Ask The Experts: Money Matters

By Mike Miles

TSP loan

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Q. The Air Force is going through a drawdown because of sequestration. If a person has a current Thrift Savings Plan loan and is involuntary retired earlier than the minimum 20 years for military service, what are their TSP loan options? Are they required to immediately pay this back, or will they still have the option to pay the loan back over time? Also, how does joining the civil service affect the TSP account?

A. You will be required to repay any outstanding loan balance within 90 days of separation, or the unpaid balance will be declared a taxable distribution.

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Lessening the blow of taxes

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Q. I retired early from the post office last year. At the time, I had a two loans out on my Thrift Savings Plan account. Now the time has come to pay the piper and the tax bill is enormous. I just turned 56 in January. Is there any way to lessen the blow or offset any of the taxes and penalties from the unpaid loans I took out before retirement? Or at least something I can do, other than pay the full amount of early withdrawal and regular taxes?

A. Assuming that it’s been more than 60 days since the taxable distribution was declared, I don’t know of anything. Maybe a payment plan? I suggest that you consult a CPA.

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Retirement date, taxable distribution and IRS penalties

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Q. I am an FERS employee and, for various reasons, have selected Nov. 28, 2015, as my retirement date, age 60+ with 21 years civil service and four years military, for which a deposit has been made. One of the many reasons that I selected this date was so that I could have a Thrift Savings Plan residential loan balance declared as a taxable distribution during the 2015 tax year, because I will have substantial withholdings by that time, and given my tax return history, would have a significant tax overpayment that would be useful in paying a portion of the tax bill rather than receiving it as a refund. It was my intention to pay the remaining tax liability (however much it is) with a smaller withdrawal of TSP funds, and take that as a taxable distribution during the following tax year (2016), which could be manageable through withholdings from my pension and life annuity payments.

Subsequently, however, my research has uncovered that the Internal Revenue Service levies a substantial (but unspecified) penalty against any retiree if “90 percent of a payers’ tax liability is not withheld from salary, pension and annuity or made via quarterly payments” during the tax year.

Does this IRS rule apply to my situation? If so, regardless which date I choose in FY2015, I will surely fall short and be subject to that penalty, as I will no doubt be owing greater than 10 percent of my total tax bill, and officially be a “retiree” by the end of tax year 2015, even though I will not have even received any retirement pay from either pension or annuity by years end, due to high processing times.

How much is the penalty that the IRS assesses against retirees who have had insufficient withholdings during a tax year?

If this rule applies to me, I will have to postpone my retirement date until year’s end so that the distribution is declared in 2016, and then make quarterly tax payments to cover the total outstanding amount due, which would greatly complicate my cash flow situation during my first year of retirement, and possibly make it unfeasible.

A. Sorry, but these are questions for the CPA who will prepare your tax returns for the year(s) in question. There are some exceptions to the 90 percent rule and, in my experience, the penalty for under-withholding is not severe.

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TSP loan

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Q. I’m planning on retiring this year at age 62 under FERS. I will have an outstanding Thrift Savings Plan loan balance of $16,000 and was not planning on repaying the rest of the balance and was needing to find out if the outstanding balance will be considered income and taxed with my other income for the year at the end of the year, since it will be tagged as taxable distribution?

A. Yes, any loan balance outstanding 90 days after separation will be declared a taxable distribution at that time and reported as ordinary income for that year.

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Taxable distribution vs. paying off TSP loan

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Q. I have separated from federal service with an existing Thrift Savings Plan loan. My intent is to take a lump-sum withdrawal and take a taxable distribution versus paying off the loan. In the end, will I end up paying more or less tax if I were to pay off the loan versus taxable distribution?

A. It’s impossible to say what you’ll pay “in the end,” but if you repay the loan on time, your tax on the money owed will be zero until it is ultimately withdrawn.

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Age-based, in-service withdrawal vs. partial withdrawal

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Q. I’m a 32-year FERS employee, 60 years old and about to retire in February 2014. I would like to take out some funds from my Thrift Savings Plan. Should I request an age-based, in-service withdrawal or take a partial withdrawal after I retire?

A. Either will count as your single lifetime partial withdrawal. Will the tax cost for the withdrawal be significantly lower if the money is withdrawn in 2013? If so, you should consider taking the withdrawal now. If not, it will not really matter when you take it in 2014. If you need the money now but would rather have it taxed as 2014 income, you could take a loan now and then fail to repay it after you retire so it will be declared a taxable distribution in 2014.

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TSP loan

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Q. I am 61 years old and have a Thrift Savings Plan loan of $24,000 and over $60,000 remaining in my TSP account. I applied for a Voluntary Early Retirement Authority/Voluntary Separation Incentive Pay at my human resources office awaiting approval. What happens to my TSP loan and to my remaining balance in my account if I request a full withdrawal when my retirement is approved? Does the remaining balance of my TSP loan gets paid up from my remaining balance and incur penalty for the full withdrawal?

A. If you don’t repay your loan within 90 days of the day your agency notifies the TSP of your separation from service, the outstanding balance due will be declared a taxable distribution. If you request a lump-sum withdrawal of your entire TSP balance at retirement, you’ll pay tax on the remaining balance and the un-repaid loan amount due.

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Annuity to TSP

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Q. I have a variable annuity (mutual fund) with Western Reserve Life Assurance and it has been doing terribly for many years. I put $10,000 in it in 2001, and it’s only valued at $14, 500 now, 12 years later! My Thrift Savings Plan account is doing much better, and I would love to transfer or roll over this money into my TSP account. Can it be done, should I, and, if so, how?

A. It may only be done if:

1. The annuity is an IRA or other Qualified Retirement Account; and

2. All of the money it contains is taxable on distribution.

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TSP loans and furlough

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Q. I have seen quite a few questions (and answers) about how to request that Thrift Savings Plan loan payments be suspended during the government shutdown, but no detailed information about exactly how to continue to make payments should one want to do that. When during the regular pay cycle should one send in a payment check with the appropriate form? When we go back to work, and if back pay is given, will the loan payments for the entire period of furlough, or perhaps the last pay period only, be taken out? How long of a period of nonpayment may there be before the tax penalties kick in?

A. If you are in nonpay status for reasons other than active military service:

The maximum period that the TSP can suspend loan payments is one year.

If your nonpay period exceeds one year, your loan will be automatically reamortized and you must make payments from your personal funds to avoid being in default.

Interest on your loan accrues while your payments are suspended.

If you want to continue making loan payments while in nonpay status, you can do so by sending a personal check or money order to the TSP. Use Form TSP-26, Loan Payment Coupon, when sending in your payments. Your payments will be taken into account when the loan is reamortized upon your return to pay status.

When you begin your period of nonpay status, you or your agency must submit one of the following forms of documentation to the TSP:

Form TSP-41, Notification to TSP of Nonpay Status; or

Form SF-50, Notification of Personnel Action; or

A letter on agency or service letterhead, signed by an appropriate agency official or your commander or adjutant, that contains your name, date of birth and Social Security number; the beginning date of the nonpay status; and the signature and title of the agency or service representative providing the information; or

A copy of your military orders.

When you return from nonpay status, you must notify the TSP of your date of return. You can use any type of documentation described in the above section. Once your agency notifies the TSP of your return, your loan will be reamortized to place it in good standing.

Note: If your agency reports you as separated from civilian service to perform military service, you will be required to repay your loan in full within 90 days. If you don’t, the outstanding loan balance and any unpaid interest will be reported to the Internal Revenue Service as a taxable distribution.

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TSP loan

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Q. I’m eligible to retire CSRS Offset in a few months. I was considering a Thrift Savings Plan loan prior to retiring to pay off other bills. I understand that upon retirement/separation, I would receive a Form 1099 for taxable income. Is this something I should consider?

A. If you don’t repay your outstanding loan balance within 90 days of separation from service, the amount due will be declared a taxable distribution and will be treated as though you took the money from your account on the date of the declaration. I believe that you should always consider all reasonable options when it comes to making important financial decisions.

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