Ask The Experts: Money Matters

By Mike Miles

TSP inheritance

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Q. My TSP question is based on an earlier answer you gave someone else: “A life annuity means that payments continue, on an accrual basis, until the annuitant’s death, unless a survivor benefit option is elected at the time of purchase.” When I die, are the funds remaining in my TSP inheritable by my adult
child?  If not, why should I leave it in the TSP not knowing when I will die? If yes, can the funds remaining in my TSP be rolled into an IRA or TSP that my adult child owns?

A. If you use the funds in your TSP to purchase a life annuity, the funds are no longer yours to leave behind. They become the property of the insurance company that provides the annuity. If, instead, you leave funds in your TSP account, the balance left in the account when you die will pass to the named beneficiary(ies).

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TSP annuity option at age 70 1/2 after retirment

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Q: I retired from Federal Service under FERS at the end of May of this year with 24 years of service. I also turned 70 in early May of this year. My plan had been to purchase a lifetime annuity through TSP (METLIFE) in August of this year as annuity interest rates had typically been higher in August for the past few years (2006, 2007, 2008 and 2009). Unfortunately the rates have steadily decreased since my retirement and are now down to 2.750 percent, which is equal to the low of March 2009. Obviously this was not a good time to purchase an annuity. Therefore I have not made a decision or otherwise made any withdrawals of any sort on my TSP account.

I have researched both the TSP and your websites for guidance without yet gaining a clear understanding of my withdrawal options. While I am in the process of exploring other options I am still leaning toward the lifetime annuity (Joint Life with Spouse/Level Payments/Cash Refund Feature/100% Survivor Annuity).

TSP-536 (Tax Notice) provides the following statement: “Required mimimum distribution if you are over 70 1/2. If you are over age 70 1/2 and are separated from federal service, you must either withdraw your entire TSP account or begin receiving monthly payment by April 1 of the year following the year you turned 70 1/2. In addition, this April 1 date is the deadline for the TSP to start to distribute the IRS required minimum distribution, a minimum amount of the money in your account which you must receive each year.”

Then the TSP booklet titled “Withdrawing Your TSP Account After Leaving Federal Service” dated June 2007 provides the following on page 15. Under the third paragraph below “IRS Rules that Affect Separated Participants Who Are 70 1/2 or older.” “If you do not make a full withdrawal of your account before you turn 70 1/2, you may make a partial withdrawal through December of the year in which you turn 70 1/2. However, you must select a withdrawal option for the balance of your account before April 1 of the following year.”

Since I will turn 70 1/2 in November 2010, will I be required to take a mimimal withdrawal this year, or does that begin the year following my turning 70 1/2, or next year 2011?

If I am required to take a mimimal withdrawal this year (2010), can I continue to do that each year hoping at some point the annuity interest rates will go back up so as to purchase the lifetime annuity, or does taking the mimimal withdrawal this year then mean that I must decide and declare my withdrawal option (which may include the lifetime annuity) before April 2011?

A: If you reach age 70 1/2 this year and are no longer working, your first required distribution is not due until April 1, 2011.

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TSP distribution

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Q. I am a Department of the Air Force civilian and I plan to retire in June 2014.  I will be 60 and have 20 years of federal civilian service.  I currently have my entire TSP tied up in the 2020 L fund.  Is it too early to put all of my funds into government funds for stability purposes?

A. It’s not a question of timing, but of spending. You can move all of your money into the G Fund, if that’s what you mean, any time you like, but you’ll be limited to the lifestyle that can be supported by its performance.

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TSP after retirement

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Q. Is it true that after retirement you cannot move your money around within the different TSP funds?

A. After retirement, you may continue to manage your TSP account assets, including reallocating your money among the various funds, as you did before retirement.

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TSP Funds

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Q. I sent an e-mail about two months ago asking a question about my TSP account. I’ve been working as a General Schedule employee for about 4½ years. I have all my money invested in one fund (the I Fund). I don’t want to work much longer and was wondering if it would be best if I divided it into three different funds. The S Fund, the I Fund and the C Fund. I checked and didn’t see a question along this line. Your advice in this matter would be greatly appreciated. Thanks.

A: I did provide an answer to this question and am not sure why you didn’t receive it. I’m asked about how to invest all the time and the answer is always the same: There is not one-size-fits-all solution. Your investment strategy should be selected for its ability to meet your particular goals. These goals will need to be first translated into a series of cash flows that will affect your account.

If you’re not sure how to invest your money — and are unwilling to find someone to help you who is — then you might want to use one of the TSP’s L Funds. This is  a less than optimal solution, but probably much better than the inefficient allocation you’re currently using. Your one fund allocation has subjected you to unnecessary risk without commensurate return.

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No penalty for early TSP withdrawal

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Q: I am 56 years old and have 33 years of combined federal service (20 years in the military and 13 years as a civilian), and due to personal reasons, I chose to retire on March 26, 2010. Approximately 14 months ago, I borrowed $50,000 from my Thrift Savings Plan account. I managed to repay approximately $10,000 of the loan prior to retirement, so I still owe approximately $40,000. Can you tell me approximately how much I will have to pay in taxes and the early distribution penalty? The reason I am asking is because I am in a position where I could refinance my residence and repay the remainder of the loan in full, thereby not incurring the aformentioned charges. Would it be wiser to refinance my residence and pay back the TSP loan, or simply pay the taxes and distribution penalty?

A: You’ll have to ask whoever will prepare your tax return for 2010 how much you’ll likely pay in taxes on the distributions and use this information to figure out whether refinancing is the better alternative. I can tell you that you won’t owe any early withdrawal penalty since you’re separating from service during or after the year in which you reach age 55.

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Rollover of TSP withdrawals to a Roth IRA

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Q: My 2010 “annual” required minimum distribution from my Thrift Savings Plan will be approximately $8,500 (about $710 per month). My “monthly” withdrawals will be $2,000.00. If I roll over to a Roth IRA that part of my withdrawal that exceeds my required minimum distribution, can I start deposits to my IRA of $1,290 in January and each month after that, or do I have to wait until May, at which time my entire “annual” required minimum distribution will be met before I can make deposits to my Roth IRA?

A: The limits are annual limits, so what matters is that at the end of the year, the numbers work out within those that apply.

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