By Mike Miles
Rollover mistake
March 11th, 2013 | Uncategorized
Q. I’m a recent federal retiree and was attempting to rollover my Thrift Savings Plan account to an IRA. I filled out the proper forms and had the financial institution where I’m rolling over the funds complete its section (Page 4), as well. I faxed the TSP withdrawal form as instructed. After a couple of weeks, I received a check (minus federal taxes) in the mail. I called the TSP hotline and they said that they received all of the pages of my form except for Page 4. They said that Page 4 was missing but the pages following Page 4 were received. I’ve asked repeatedly on how we can fix this problem but haven’t gotten a good answer yet. It’s been two weeks now and I haven’t cashed the check yet. I would like to give it back and have the full amount rolled over to the IRA. Is there someone I can talk to other than the people in the call center? What are my options?
A. You should engage a CPA as quickly as possible for advice on how to handle this. If you have a check in your possession, payable to you, you have constructive receipt of the money and the clock is ticking for the rollover. Not cashing the check will not prevent the money from being considered a taxable distribution if the rollover time limit expires.
Tags: IRA, rollover, taxable distribution, TSP, withdrawal
TSP loan and taxes
February 20th, 2013 | Uncategorized
Q. I am an air traffic controller who is retiring in two months at age 48. I have an outstanding Thrift Savings Plan loan for about $9,000. What happens if I don’t pay this off before I retire? Do I pay the 10 percent penalty, along with it being shown as income? Does this affect my monthly withdrawal from TSP using the 72(t) rule? Also, can I take a one-time partial lump-sum withdrawal and pay the 10 percent penalty without it affecting my monthly withdrawal?
A. If you don’t repay the loan within the grace period after you retire, it will be declared a taxable distribution and you will owe penalty and taxes on the income. This does not affect your ability to initiate monthly distribution payments to satisfy the 72(t) rules on the remaining balance. Taking a partial withdrawal does not impair your ability to take automatic monthly distributions, which are considered a form of full withdrawal.
Tags: 72(t), loan repayment, lump-sum, monthly, one-time partial, penalty, retirement, taxable distribution, taxes, TSP, withdrawal
Taxable distribution
January 14th, 2013 | Uncategorized
Q. What would be the tax rate on a TSP taxable distribution due to an unpaid loan stemming from a transfer of function/work? My human resources office did not make appropriate change in time and left me with a balance amount (lump sum) I could not afford to pay back in order to continue loan payment. Now I’ll have to pay taxes on a taxable distribution of $11,680. Just trying to figure out how much I’ll owe. I’m hoping my refund will cover the taxes due.
A. The distribution will be included on your tax return as ordinary income, and the amount you’ll owe can only be determined by completing your return.
Tags: income, loan repayment, lump-sum, taxable distribution, TSP
Military buyback and 401(k) rollover
November 19th, 2012 | Uncategorized
Q. My husband has 10 years of Air Force service and is in the process of negotiating to take a federal position. Is it possible to use a 401(k) rollover to buy back his service? I am thinking not, since a rollover is only allowable to an IRA or other “qualified plan.” We certainly can take a direct taxable distribution of a portion of that 401(k) plan and use that money to buy back, but he wondered if it can be done with the rollover.
A. No.
Tags: 401(k), IRA, military buyback, rollover, taxable distribution
TSP loan repayment
October 24th, 2012 | Uncategorized
Q. I am 59 and am going to retire next year. I am in CSRS. I have a loan on my Thrift Savings Plan, which, if I retire next year, won’t be completely repaid. Do I have to repay it, since it’s my money and I can withdraw all of my money from TSP when I retire?
A. No. If you don’t repay it, the outstanding balance will be declared a distribution and will be reported to you as taxable income. Since you are retiring after the year in which you reached age 55, there will be no early withdrawal penalty.
Tags: age, CSRS, early withdrawal penalty, income, loan repayment, retirement, taxable distribution, TSP
Loan repayment
September 19th, 2012 | Uncategorized
Q. On June 26, I took out a $22,000 loan against my 401(k) plan for major home improvements. That equaled up to $376 per month taken out of my paycheck to repay this loan. Then, Aug. 1, my hours were temporarily reduced until the end of 2012 to 30 hours per week, which amounts to an additional $620 deducted from my pay monthly. This puts a serious hardship on my ability to pay my monthly obligations. Is there a way to legally stop payments to my 401(k) repayment, seeing as I had no idea my hours would be reduced, whereby affecting my ability to pay my monthly obligations, including my mortgage?
A. You may be able to re-amortize the loan to extend the term and decrease the payments. If you default on the loan, the unpaid balance due will be declared a taxable distribution from your account. While this may not be attractive, it’s not the end of the world.
Tags: 401(k), account balance, loan repayment, mortgage, taxable distribution
Early TSP withdrawal and tax penalty
September 19th, 2012 | Uncategorized
Q. My understanding is if I withdraw using a loan from my Thrift Savings Plan (say a residential loan) shortly before I retire and under 59½ years old, and then I retire or turn 59½, I get a 10 percent tax penalty because the loan was taken when I wasn’t eligible for a withdrawal without penalty. It seems a little contradictory because I could pay off the outstanding amount and then take an unpenalized withdrawal after retirement or 59½. Am I reading this rule correctly?
A. No. If your unrepaid loan balance is declared a taxable distribution, it is counted as a distribution during the year it in which it is declared, not retroactively to the year in which you took the loan.
Tags: age, early withdrawal penalty, loans, retirement, taxable distribution, TSP
Loan non-repayment
August 28th, 2012 | Uncategorized
Q. I am 60½ years old, under FERS and plan to continue to work until 66. I took out a loan from the Thrift Savings Plan and currently have payments for two more years. I am wondering if I could not pay this loan off and have it counted as a disbursement since I am old enough to withdraw from my account. I would not do this until 2013.
A. Yes, if you default on your loan repayment, the TSP will declare your unpaid balance, including interest, a taxable distribution and the usual rules will apply.
Tags: FERS, interest, loan repayment, taxable distribution, TSP
‘Intent not to repay’
July 9th, 2012 | Uncategorized
Q. I just separated from the military and have an outstanding loan. I recently mailed in the “intent not to repay” form. How long will it take for the Thrift Savings Plan to claim a taxable distribution and close out the loan? Also, if the entire sum of the loan was accrued in a tax-free combat zone, will they still tax the remaining balance?
A. I checked with the TSP, and it should take one to two weeks for TSP to declare a taxable distribution once it receives an “intent not to repay” notice. Only the outstanding loan principal and interest will be reported to the Internal Revenue Service as income. To the extent that the loan principal is attributable to combat-zone contributions, that portion is not taxable. However, the interest on the amount of the loan principal that is attributable to combat-zone contributions is taxable. Loans are distributed pro rata from taxable and nontaxable amounts. The only way that the entire sum of a loan could be attributed to combat-zone contributions is if the account balance consisted only of combat-zone contributions and no interest had accrued.
Tags: income, IRS, loans, military service, taxable distribution, TSP
Loan repayment and TSP withdrawal
July 2nd, 2012 | Uncategorized
Q. I have a loan of $6,000 on my Thrift Savings Plan with 20 payments left. I am 60. If I make an age-based in-service complete withdrawal of my TSP, what happens to my loan and the payments I am making? Do I have to keep making the payments and then wait until I separate from service to receive it, or will it become a taxable disbursement and end my payments?
A. Your loan repayment obligation continues until the loan is repaid or you fail to make the required payments and the balance due is declared a taxable distribution.
Tags: in-service withdrawal, loan repayment, taxable distribution, TSP