal and transfer that to an IRA currently held at another institution. I’m assuming I can make that transfer/withdrawal at age 50 with no penalties, correct? This would allow me to each year assess our taxes and determine what amount of the IRA I would like to convert to my Roth IRA. I would only do a partial withdrawal as I appreciate the low expenses of the TSP, but the inflexibility to convert to a Roth is too limiting.
Does this make sense? And is everything I’ve laid out reasonable and doable?
A. What you’ve proposed is doable, but I’m not sure I see the value in the Roth IRA conversions.
August 6th, 2013 | Uncategorized
Q. When does a nonfederal retirement fund (401(k), IRA, Substantially Equal Periodic Payment, etc.) qualify to be rolled over to the Thrift Savings Plan? Is there a time limit that such funds need to remain before transferring to a TSP account?
A. Basically, the funds need to come from a tax-deferred retirement account and consist of only yet-to-be-taxed money.
December 10th, 2012 | Uncategorized
Q. I am retiring from the Army after 22 years of service and I am 45 yrs. old. Can I start withdrawing from the Thrift Savings Plan and avoid the early withdrawal penalty by taking a series of Substantially Equal Periodic Payments? How does that work? My life expectancy is 37.7 more years, according to the Internal Revenue Service, so is that the number of years my funds can be distributed? If so, do I then divide what I saved by 37.7 and again divide by 12 to see what my monthly payments would be?
A. You may avoid the penalty by taking a series of Substantially Equal Periodic Payments, but the rules are complicated and strict, with the penalty for violating them potentially large. I suggest that you consult with a CPA or other qualified tax preparer, who will prepare and stand behind your returns during the distributions, to run the calculations for you. There are actually three options for calculating the distribution amounts, and they typically produce a wide range of values. If you insist on doing it yourself, you can start the learning process by conducting an Internet search on “72t distributions,” but the IRS won’t care if you relied on bad information or methods that led to mistakes.
November 19th, 2012 | Uncategorized
Q. I am a firefighter with a county fire department in Florida. As such, I am part of the Florida Retirement System in the special risk class. I started my career early and will be eligible for retirement with full benefits and no FRS penalties by age 48. (This is 25 years of service.) However, because of the Internal Revenue Service penalty for retiring before age 50, I would receive a 10 percent tax penalty in addition to the normal taxes I will pay on my retirement income. I understand that I will receive the penalty of 10 percent. However, I want to know whether that penalty goes away after I have reached age 50, or if it continues until I am 59?
A. The early withdrawal penalty rules will continue to apply until you reach age 59½. You can avoid the penalty by withdrawing from your Thrift Savings Plan account in a series of Substantially Equal Periodic Payments under section 72(t) of the tax code.
November 14th, 2012 | Uncategorized
Q. I am a federal employee with the Department of Justice, non-law enforcement, and will have 30 years of service at age 54, approximately two years before my minimum retirement age. Can I leave the government before MRA with 30 years and still be eligible to receive my special retirement supplement and my FERS retirement without a penalty at my MRA? Would I still be able to collect my Thrift Savings Plan, without penalty at my MRA, or would I be required to wait until age 59½?
A. Mike: If you separate from service before the calendar year in which you reach age 55, the early withdrawal penalty rules will apply to your TSP account. You may avoid the penalty by taking a series of Substantially Equal Periodic Payments, however.
Reg: If you left government before reaching your minimum retirement age, you could apply for a deferred retirement. Because you have at least 20 years of service, you could apply for that benefit at age 60. However, as a deferred retiree, you wouldn’t be eligible for the special retirement supplement.
October 1st, 2012 | Uncategorized
Q. If I agree to make Substantially Equal Periodic Payments available under Internal Revenue Service code section 72(t) from my TSP, may I do so before I retire and avoid the 10 percent penalty? If it matters, I am a federal law enforcement officer who will have 25 years of service before age 50.
A. No, since you’re not allowed to initiate monthly payments before you retire. The 72(t)-compliant distributions will avoid the early withdrawal penalty whenever they are initiated, however.
July 31st, 2012 | Uncategorized
Q. I’m 52 and a recently retired FERS law enforcement officer. I plan to leave my Thrift Savings Plan alone for at least two more years ($500k+ balance) and then do a 72T Substantially Equal Periodic Payment withdrawal. However, I may need approximately $30K to $40K, probably in 2014, before I do the 72T SEPP withdrawal. Would it be better to do the one-time partial TSP withdrawal, or withdraw from my Roth IRA contributions (tax-free)? I have approximately $140K in the Roth.
A. This is really a question for your tax preparer after a look at some pro forma returns for the relevant years. In general, however, I recommend that you leave your TSP account in tact for as long as possible, unless there is a clear advantage to doing otherwise.
July 16th, 2012 | Uncategorized
Q. I am a 55-year-old postal worker of 27 years who has a work-related medical problem. Last year, I was let go on “no work available status” and have been on workers’ compensation since. I have applied for postal disability and am waiting to see what happens with that. So far, I’ve received no letter of separation nor postal job offer. Will I be able to access my Thrift Savings Plan without penalty if I become separated from the Postal Service and am granted disability retirement?
A. The answer depends upon your specific circumstances. If you separate from service during the calendar year in which you reach age 55 or are totally and permanently disabled, you will be exempt from the early withdrawal penalty. Or, you may avoid the penalty by taking a series of Substantially Equal Periodic Payments.
The details are explained in the notice available at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf
Following is an excerpt from that notice:
If you receive a TSP distribution before you reach age 59½, in addition to the regular income tax, you may have to pay an early withdrawal penalty tax equal to 10 percent of any taxable portion of the distribution not transferred or rolled over. The additional 10 percent tax generally does not apply to payments that are:
* Paid after you separate from service during or after the year you reach age 55;
* Annuity payments;
* Automatic enrollment refunds;
* Made as a result of total and permanent disability;
* Made because of death;
* Made from a beneficiary participant account;
* Made in a year you have deductible medical expenses that exceed 7.5 percent of your adjusted gross income;
* Ordered by a domestic relations court; or
* Paid as substantially equal payments over your life expectancy.
November 8th, 2010 | Uncategorized
Q: Once the Roth option becomes available through the Thrift Savings Plan (supposedly the first pay period in 2012), is there any IRS preclusion to making substantially equal periodic payment (SEPP) distributions in 10 years or less from our current TSP into our upcoming Roth TSPs? SEPP distributions in 10 years or less are currently permitted in regular Roth IRA’s and regular Roth 401K’s; I see no reason the IRS regulations would prohibit similar SEPP distributions in TSP, would love to be able to do so, and would like to be able to plan accordingly.
A: I’m not sure I understand the “10 year or less” premise underlying this question. SEPP is a way to extract money from a retirement plan account without incurring the early withdrawal penalty, but a SEPP stream must continue until age 59 1/2 or for at least 10 years, whichever is longer.
March 9th, 2010 | Uncategorized
Q. I plan to retire at the age of 53 with 22 years under law enforcement with the Bureau of Prisons. Can I have my 72T Substantially Equal Periodic Payments come from TSP or do I have to transfer to a financial planning firm such as Edward Jones?
A. The payments can come from your TSP, but will have to be set up as monthly payments.