Ask The Experts: Money Matters

By Mike Miles

Life annuity vs. TSP monthly payments

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Q. I am retired and turn 70 this month. Even though I do not want to begin distribution of my Thrift Savings Plan investment, I understand that by law I must select a required minimum distribution program. My dependent spouse is 76 and also retired.

I am healthy and, with my family genetics, could expect to live to age 100. I do not need the TSP to live on and want to maintain it in the TSP investment form for as long as possible.

Under these circumstances, what is the best RMD to select: a life annuity or a TSP monthly payment? Should it be a single, or joint with survivor benefits? What is the tax exposure for the recommended way to go?

A. You should request automatic monthly payments based on your life expectancy. This will minimize the size of the payments.

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TSP waiver

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Q. My husband asked me to get a paper notarized and sign stating that I waive my rights to 50 percent annuity and so forth. Is he trying to keep me from any of it, or is that the only way to receive his withdrawal?

A. You need to read and understand what you’re being asked to sign before you agree. In certain circumstances, the only way he can withdraw the Thrift Savings Plan money is if you agree to waive your claim for a survivor annuity. You have a right to certain benefits from his TSP account. If you waive this right, it might work out badly for you, so you should be careful.

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Firefighters’ benefits

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Q. Is Federal Employees’ Group Life Insurance, survivor benefit and Thrift Savings Plan matching based on GS base pay or firefighter base pay?

A. Mike: TSP matching is based on your pay.

Reg: Your annuity will be based on your highest three consecutive years of basic pay. To determine what is included in the term “basic pay” for a firefighter, you’ll have to check with your personnel and payroll offices.

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Retirement questions

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Q. I have selected a retirement date of June 28, 2014. I will be 59½ years old with 33½ years of government service. I have been FERS my whole career. I have $365,000 in my Thrift Savings Plan. I will retire with a high-3 at GS-13, Step 4 and a 16.51 percent locality pay. I am debating paying off my mortgage on my retirement home by taking a partial withdrawal from my TSP.

The reasons for this are:

1) Escrow of property taxes

2) Flood insurance imposed by Dodd-Frank

3) Desire to be mortgage-free in retirement.

I owe $185,000 on my mortgage. I am single and will have no other debt once I retire. Does this make sense? What are the tax liability consequences if I pay off the mortgage in July 2014?

My TSP distribution is 50 percent C Fund, 25 percent L2020, 15 percent S Fund, and 10 percent G Fund. I am only able to fund my TSP at 5 percent to take advantage of matching funds. Would you recommend a more conservative distribution at this point in my career or continue with this risk model that I have been comfortable with for several years?

I have enclosed my most recent annuity estimates from my human resources center.

Also, if I were to marry after retirement what is the policy for covering my future spouse on my Federal Employees Health Benefits? If I choose a survivor benefit for my future spouse, is it possible to change from a self-only pension to one with survivor benefits?

A. You’re asking for personal financial decision support, which I can’t provide without an engagement agreement and some analytic work. If you’d like to consider hiring me to do the work necessary to answer your questions about using the TSP to pay off your mortgage and how you should invest your TSP to support your goals, visit www.variplan.com.

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TSP

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Q. Retirement date: Sept. 15, 2017, at age 62. Retire as GS-13, Step 7, FERS, with 38 years total service (figure includes my nine years military, bought back).

TSP: About $250,000, Social Security paid in full to receive full benefits for a 62-year-old.

I live in Washington state. I expect to pay spouse survivor benefits, federal income tax. Should I leave my Thrift Savings Plan alone or draw it out entirely?

A. Leave your TSP alone for as long as possible.

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Divorce and TSP

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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.

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Survivor benefits vs. life insurance

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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.

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TSP vs. IRA tax burden to spouse and heirs

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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.

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70 1/2 and survivor benefits

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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.

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Survivor benefits

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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.

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