Ask The Experts: Money Matters

By Mike Miles

Tax withholding

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Q. I’m 68 and still working, and I started drawing Social Security when I turned 66 two years ago. How do I calculate how much taxes will come out of my Social Security, TSP and FERS retirement checks?

A. You will find the rules for tax withholding from TSP distributions in the table on Page 3 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

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TSP and Roth TSP

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Q. Upon retirement I want to transfer my Roth TSP out so I have more flexibility with taxes. Currently, I have all of my TSP money invested into the Roth TSP. Once retired, I want to transfer all but $1 to another firm into both a regular IRA rollover and Roth IRA rollover so that the two  types of TSP accounts are no longer co-mingled. I then want to transfer my regular IRA back into the TSP in order to keep the two types of accounts separate (regular TSP at the TSP and Roth TSP with outside brokerage firm in a Roth IRA rollover). Is this feasible? The TSP doesn’t allow you to have distributions from one or the other, only both. This way I could set up my distributions separately for tax advantages. Read the rest of this entry »

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Taxable income

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Q. My birthday is June 30, 1944, so I turn 70-1/2 on Dec. 30, 2014. Do I draw on this by Dec.30? Or if I wait until April, do I have to do two payments in 2015?

A. Deferring some or all of your 2014 RMD into 2015 will reduce your taxable income for 2014, but increase your taxable income for 2015.

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TSP taxation

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Q. Are all TSP withdrawals subject to the 20 percent federal tax withholding? Including full withdrawal by way of monthly payments?  And is this done automatically when you set up your payout options with TSP or do you need to complete a form?

A. Not all TSP withdrawals are subject to mandatory withholding. See the table on Page 3 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for the rules. Mandatory and default withholding happens automatically. Anything else, you’ll have to request.

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TSP taxation

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Q. Are all TSP withdrawals subject to the 20-percent federal tax withholding, including full withdrawal by way of monthly payments? And is this done automatically when you set up your payout options with TSP or do you need to complete a form?

A. Not all TSP withdrawals are subject to mandatory withholding. See the table on Page 3 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for the rules. Mandatory and default withholding happens automatically. Anything else, you’ll have to request.

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TSP residential loan

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Q. What happens if the down payment made is less than the amount of a TSP residential loan? Would the borrower have to claim the difference as a withdrawal and pay the penalty and claim as income?

A. I don’t believe that there is a requirement to commit the entire loan to the down payment, but you should consult your tax preparer to be sure.

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IRA requirements

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Q. I have three IRA accounts and I turned 70 in March. Do I combine the three to figure the required withdrawal? What would the tax  be if I do a lump-sum withdrawal from all three?

A. You must obey the aggregations rules for calculating your IRA RMD spelled out in IRS Publication 590. The taxable portion of each withdrawal will be added to your tax return as ordinary income for the year, where the tax you owe on the withdrawal will be calculated. Whoever prepares your tax return for the year of the withdrawal is responsible for making sure that it is done right.

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Early retirement penalty

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Q. I am 50 and I retired as a firefighter (Special Category) on Dec. 31, 2013, with 25 years and 10 months of service. I want to withdraw my TSP but I’m being told by TSP that they withhold 20 percent for taxes and my accountant is telling me that I will have to pay 10 percent for a penalty because I retired early. I looked into the IRS publications 575 and 721 and they state I don’t get charged a penalty. Read the rest of this entry »

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Tax withholding

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Q. Is there a way I can get federal taxes deducted from my TSP withdrawals. I am currently receiving a monthly payment.

A. Yes. Use form TSP-78: https://www.tsp.gov/PDF/formspubs/tsp-78.pdf.

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Withdrawal fees

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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.

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