Ask The Experts: Money Matters

By Mike Miles

Withdrawal fees

Bookmark and Share

Q. I want to pay off a few student loans before I retire from the military. I want to use my TSP to do so. Should I convert my TSP to a Roth IRA so I can avoid the heavy withdrawal fees?

A. There are no fees for withdrawing money from the TSP. All withdrawals from the TSP (except contributions you made from tax-free combat pay) will be subject to income taxation and, unless you qualify for one of the exceptions listed on Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf, any withdrawal you take before reaching age 59-1/2 will be subject to the IRS’ early withdrawal penalty. You should seek advice from a CPA before proceeding with this. You might want to consider taking a TSP loan to pay off the student loans, instead.

Tags: ,

Annuity investment

Bookmark and Share

Q. I am a retired federal employee since July 1, 2011. Because of the IRS rules regarding RDA if you’re 70-1/2 years old. I decided to withdraw an annuity of $1,500 each month. What is the best investment as to where to put my $1,500. By the way, this amount is below the 4 percent commonly used by retirees as a yardstick.

A. You should invest the money in the safest place that is highly likely to produce a sequence of periodic investment returns that will support your future financial goals. If you’re not sure what that is, I suggest that you put the money in the bank and contact me for help.

Tags:

Social Security reduction

Bookmark and Share

Q. I’ve read about the Social Security reduction if your income is above a certain amount. Does the calculation for that amount include the FERS pension and TSP annuity payments? In other words, does the Social Security Administration consider my pension and TSP payout to be “income” they will reduce against? Or is the reduction only against “wages” from actual employment income after you reach Social Security retirement age? Read the rest of this entry »

Tags: ,

Partial withdrawal

Bookmark and Share

Q. I want to make a one-time partial withdrawal from my TSP account. I realize this withdrawal is subject to the Virginia state and federal income taxes. Who should I contact to learn how much taxes, both federal and state, I have to pay?

A. The withholding requirements are listed in the table on Page 3 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf. You won’t know how much tax you’ll actually owe until you file your tax returns for the year, however.

Tags:

Taxation on TSP

Bookmark and Share

Q. How much is the TSP taxed upon retirement if pulled out all at once, and how does that affect you’re end-of-year taxes at the end of that year?

A. Your withdrawal will be subject to a 20 percent mandatory federal tax withholding and the amount of your withdrawal will be added to your tax return for the year as ordinary income. The withholding is considered a deposit against your federal tax liability for the year.

Tags:

Taxes and TSP

Bookmark and Share

Q. I understand TSP withdrawals will be taxed as regular income come tax time.
However, when one takes/chooses monthly TSP payments upon retirement, are
taxes taken out of these payments? In other words, when I run the TSP
calculator, understanding it is only an estimate, can I expect these
payments to be lower due to taxes being taken out? Read the rest of this entry »

Tags: ,

Tax question

Bookmark and Share

Q. I’m a federal employee aged 58 retiring with 30 years’ service, and I would like to take 109,000 from my non-Roth TSP to pay off mortgage. Besides federal tax, would I also have to pay a 10 percent penalty because I am not 59 1/2 years old? Would the federal government withhold 20 percent penalty or taxes or would it be more?

A. There will be mandatory withholding of 20 percent, but the early withdrawal penalty will not be assessed. Details are available at

https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

Tags: ,

USAA Roth and TSP contributions

Bookmark and Share

Q. I took my tax info to a professional to have them done this year. I’ve maxed out my Roth IRA with USAA. I’ve also contributed about $2500 to a traditional TSP as a uniformed service member. I’m being told I’ll be penalized for my contributions to my Roth account since I have an employer-based retirement plan. Is this accurate? Can I only contribute a total of $5500 for both accounts? I’ve always been told to contribute to both.

A. The TSP contribution limit is fixed and not contingent on any other factor. Your eligibility to contribute to a Roth IRA might be limited if your income is sufficient. In the future, I suggest that you max out your TSP contributions before you save to a Roth IRA, and then check with your tax accountant before you attempt to make any IRA contributions since your eligibility depends upon your tax return for the year. See IRA Publication 590 for the limits on IRA contributions.

Tags: , , , , , , ,

IRS penalty on partial TSP withdrawal

Bookmark and Share

Q. I am a FERS employee (6c law enforcement coverage) planning to retire in January 2015 after 31 years in federal law enforcement. I plan to build my retirement home soon after and have need of a partial withdrawal from my Thrift Savings Plan at retirement. Is this partial withdrawal subject to the 10 percent IRS tax under the one time withdrawal provision, and if so, do I have any option to avoid that penalty while still accessing about a third of my account?

A: If you retire during or after the year in which you reach age 55, you will be exempt from the early withdrawal penalty on any kind of withdrawal. If you retire before that point, you’ll be subject to the penalty until you reach age 59 1/2 unless you qualify for one of the exceptions listed on page 7 of the notice at: https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

Tags: , , , , ,

Traditional TSP vs. Roth TSP

Bookmark and Share

Q. I am 24 years old and I have been contributing 15 to 20 percent of my pay to a traditional TSP for 3 years now. When I started my TSP, the option to invest in a Roth TSP was not available. I have a decent amount of money in my traditional TSP right now. I’m curious if it would be better to stop contributing to my traditional and let it grow and start contributing to a Roth TSP or continue to invest in my current plan and maintain my current compounding interest? I’m nervous that if I change my contributions I will lose out on a significant amount of money that I could have gained by maintaining my contributions in my already established traditional TSP.

A. It will only matter if the effective tax rate on your contributions is different from the rate on withdrawals, and that’s something you can’t know this far ahead of time. There’s no way to know if contributing to one or the other, or both, will work out best for you, so do it the way you like. In the end, it won’t matter nearly as much where you saved the money as it will matter that you saved it.

Tags: , , ,