Ask The Experts: Money Matters

By Mike Miles

TSP penalties for retiring at 62?

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Q: I plan on retiring at 62 from the Federal Employees Retirement System. Will I be penalized for withdrawing money from my Thrift Savings Plan account at that age?

A: No.

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Figuring out required minimum distributions

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Q: I have a question concerning the following paragraph from your Feb. 20 column in Federal Times:

I find it disappointing that it appears that you will not be able to manage, or withdraw, money selectively between the two options. Your contribution allocation and any interfund transfers you direct will apply to both options. Any withdrawals will be taken, pro rata, from both options. You may, however, split a rollover distribution between traditional and Roth IRA accounts.

Specifically, I am puzzled by the statement in the second sentence. As I understand the general concept with “tax deferred” individual retirement accounts and 401(k) plans, mandatory minimum withdrawals begin not later than April 1 of the year following the depositor reaching age 70 1/2.  As I understand the general concept with “tax paid” — i.e., Roth IRAs and 401(k) plans — no mandatory minimum withdrawal is required earlier than the death of the contributor/owner of the tax-paid account.

If I understand the meaning of the language in the paragraph in your column, and assuming a Thrift Savings Plan participant has made both “tax deferred” TSP contributions and “tax paid” (Roth) contributions to the TSP, any mandatory minimum withdrawal from the tax-deferred segment of the TSP will result in a pro rata withdrawal from the tax-paid (Roth) option of the TSP.

Do I understand that the allocation mix in the non-Roth and the Roth segments of the plan must be identical?  Given the option, I would elect to allocate greater risk to the Roth segment in order to avoid being forced to make mandatory minimum withdrawals after taking a “financial hit” similar to that which occurred during the period beginning in late 2007. Surely Congress could not have intended to impose a mandatory minimum withdrawal on “tax paid” (Roth) contributions to the TSP when it authorized the Thrift Savings Board to offer a Roth option to the TSP.

A: I based the comments in my column on the following excerpt from the TSP’s brochure: “A New TSP Element”

You will be able to take loans, in-service withdrawals, and partial withdrawals from your account as before. They will come out of your account on a pro rata basis — with a proportional amount from your traditional and Roth balances.

Details on how required minimum distributions will be handled have yet to emerge.

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Ready to cash out my TSP: How do I do it?

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Q: I have looked all over the Thrift Savings Plan website and cannot find the button to push that says I am retiring and want to start collecting my money. I am almost 62 and intend to retire in 191 days. I have figured out that I want to begin receiving my money on a monthly basis and can only change that election once a year. The online calculator tells me that amount is good for 60 years and four months. It does not tell me how far off the minimum distribution I am. But where is the button?

A: Directly from the TSP website:

How to Request a Withdrawal: If you are ready to request a withdrawal from your TSP account, you need to do the following:

1. Read the booklet Withdrawing Your TSP Account After Leaving Federal Service.
2. Read the TSP tax notice “Important Tax Information About Payments From Your TSP Account.
3. Complete either Form TSP-70, Request for Full Withdrawal (TSP-U-70, uniformed services) or Form TSP-77, Request for Partial Withdrawal When Separated (TSP-U-77, uniformed services).

The calculator is useless, in my opinion, and you won’t know how much your minimum withdrawal amount will be each year until after Dec. 31 of the year in which you’ve reached age 70 1/2.

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Forms for minimum TSP distribution

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Q: I plan to take the required minimum distribution from my Thrift Savings Plan each year starting the year after I turn 70 1/2. What forms do I submit and to whom?

A: You submit Form TSP-70 according to the instructions on the form.

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TSP withdrawal into an IRA

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Q: I’m currently contributing to the 2050L fund of the Thrift Savings Plan. Is it possible to transfer my TSP funds to a Roth individual retirement account without getting penalized?  I don’t want to touch the money, I just want to invest in precious metals instead of Fortune 500 companies and small businesses.

A: If you are age 59 1/2 or older, you may take one age-based in-service withdrawal from your TSP account. Check with a CPA (ideally, the one who will be preparing your tax return for the year) for advice on converting it to a Roth IRA.

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Filing jointly with multiple retirement accounts

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Q: Both my wife and I contributed to a Thrift Savings Plan and an individual retirement account for the 2011 tax year. We filed jointly. My wife maxed out her TSP contributions, but I did not because I was hired midyear. We both maxed out our IRA contributions at $6,000: her to a Roth, me to a traditional.  When using an electronic filing program, the software would not include our IRA, but it did so when I ran a fictitious sample filed as a single. Why did the program not deduct the IRA? Is a simultaneous deduction for TSP and IRA allowed?

A: I can’t tell why, with certainty, a particular computer program did what it did, but I can tell you that your income, your filing status and your eligibility to participate in an employer-sponsored retirement plan affect your eligibility to contribute to IRA accounts. See IRS Publication 590 for the rules.

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Using TSP money for VCP

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Q: As I understand the Voluntary Contribution Plan, eligible employees can start making deposits at any time prior to retirement. At retirement, they can choose to withdraw the funds or purchase a VCP annuity.  Am I correct that after age 59 1/2, I can make a taxable withdrawal from my Thrift Savings Plan and deposit that money into the VCP to be used to purchase a VCP annuity upon retirement?

A: Yes. The VCP doesn’t care where you get the money to make the deposit, as long as it is after-tax money.

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Making changes to TSP

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Q: I’m a Federal Employees Retirement System employee and will retire at age 64. I will opt for monthly payments from my Thrift Savings Plan. I know I can change the amount yearly, but can I also change the plan in which the funds are invested?

A: You may change your investment allocation in the TSP as you see fit, within the usual limits, for as long as you maintain the account.

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Changing to TSP annuity 4 years into retirement?

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Q: When I retire at age 56, can I take monthly payments until age 60 and then convert part of my Thrift Savings Plan balance to an annuity? Interest rates are at all-time lows, but in four years, with a potential rate increase and me reaching age 60, my monthly annuity payment would be higher than what I could get now.

A: Once you begin monthly payments, your only options are to change the payment amount once each year or request the distribution of your remaining account balance. Purchasing a TSP annuity is not an option at that point. You could, however, have the remainder of your account distributed to an IRA and then use part of your IRA to purchase a retail annuity.

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IRA and TSP

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Q: I am 47 and recently retired from active duty because of a 100-percent disability. In a nutshell, my financial sitrep: Roth IRA $60K; Uniformed service TSP $38K; debt $450K (house $400K, Credit Card $29K, Cars $21K), retirement and disability income is $6K per month; one spouse; no children. I am considering rolling the Roth IRA into the TSP and taking a partial withdrawal of $50K to pay off credit card and car loans. We’ve cut back but make little headway against the credit card. I am expected to live another 20-30 years but am unemployable per the Veterans Affairs Department. Is this a good idea? I am open to other options. What fund allocation would you recommend in the TSP for a person in my situation?

A: You’re asking for specific investment advice, which I can’t give you through this forum. I can tell you that you can’t transfer your Roth IRA into your TSP account. You should consider using the L Funds for your TSP investment. Visit www.tsp.gov for information and guidance.

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