By Mike Miles
Avoiding penalty on TSP withdrawal
September 26th, 2012 | Uncategorized
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.
Tags: age, annuity, life expectancy, penalty, TSP withdrawal
Converting Roth TSP to Roth IRA
September 24th, 2012 | Uncategorized
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.
Tags: C Fund, F Fund, G fund, I Fund, L Fund, maximum contribution, military, Roth IRA, Roth TSP, S Fund, TSP, TSP withdrawal
70 1/2 rule and required minimum distribution
September 24th, 2012 | Uncategorized
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.
TSP withdrawal
July 20th, 2012 | Uncategorized
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.
Tags: penalty, retirement, TSP withdrawal
TSP withdrawal or personal loan?
July 2nd, 2012 | Uncategorized
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.
Tags: loans, mortgage, taxes, TSP withdrawal
VERA, TSP withdrawal and taxes
July 2nd, 2012 | Uncategorized
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.
Tags: taxes, TSP withdrawal, VERA
Withdrawing TSP
July 2nd, 2012 | Uncategorized
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?
Tags: FEHB, FERS, life insurance, rollover, Social Security, TSP withdrawal
TSP withdrawal
June 19th, 2012 | Uncategorized
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.
Tags: IRA, rollover, taxes, TSP withdrawal, withholding rate
Paying off TSP loan after age 60
May 14th, 2012 | Uncategorized
Q. I have an outstanding Thrift Savings Plan loan, and I just turned 59. I plan to continue to work for some time. After age 59½, can I pay off this TSP loan from other personal funds, then immediately withdraw those funds from the TSP without penalty if I need them for other purposes? With no loan balance remaining, would I then be eligible to take out another TSP loan?
A. You may repay the loan, take a distribution and then take another loan, but 60 days must elapse between the two loans.
Tags: TSP distribution, TSP loan, TSP withdrawal
TSP withdrawal for debt?
April 23rd, 2012 | Uncategorized
Q. I have been working for the federal government for 10 years. I have contributed the max for most of that time to the Thrift Savings Plan/FERS. After a divorce, I have been battling debt in the form of school loans, credit cards, etc. In an attempt to pay off the debt, I pay approximately $700 per month. I have attempted and requested to decrease the annual percentage rate on some items, with little success. I have a fair amount in my TSP. I am debating whether to withdraw just the amount I need to pay off the debt (20 percent of the entire amount) and be debt free. At that point, I would increase my contribution to the max again in an attempt to make up lost ground. I understand the six-month penalty. I am 34. I started at 24. I have many more years to contribute. I am also in the Air Force Reserve. Is this a good move, given my age and years to contribute? Also, what tax percentage would I be paying off the withdrawal amount (10 percent or 20 percent)?
A. I suggest you consider taking a TSP loan, instead of a withdrawal. If you elect to take, and qualify for, a financial hardship withdrawal, the automatic withholding will be 10 percent, but you’ll be on the hook for whatever tax and penalty accrue when you file your tax return for the year.
Tags: contributions, FERS, penalty, tax, TSP withdrawal