Ask The Experts: Money Matters

By Mike Miles

Partial TSP withdrawal

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Q. I am 60 and had to retire early due to disability. I am receiving Social Security disability and a small annuity. Can I take a small amount — say, $10,000 — from my account but then start monthly draws when/if it becomes necessary? Should I leave all of my money in this account or do a rollover into a regular or Roth IRA?

A. Yes, as long as you have not previously used your single partial withdrawal. I think you should retain your Thrift Savings Plan account for as long as possible.

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Early withdrawal penalty

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Q. I will be 52 years old March 9. I am covered under FERS, and I have 31 years of federal service. If my base offers an early-out this year, I plan to take it.

I have a substantial balance in the Thrift Savings Plan and would like to withdraw it in its entirety when I take the early-out so I can invest it in my daughter’s business.

1. Will I be penalized for withdrawing my TSP funds early? If so, how much? I know I will be taxed, and I am OK with that. My husband plans to keep working. He is a GS-12, retired military and we have no bills, so we will be fine.

2. I know I cannot draw Social Security, and I don’t plan to do so until I reach the required age. In the meantime, will I be eligible for the special retirement supplement if I retire now? If not, at what age will I be eligible, if at all?

A. Mike: Unless you are sufficiently disabled or have massive medical bills, you will pay the 10 percent early withdrawal penalty on the lump sum.

Reg: If you accept your agency’s offer of early retirement, you’d be entitled to the special retirement supplement when you reach your minimum retirement age, which is 56. The SRS will end at age 62, whether or not you apply for a Social Security benefit.

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Special retirement supplement and TSP

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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.

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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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Special retirement supplement and taxes

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Q. I received a 1099R from the Internal Revenue Service. They do not differentiate the annuity income from the supplement income. I’ve read the IRS Publication 721 tax guide to U.S. Civil Service Retirement benefits. There is no mention of the special retirement supplement. I called the IRS; they said they never heard of the supplement being treated like Social Security. They also advised me to report the income on the 1099R as is (do not separate the supplement from the regular annuity). If it is indeed to be reported like Social Security, how do I go about it without raising red flags?

A. The special retirement supplement is paid out of the Civil Service Retirement and Disability Fund and, as ordinary income, is treated no differently than an employee’s annuity.

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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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When to collect TSP

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Q. I am a federal air technician with the Air National Guard. I have 34 years in the Guard and 27 years as a federal full-time technician. I am in FERS and have a minimum retirement age of 56. I will be 53 this year.

It has been communicated to me that I will probably not be retained this year, meaning that Dec. 31, 2014, I will be involuntarily retired, thus losing my full (technician) and part-time (traditional Guard) employment. When can I begin collecting my retirement pay, Social Security, Thrift Savings Plan? Are there any penalties if I was forced to retire?

A. Mike: You may begin collecting your TSP money as soon as you retire.

Reg: Because you have enough years and civilian service (50 and 20), you’d be able to retire immediately and receive a discontinued service annuity. You would also be entitled to the special retirement supplement, which approximates the amount of Social Security benefit you earned while a FERS employee. The SRS would continue to be paid until you reach age 62 and are eligible for a Social Security benefit.

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Disability retirement and TSP withdrawal

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Q. I am 56 and had to retire under a disability retirement because of cancer. I am receiving Social Security, and I have 90 percent disability from the Veterans Affairs Department. Can I withdraw from the Thrift Savings Plan without the 10 percent penalty, or do I need to wait until I’m 59? What documentation do I need for taxes? Can you also refer me to the correct tax pubs and pages?

A. The answer will depend upon when you retired and the nature of your disability. See Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf to see if you meet one of the exceptions to the penalty.

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Social Security taxes and TSP withdrawals

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Q. After I retire, I am planning to withdraw $4,000 per month from the Thrift Savings Plan and I am not claiming Social Security. How will Social Security taxes be paid for the TSP I withdraw?

A. Social Security taxes can’t be paid from your TSP withdrawals since they are not considered earned income.

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Test your retirement financial fitness

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Are you planning to retire soon? If so, you’ll need to figure out whether you’re financially able to make it work in the near and the distant future. Because there are few, if any, truly reliable financial guarantees, this can be a difficult thing to determine.

The essential question is this: “Will I have the resources — usually cash — available when I need it to support my desired standard of living for the rest of my life?” If someone else is depending upon you for all or part of their financial support, your retirement decision will affect them, as well, and they should answer this question before you commit.

If you are relying solely on a CSRS annuity, or even Social Security, to support your living expenses in retirement, your job is fairly easy. Both of these income streams are fully indexed for inflation and guaranteed by the best guarantor there is. The most significant risk you have to consider with these is that the guarantee you’re counting on might fail. While this may seem like a large risk, it is relatively small when compared with the risks associated with other potential income sources, like FERS and private annuities, and withdrawals taken from an invested portfolio. These risks include loss of purchasing power, insolvency, reduction in benefits, and market and interest rate risks. Assigning probabilities to these risks and analyzing their potential effects on your retirement plan is beyond the ready ability of most people who don’t specialize in statistical analysis. So, what can you do?

Start with this basic test. Add up the sum of your guaranteed retirement income streams from such sources as CSRS, FERS, Social Security and other defined benefit pension plans.

Then do some research to see what kind of payout you can expect to receive if you used all of your savings and investments to purchase one or more inflation-adjusted guaranteed fixed immediate annuity contracts.

Make sure that you choose the maximum inflation adjustment rate available when requesting the quote. The Thift Savings Plan website has a calculator that will give you a quote, on the spot. Add this guaranteed annuity income to your other guaranteed income to find your total pretax guaranteed retirement income.

If this is enough to meet your expected cost of living, after deducting an allowance for taxes, then you can probably safely retire.

If not, you should investigate your options further to see if an alternative approach might be workable.

With annuity payouts near historical lows, the invest-and-withdraw option, if managed prudently, will probably support a higher standard of living and produce better results — at least until the payout rates rise significantly.

Here’s a sample test calculation based on three guaranteed income sourses — FERS, Social Security and TSP:

FERS annuity: $30,000

Social Security: $20,000

TSP annuity payout with increasing payments on $200,000: $10,000

Total guaranteed pretax income: $60,000

Less 25 percent allowance for taxes: -$15,000

Total guaranteed after-tax income: $45,000

After-tax cost of living in retirement: $40,000

Test result: Fit to retire.

This test is not conclusive, but it is a good starting point in determining your financial fitness for retirement.

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