Ask The Experts: Money Matters

By Mike Miles

TSP early withdrawal penalties

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Q. I just turned 57 in January and am planning on retiring on June 1, 2014. I am CSRS and currently working with the U.S. Postal Service. I was hired by the Postal Service in March 1982 and have met my minimum retirement age and time in service. I also have 4 years prior military service in the Navy from 1976 to 1980 on active duty. Will I be penalized if I make a TSP withdrawal prior to turning age 59 1/2 years of age?

A. No. You will have retired after the calendar year in which you reached age 55 and, therefore, qualify for one of the exceptions to the early withdrawal penalty.

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TSP withdrawal without penalty

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Q. I am a CSRS postal employee retiring at age 56 with 38 years of service. Can I withdraw from my Thrift Savings Plan without penalty?

A. After you retire, yes.

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Avoiding penalty on TSP withdrawal

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Q. I’m retiring from the military at age 52 after 30 years of service. As I understand things, I can’t withdraw my Thrift Savings Plan funds without a penalty until age 59½ (except as an annuity or equal payments based on life expectancy). What if I go to work for the government as a civilian until age 55? Then, could I withdraw the whole amount without penalty? Is there a certain length of time I must spend as a civilian federal worker?  What if I only worked for the government for three months during the year I turned 55? Is that sufficient to qualify for penalty-free withdrawal?

A. The rule to avoid the penalty on TSP withdrawals is that you must separate from covered service during or after the year in which you reach age 55.

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Converting Roth TSP to Roth IRA

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Q. I am 29 years old and serve in the Air Force. I contribute the maximum $5,000 amount to my Roth IRA every year, and have a few thousand dollars in the standard Thrift Savings Plan. I am concerned about the lack of investing options besides the G, F, S, C, I and L funds within the TSP. With the new Roth TSP option, would it be possible for me to continue to contribute $5,000 directly to my Roth IRA, then contribute $17,000 to a Roth TSP, and finally roll that $17,000 over to my Roth IRA each year?

A. Your participation in the TSP does not preclude you from contributing to a Roth IRA. If your income level is within the statutory limits, you may contribute to both. Since your access to TSP withdrawals is limited while you are still participating, you will not be free to roll money over each year.

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70 1/2 rule and required minimum distribution

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Q. I attended a seminar given by MetLife Financial people about Roth TSP, IRAs, etc., and was told that even if I am working at 70½ and not retired that I still have to make a withdrawal of my TSP percentage. However, in the booklet “Withdrawing Your TSP Account” on Page 3 under withdrawal deadlines, it states in the second sentence:  “If you are still a Federal employee employed at 70½, your required withdrawal must be by April 1 of the year following the year you separate.”

I told the lady what our TSP booklet said, but she said it doesn’t matter what our book says; that it is the IRS that says we have to start withdrawal at 70½. I am 68 now and may work past 70½ if my health holds out, and I am asking so that I know who is correct: the TSP book, or the MetLife representative?

A. Hmmm. I wonder who’s more reliable — a financial industry salesperson or the TSP? The TSP booklet is correct.

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TSP withdrawal

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Q. I plan on retiring in 2014 with 30 years of service at age 57½. Can I withdraw my Thrift Savings Plan without penalty?

A. Once you retire, yes.

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TSP withdrawal or personal loan?

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Q. I am 61½ years old. I want to pay my mortgage off. I am losing my contract job and need to lower my debt.   I have saved up all but $30,000. If I withdraw that from my Thrift Savings Plan, how much in federal taxes will I have to pay? Would it be better to get a personal loan?

A. Your TSP withdrawal will be added to your income for the year and taxed at your marginal tax rate for the year. You’ll need to prepare a pro-forma tax return to estimate the amount you’ll owe. It’s impossible to say, without more rigorous analysis, whether or not a personal loan would be a better solution.

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VERA, TSP withdrawal and taxes

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Q. I will be taking voluntary early retirement July 31. I have plans to take my money out of TSP to pay off bills and buy a home. Would it be better to wait until next year to pull out since I will be in a lower tax bracket?

A. While it’s nice to reduce the tax liability on your withdrawals, the size of any advantage you’ll enjoy from waiting will depend on how much income is ultimately exposed to lower tax rates. Once the potential tax benefit from delaying the withdrawal is determined, it needs to be weighed against the potential costs of waiting to implement the other elements of your plan. This exercise requires complex analysis and is beyond the scope of this forum. Unfortunately, there is no one-size-fits-all answer to your question.

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Withdrawing TSP

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Q. I am 59 years old and will have 38 years civil service (FERS) in October. I hope to work until age 62. We went to a financial adviser when my husband retired two years ago, and he invested his 403 in an insurance fund and another fund recommended by this adviser. It has earned around 5 percent. The adviser now wants me to withdraw most of my Thrift Savings Plan at 59½ and invest with him. I know 5 percent is pretty good, but it will be locked in for several years. He also recommended I purchase whole life instead of survivor benefit through the government. We use the Federal Employees Health Benefits plan as primary and Tricare secondary, as my husband is retired military. I am hesitant to withdraw (roll over) all of my TSP and don’t feel I need SPB or whole life as my husband has two retirements, Social Security and investments. He will also receive the money I have in the TSP, should I predecease him (he is four years older and has had two heart attacks). I have checked this adviser on finra.org and he has several certifications, has been CEO of the company since 1982. Is this sound advice, or is he lining his own pockets?

A. Certifications don’t mean much and guarantee nothing. He gets paid by other people to sell stuff to you. His success is, at least in part, determined by how much of your money he can extract for the benefit of himself and others. Why would you take important financial advice from a salesman?

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TSP withdrawal

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Q. I plan to retire next month at age 62 and withdraw my entire Thrift Savings Plan account. I know that they will withhold 20 percent for federal taxes, but how can I keep from being taxed on that amount as income in the same calendar year? With my current rate of pay, adding some $300,000 to $400,000 in the TSP withdrawal will surely kill me in taxes.

A. Assuming that you are determined to withdraw your entire account balance at once (why would you do this?), you can roll over part of your withdrawal to an IRA.

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