By Mike Miles
Divorce and TSP
April 29th, 2013 | Uncategorized
Q. I am about to divorce my husband, who works for the Federal Aviation Administration.
1. Can I keep his health insurance as an individual? Does this cost anything to him? How much will it cost me?
2. How can I be eligible for his life insurance after divorce?
3. Which is more beneficial: Getting a survivor benefit or getting a higher pension?
4. When can he start taking money from his Thrift Savings Plan?
A. You can’t withdraw money from his TSP account. Your divorce settlement will govern how the TSP is divided and distributed and you’ll likely wind up with your share in an IRA in your name. The usual rules for distributions will then apply.
Tags: divorce, health insurance, IRA, life insurance, survivor benefits, TSP, withdrawal
Survivor benefits vs. life insurance
April 2nd, 2013 | Uncategorized
Q. My husband is putting in papers to retire after 40 years in civil service. He wants me to sign a paper saying that I agree not to accept his retirement if he dies before me. He said it would be less costly to get a good life insurance policy. We are both 61 years old and in good health. I have asthma and take medication for cholesterol. I have 21 years with the public school system. I hope to retire in the next year or two. Is it a good idea for me to sign this paper? He doesn’t want to discuss it.
A. Here is a link to a column I wrote for Federal Times a few years ago on the topic: www.variplan.com/uploadedDocuments/1213969385How_pension_max_compares_to_survivor_annuity.pdf.
This is, potentially, a critical question, and the correct answer depends entirely upon your circumstances — your goals, resources and constraints. Unfortunately, the analysis required to answer it correctly is usually complex. The only universal recommendation I can make is that, if you’re in doubt, the safest bet is to elect the maximum CSRS or FERS survivor benefit.
Tags: CSRS, FERS, life insurance, retirement, survivor benefits
TSP vs. IRA tax burden to spouse and heirs
March 11th, 2013 | Uncategorized
Q. I will retire April 30 under FERS (law enforcement agent; I will be 66½ years old) and have been exploring options available regarding my Thrift Savings Plan account. I read with interest your Feb. 4 Federal Times article “Don’t overlook TSP for lowest-cost investment” but have the following questions concerning what happens to my TSP account funds if I predecease my wife/heirs before or after the required minimum distribution takes effect.
As the annuitant, upon reaching 70½, I would have 10 years to draw down my TSP funds. What happens if I predecease my wife/heirs during this time frame? It is my understanding they will have a 5-year drawdown period, which would subject them to a heavier tax burden. Is this assumption accurate?
If I roll over my TSP into an IRA and I predecease my wife/heirs, then they would have the option of rolling over the funds into their own individual IRAs therefore avoiding a significant tax burden. Is this accurate?
A. The rules for this are complex and depend upon a number of factors. Your questions leave open too many possibilities to cover here. I suggest that you review the notice at https://www.tsp.gov/PDF/formspubs/tsp-776.pdf and then come back with any specific questions that remain unanswered.
Tags: age, FERS, IRA, law enforcement, Required Minimum Distribution, retirement, rollover, survivor benefits, taxes, TSP
70 1/2 and survivor benefits
January 16th, 2013 | Uncategorized
Q. I have about $260,000 in my Thrift Savings Plan account and just turned 67. We don’t need extra income right now. I’ve read your advice to others concerning leaving the money in TSP and withdrawing the minimum to satisfy requirements. Assuming nothing changes between now and then, is that still your recommendation concerning the requirement for withdrawal at 70½? Second, must I take action beyond designating order of precedence to ensure the appropriate next of kin receive the account balance when I die?
A. My recommendation is simple: Delay drawing down your TSP for as long as possible. It’s not a matter of designating precedence. The law does that for you if you don’t designate the beneficiaries for your account.
Tags: income, survivor benefits, TSP, withdrawal
Survivor benefits
December 14th, 2012 | Uncategorized
Q. I’m going to retire in May, and I’m considering withdrawing my Thrift Savings Plan in equal monthly payments. Based on the TSP website calculator, my $190,000 will give me 288 payments using a 1.5 percent interest rate. If I die after, say, 150 payments, what are the options open to my wife?
A. A beneficiary participant account will be established for your spouse beneficiary, and she may then manage it or withdraw from it as she chooses, subject to the applicable TSP and Internal Revenue Service rules.
Tags: IRS, monthly, retirement, survivor benefits, TSP, withdrawal
Survivor annuity for siblings
December 3rd, 2012 | Uncategorized
Q. I am an unmarried federal employee. I max out my contribution to the Thrift Savings Plan. I plan to work until at least 62, which will give me 21 years of service, or possibly until 65 with 24 years. As a federal employee in FERS and with TSP, what is the best way to provide income for two siblings when I die? I am not opposed to taking a reduction in monthly benefits if that is the best way to do so. My home will be paid off in 2014. I have no other debt and live on about 58 percent of my take-home pay.
A. Mike: Providing income for survivors is a complex exercise, and there is no universally “best” way to do it.
Reg: With one exception, only a spouse (or former spouse by court order) can be provided with a survivor annuity. Here’s the exception: You can elect an insurable interest annuity for someone who is dependent on you financially and is a blood or adoptive relative closer than a first cousin. If you elect an Annuity With a Benefit to Named Person Having an Insurable Interest, the amount your annuity would be reduced depends on the difference between your age and the age of the person you name. I doubt that you can name more than one person to receive an insurable interest annuity. However, that decision will have to be made by the Office of Personnel Management.
Tags: age, FERS, maximum contribution, OPM, survivor benefits, TSP
Annual TSP withdrawal and survivor benefits
November 5th, 2012 | Uncategorized
Q. I’m a Postal Service employee who is very close to his retirement date. I was told that withdrawing 4 percent of my Thrift Savings Plan savings per year would last for a lifetime? Is this true? What if I die two years after I begin to draw and my benefits are left for my daughter who is only 38 now? Will she receive the money for a lifetime also? Or will she be paid only the balance?
A. You can’t be sure that a 4 percent annual withdrawal rate will be safe. It depends upon a number of factors, including how you invest and manage your account. Your beneficiary will paid the lump-sum balance in your account after you die.
Tags: lump-sum payment, Postal Service, retirement, survivor benefits, TSP, withdrawal
What to do with taxable portion of VCP
August 20th, 2012 | Uncategorized
Q. Effective Feb. 29, 2012, I am a CSRS retiree from federal service; I participated in both the Thrift Savings Program ($201,000), and the Voluntary Contributions Program. I must make an election soon of the funds now in the VCP: $87,637 (nontaxable); $34,682 (taxable).
I am married, and I will be 66 years old in October. I (we) do not foresee needing the money from these two sources in the near term. I will likely convert everything to a traditional IRA then Roth IRA in April of the year after I turn 70½, to be left to my son after I die. He is now 23.
Inasmuch as I have all TSP funds in the G Fund, I would like to know if it is prudent/savvy/advisable to place the taxable VCP portion in the TSP G Fund and then deposit the nontaxable portion into a traditional IRA at my federal credit union.
A. I can’t responsibly tell you how to invest the money without knowing a lot more about you, your goals and your circumstances. I can recommend, however, that you roll the pretax money into your TSP account and the post-tax money into a Roth IRA at a discount broker. You may then take advantage of the unique opportunities in the TSP and emulate some of those opportunities in the Roth IRA by using exchange-traded index funds that are similar to those offered in the TSP. For example, the following iShares funds are comparable to four of the TSP’s basic funds: IVV for the C Fund, IWM for the S Fund, EFA for the I Fund and AGG for the F Fund. Unfortunately, there is no equivalent for the G Fund and money market or bank savings will be about the best you can do.
Tags: 70 1/2, C Fund, CSRS, G fund, I Fund, IRA, nontaxable, retirement, Roth IRA, S Fund, survivor benefits, tax, TSP, voluntary contributions program
TSP disbursement after death
June 27th, 2012 | Uncategorized
Q. My sister retired in 2010 and most likely will not move her Thrift Savings Plan into an IRA and begin withdrawals until she’s required to in 2015. In the meantime, she has awarded percentages of her TSP to children and friends.
If she dies before 2015, I know that the beneficiaries will have to notify TSP. It’s my understanding that the TSP beneficiaries will each have to start new IRAs to receive their portions. I don’t think there’s any way for the beneficiaries to receive a lump-sum payment, unless they pay penalties. Am I correct? And this is true regardless of their ages?
A. The beneficiaries don’t have to start IRAs to receive their share of the TSP account. The money will be distributed as taxable income unless it is transferred into a beneficiary IRA. The early withdrawal penalty does not apply to distributions made on account of the account holder’s death.
Tags: early withdrawal penalty, income, IRA, lump-sum, survivor benefits, taxes, TSP
Inheriting a TSP
June 6th, 2012 | Uncategorized
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.
Tags: 401(k), FERS, IRA, retirement, salary, survivor benefits, taxes, TSP