Ask The Experts: Money Matters

By Mike Miles

Special retirement supplement and TSP

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Q. I am looking at retiring in January 2015. I will be 56 years old Oct. 15. I will have 30 years in as of Dec. 24. Waiting until the end of leave year to cash in all available annual leave. I am looking at cashing out my Thrift Savings Plan in a lump sum to pay off all debts. Will that income be considered part of earned income so that the special retirement supplement is reduced?

If so, would it be in my interest to retire at the end of 2014 so that my annual leave hits that year instead of 2015? I will have more than 1,800 hours of sick leave accrued by the end of 2014. Can that be used to offset the age so that I could perhaps retire earlier so that the TSP lump sum is counted in 2014?

A. Mike: No, the TSP distribution will not be considered earned income. It is considered ordinary income.

Reg: Unused sick leave is only added after you have met the age and service requirements to retire. Therefore, to avoid the 5 percent-per-year age penalty imposed on those retiring under the MRA+10 provision, you’ll have to wait until you reach your MRA and have 30 years of actual service. Regardless of whether you retire at the end of 2014 or the beginning of 2015, you wouldn’t receive a lump-sum payment for your unused annual leave until 2015. It will be considered to earned income, so the annual Social Security earnings limit would apply. Depending on how much annual leave you’ll be cashing in, it could reduce or eliminate the special retirement supplement for 2015.

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TSP withdrawal

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Q. I am 70½ and separated from federal service since 2008. I need to make a withdrawal election (my Thrift Savings Plan has $180,000). I was told I have three options: withdraw the account as a single payment, monthly payments or an annuity (or a combination). Assuming I do not need the money right now, what is the best option to maximize the interest I am getting and paying taxes on what I’ll be withdrawing?

A. If you don’t need the money, I suggest that you begin fixed monthly distributions in an amount that will satisfy or nearly satisfy your required minimum distribution for the year.

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Avoiding early withdrawal penalty

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Q. I am under FERS and my minimum retirement age is 56. I plan to take regular retirement at age 58 with 34 years of service. I would like to take level monthly payments, rather than a Thrift Savings Plan annuity, as my TSP withdrawal choice starting immediately upon retirement. Can I do this without incurring the 10 percent penalty for being under age 59½?

A. If you retire from federal service at age 58, you will be exempt from the early withdrawal penalty for TSP withdrawals of any kind.

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Adding 401(k) to TSP

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Q. I am a retired CSRS annuitant. What is the procedure to add external qualified 401(k) funds to the Thrift Savings Plan?

A. Use Form TSP-60, which includes thorough instructions.

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TSP annuity?

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Q. My father died with $90,000 in a Thrift Savings Plan annuity. How do I collect?

A. There is no such thing as a “TSP annuity.” Your father used his TSP assets to buy an annuity from an insurance company. You’ll need to file your claim with the insurance company that issued the annuity contract and was making his payments.

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TSP administrative fees

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Q. I am a federal employee under FERS. My financial adviser claims that the famously low Thrift Savings Plan administrative fees increase substantially after a federal employee separates from service. He is using this as justification to roll over my TSP into one of his firm’s IRAs. Is it true?

A. Not true. The TSP’s expenses are the same for all participants, employed or retired. In the future, you should avoid confusing a salesperson with an adviser.

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Paying taxes at retirement on TSP balance

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Q. Is it possible to pay all taxes on the Thrift Savings Plan at retirement and then still keep money in a Roth TSP? If not, is there any way to convert money in TSP before I turn 70 to avoid having to take minimum distribution? I do not want to pay taxes again on money that I may not need if it is paid out as a minimum distribution.

A. You may not convert a traditional TSP balance to a Roth TSP balance. You should also reconsider the logic of what you’re trying to do, which is electing to pay tax on a large sum now rather than pay tax on a series of much smaller sums later. There is no risk of double taxation, and you’re likely to wind up paying a higher rate using your proposed strategy.

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Risk efficiency

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Q. I saw you use the term risk efficiency in a recent response, and it made me curious. I have a nice little amount in the Thrift Savings Plan now. I don’t think I will be needing it in the future, except to hand down to future heirs, and so have tried to maintain a 70 percent stocks (35 percent C, 15 percent S and 20 percent I), 15 percent F, 15 percent G ratio. I read in a financial magazine (sometime around 2009) that a 70/30 ratio of stocks to bonds and/or cash reduced the risk considerably over a 100 percent stock portfolio, and didn’t reduce returns significantly. Do you agree, or do you have some other thoughts on what is risk-efficient for long-term growth?

A. Risk efficiency is a measure of how close an investment portfolio lies to the “Efficient Frontier” — the set of portfolios that mix assets together in ways that produce the maximum expected rate of return for the level of risk they produce. I can’t tell you how risk-efficient your asset allocation model is, but I’d guess it’s pretty risk efficient. Note that this doesn’t mean that it’s risk-appropriate. The correct asset allocation will be both.

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Using TSP withdrawal to pay off debt

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Q. I am soon to be 65 and plan to retire within the year and have debt in the amount of $67,000. This is not including my home, car, etc. I have been considering withdrawing a large amount from my Thrift Savings Plan to pay this debt. With my pension and Social Security benefits, if I figured correctly, I would be bringing home about what I do now after taxes. I know it’s personal preference, but is it a wise decision?

A. I can’t say if it’s the best course of action, but the debt needs to be paid. The issue is whether it’s better to take the tax hit for a lump-sum withdrawal to avoid the interest on the debt or to take monthly withdrawals to reduce the taxable income in any one year and pay the debt down over time. The correct answer will depend upon the cost of the debt and your tax returns. If you won’t significantly increase the amount of tax you’ll pay on the withdrawn TSP money by taking it all at once, it’s probably a good idea to go ahead and retire the debt.

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Combining TSP accounts

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Q. I was enlisted in the Marine Corps from 2004 to 2008 and have been a full-time employee at the Social Security Administration since March 2012.

So, I have a uniformed services Thrift Savings Plan account and a civilian TSP account (using pretax and Roth contributions).

Nothing has been contributed to the uniformed services account since I left the Marines in 2008, so I asked someone in human resources here if I could combine the accounts. I was initially told this wasn’t possible, but after my own research, I found Form TSP-65 – Request To Combine Civilian and Uniformed Services TSP Accounts.

After I showed this to the HR office, I was told it wouldn’t be beneficial to combine the accounts because I would take a tax hit on the tax-free money that I made overseas while deployed to combat areas. This explanation doesn’t make too much sense to me because my TSP contributions were pretax contributions anyway (there was no Roth option at the time). Also, I don’t trust the info from my HR office after they were wrong about the ability to combine accounts.

Should I combine the accounts or leave them separate?

A. If you contributed tax-free combat pay to the TSP, you should keep the military account to preserve your ability to withdraw that money later without having to pay tax on it. Combat pay contributions are not the same as Roth contributions, and the two are not interchangeable.

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