Ask The Experts: Money Matters

By Mike Miles

Variable annuities

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Q. I just retired from government service under CSRS and have left my Thrift Savings Plan alone. My financial adviser, whom I consider a friend, is telling me I need to roll my TSP over into a tax-deferred variable annuity that guarantees a 5 percent return on investment each year even when the market does poorly. He says because of this “guarantee,” I can choose a very aggressive growth portfolio, while not having to worry about the results.

He claims my TSP is not protected against losses. I knew that already, of course. It’s with a highly rated company. Fees are around 2 percent annually. I noticed you have a real problem with these kinds of investments. The market is due for a major correction. Why are you so against these annuities?

A. They are expensive insurance policies. Two percent is huge! You’re more likely to lose than to gain from investing in one of these things compared to a comparable investment strategy invested in the TSP. Ask your “friend” how much money he will make from your purchase, including commissions, bonuses, fringe benefits, etc. You are paying that compensation from your account, in addition to the insurance and other costs which are designed to make sure that the insurance company profits at your expense. You shouldn’t even think about investing in a variable annuity until you’ve read the prospectus and clearly understand exactly what you’re getting into.

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Use TSP funds to pay CSRS redeposit?

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Q. I worked in the Veterans Affairs Department (CSRS) from 1981 until 1985 and then left federal service and withdrew my retirement. I re-entered federal service in 2007 (CSRS Offset) and have enough money in my Thrift Savings Plan to pay the redeposit for my time from 1981 until 1985. Can I switch over the tax-deferred TSP funds to CSRS without having to pay taxes on the transfer? I know I can make an age-based (age 67) in-service withdrawal into a qualified trust or an eligible retirement plan (as defined in IRC 402 (c) (8)). Is CSRS considered an “eligible employer plan” for such a rollover? And finally, how do I make such a redeposit?

A. You must use after-tax money to make the CSRS redeposit, so a tax-deferred rollover from the TSP will not be allowed.

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Direct rollover and taxes

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Q. I did a direct rollover from the California Public Employees Retirement System (a tax-deferred retirement) into the Thrift Savings Program. I have received a Form 1099 from CALPERS. I do not know why CALPERS would send me a 1099 as the monies went directly from one tax-deferred account into another. Do I have to declare the CALPERS monies, even though they went directly from one tax-deferred account to another? If I have to pay taxes on these monies, wouldn’t that make my contribution to TSP  ineligible? If I have to pay taxes on this direct rollover, wouldn’t that mean I would, in essence, be paying taxes twice on the same monies when I eventually withdraw them?

A. This is a question for a qualified tax preparer, but I don’t expect that your direct transfer will be taxed. The 1099 is likely just standard procedure since payers aren’t responsible for determining the tax status of a distribution, just meeting the reporting requirements.

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State taxes on TSP withdrawals?

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Q. All of my Thrift Savings Plan deposits are in the G Fund. I am a CSRS retiree. Since most of these funds are interest earned on federal bonds, are my withdrawals taxable by the state? I know they are federally taxable. I believe my contributions (which started in 1987) were both federal and state tax deferred, but I can’t recall with certainty. I called the Montana State Revenue once on this and they said they aren’t state-taxable, but I have my doubts.

A. You should consult a qualified tax preparer for the answer. In general,  your withdrawals are taxable, unless your state offers an exception.

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Combining military, civilian TSP accounts

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Q. I am 47 years old and retired from the uniformed services almost three years ago. I work as a federal civilian. I have two Thrift Savings Plan accounts and two questions.

1. Can I roll my uniformed service account balance into my federal civilian account balance? If yes, how? If no … 2. If I don’t reinvest in another tax-deferred retirement account, and elect to withdraw 100 percent of my uniformed service balance, what penalties will I pay (if any) in addition to taxes?

A. You may combine your uniformed services TSP account into your civilian TSP account. Use Form TSP-65, which is available at www.tsp.gov.

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TSP contributions and Roth

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Q. I am a GS-14 criminal investigator with 16 years covered service, and I am expecting to contribute to the Thrift Savings Plan for another 10 years or so before retiring. I have been contributing the TSP maximum for the past 10 years. What is your guidance with the Roth option? Should I scale back my TSP contribution to the 6 percent minimum to capture the matching contributions and invest the rest with the Roth option?

A. Without a good reason to do otherwise, I prefer the tax-deferred contributions.

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Discontinued service retirement

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Q. I was involuntarily separated under FERS discontinued service retirement with 26½ years of service. I was rehired to a federal job and opted to receive both salary and annuity. I no longer contribute to FERS and understand why I no longer get matching contributions to the Thrift Savings Plan, but why can’t I contribute my own money to TSP and get the tax deferral? I have a TSP account but do not plan on withdrawing money until I permanently retire in several years.

A. The only way that you’re allowed to contribute to the TSP is through payroll deferral or by transferring pretax money in from an IRA, 401(k), 403(b) or other qualified retirement plan.

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Retiring and deferring pay into TSP

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Q. I am retiring Jan. 23 from CSRS. Hence, I will be paid in 2013 for about 1½ pay periods. Can I have all of that pay go to the Thrift Savings Plan, tax-deferred? Can I also have my lump-sum annual leave payment go to TSP, tax-deferred, up to the annual limits?

A. Your pay can be deferred into the TSP, but not your leave payout.

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TSP withdrawal for vested former employee

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Q. I live in Alabama. I’m 32 and have worked about six years in the federal system. I am vested, and just left to work with a contractor. I have $7,400 in my Thrift Savings Plan account and want to do a full withdrawal. If I do the withdrawal, do I get that number since I’m vested, or only what I’ve contributed? Also, when or if I withdraw it, I know I will have 20 percent withheld. Will it hurt my tax return next year? If so, how do I avoid that?

A. You may withdraw your vested balance. That’s what “vested” means: It’s yours. The full amount of your withdrawal will be counted as ordinary income on the tax return for the year of the withdrawal. Any withheld amount will be credited against the tax you owe as a payment. You can reduce or avoid the tax effects of your withdrawal by rolling it over into another tax-deferred retirement plan, like a 401(k) or IRA.

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Penalty-free TSP withdrawal

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Q. I’m thinking of retiring at age 66 (I am FERS). How do I access my Thrift Savings Plan without any penalties or taxes? Is there a limit of withdrawal per month?

A. Because of your age at retirement, your TSP withdrawals will not be subject to the early withdrawal penalty. They will be subject to income tax, however, unless you roll the withdrawal over to another tax-deferred account.

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