By Mike Miles
10% tax penalty and VERA
March 19th, 2013 | Uncategorized
Q. My wife retired under a Voluntary Early Retirement Authority in August 2011. Her 1099-R displays a “1” as the distribution code in Block 7 of the form, “no known exceptions.” For years 2011 and 2012, we paid a 10 percent tax penalty for early withdrawal from her Thrift Savings Plan. I know the tax is usually levied unless the person is 59½ years of age, but at what age will the code on the 1099-R change for my wife so we won’t have to pay this tax? Will she benefit at some point because her retirement was a VERA, and at what age can we escape this tax? Her date of birth is Nov. 27, 1959. She retired with 24+ years of service from Natural Resources Conservation Service.
A. I can’t tell you when the code will change, but since she separated from service before the calendar year in which she reached age 55, she will subject to the early withdrawal penalty until she reaches age 59½ unless she can meet one of the exceptions listed on Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf. A VERA is not one of the exceptions.
Tags: 1099, age, distribution, early withdrawal penalty, taxes, VERA
12 questions on VERA
March 19th, 2013 | Uncategorized
Q. I am a letter carrier, age 52, started in 1985 and have 28 years of creditable service.
If I understand what I’ve gleaned from the posts here and the Postal Service were to offer me a Voluntary Early Retirement Authority this year,
1. Would I begin my annuity immediately?
2. Would I have no reductions in calculations of my annuity? (average high-3 x 1 percent x 28)
3. Would I receive credit for half of my sick leave and all of my annual leave? (How are these applied?)
4. Would I receive the special retirement supplement beginning at age 56 (my minimum retirement age), and receive it until I reach age 62?
5. Would I be able to continue carrying my current health and life insurance at non-USPS rates? (I couldn’t find how long these could be carried. Until death?)
6. Could I begin receiving Social Security as early as age 62?
7. Any withdrawal from my Thrift Savings Plan prior to age 59½ would be penalized 10 percent as per Internal Revenue Service regulations? (Can I continue to contribute to TSP after retirement?)
8. As a FERS annuitant, is there no limit to what I can earn after separation from the Postal Service as it pertains to my annuity payment?
9. At age 56 (my MRA), the special retirement supplement from Social Security would begin and would be subject to yearly income limits. Would supplement payments be reduced by approximately $1 for every $2 I earned above that year’s Social Security income limit?
10. At age 65, I’d be eligible for Medicare parts A and B? (Would this affect my health insurance coverage through Federal Employees Health Benefits?)
11. Would there be cost-of-living increases at any point for my annuity?
12. Is there a date during the year that maximizes the benefits of retirement?
Did I get this right, and are there any other things I should know before considering a VERA if it is offered?
A. Reg: 1. Yes.
2. Yes.
3. Yes. Half of your unused hours of sick leave would be added to any hours of service that were left over when your annuity was computed. Any additional months created would increase the amount of your annuity. Any unused annual leave would be paid to you in a lump sum at your current hourly rate.
4. Yes.
5. Yes. And those enrollments would continue until your death.
6. Yes.
Mike: 7. You will be subject to the early withdrawal penalty until you reach age 59½ unless you can qualify for one of the exceptions listed on Page 7 of the notice: https://www.tsp.gov/PDF/formspubs/tsp-536.pdf. You may not contribute to the TSP after you retire, but you may transfer eligible balances into the TSP from other retirement accounts such as IRA, 401(k), 403(b), etc.
Tags: 401(k), 403(b), age, annual leave, annuity, catch-up contributions, cost-of-living adjustment, early withdrawal penalty, FERS, health insurance, income, IRA, IRS, life insurance, lump-sum, Medicare, Minimum Retirement Age, Postal Service, sick leave, Social Security, Special Retirement Supplement, TSP, VERA
TSP to immediate fixed annuity
March 11th, 2013 | Uncategorized
Q. I am a 53-year-old recent retiree (I was offered a Voluntary Early Retirement Authority through the Postal Service and accepted it). Is there a penalty to move my Thrift Savings Plan account to an immediate fixed annuity? If so, what would that penalty be?
Additionally, I heard that within one year of retirement, my TSP account should be transferred to a civilian account (IRA, savings, etc.) What exactly is the time frame for that?
A. The only penalty for using your TSP account to purchase an immediate fixed annuity in retirement is that you’ll be locking in historically low interest rates for life, so be careful. You are not required to roll over your TSP account and may continue it for life. You should do everything you can to keep your money in the TSP for as long as possible, since it is superior to any other investment account you will find. Your TSP should be the last account you tap for retirement income.
Early retirement, mortgage and TSP withdrawals
January 21st, 2013 | Uncategorized
Q. I am taking the Voluntary Early Retirement Authority from the Postal Service and am trying to decide how to withdraw funds from my Thrift Savings Plan. I have about $300,000 in my account and have a mortgage of $150,000 with about 10 years until payoff. Should I take a lump sum and pay off my mortgage and keep the remaining money in TSP? Or should I just start withdrawing approximately $2,000 monthly to cover mortgage payments? I am afraid if I pay off my mortgage, the tax hit would be to great.
A. I suggest that, as long as your mortgage interest rate is competitive, and unless you can find a good reason to do otherwise, you should make the payments and minimize the withdrawals from your TSP. You might even consider refinancing your mortgage into a 30-year fixed rate, if possible, to reduce your payments and further protect your TSP balance.
Tags: lump-sum, mortgage, Postal Service, taxes, TSP, VERA, withdrawal
VERA and early withdrawal penalty
January 14th, 2013 | Uncategorized
Q. I retired as a FERS employee in July 2011 under a Voluntary Early Retirement Authority. I was 56½ with 28 years of service. During my years of employment, a Roth TSP option was not available. Therefore, all of my Thrift Savings Plan money is in a non-Roth/traditional account. I would like to use partial withdrawals to move this money into a Roth IRA. I know I must pay taxes but wondered if I must wait until I am 59½ to avoid penalty? I see references that a 10 percent penalty may not apply in the case of VERA and the employee was at least age 55 at retirement.
A. Since you retired during or after the year in which you reached age 55, the early withdrawal penalty will not apply to your TSP account.
Tags: age, early withdrawal penalty, FERS, partial withdrawal, Roth IRA, taxes, TSP, VERA
TSP withdrawal, rollover and taxes
January 7th, 2013 | Uncategorized
Q. I am taking the Postal Service Voluntary Early Retirement Authority on Jan. 31. I’ll be 56 then. I’d like to take a full withdrawal from my Thrift Savings Plan in monthly payments and then possibly roll the balance into an IRA at age 59½.
I understand that 20 percent will be withheld automatically from my monthly payments for taxes. If I withdraw the balance a few years later, will the 20 percent figure still apply, or can I roll it into the IRA without the tax hit?
Tags: age, early withdrawal penalty, IRA, Postal Service, rollover, taxes, TSP, VERA
Early withdrawal penalty
August 28th, 2012 | Uncategorized
Q. The Internal Revenue Service is penalizing me for withdrawing my Thrift Savings Plan. I am less than 59 years old, but I retired under a Voluntary Early Retirement Authority. It is my understanding that I do not have to pay an early withdrawal penalty because I am retired. Please correct me if I am wrong. I also need to find the regulations for the IRS if I am exempt from paying this penalty.
A. Unless you retired during or after the year in which you reached age 55, or meet one of the other special exceptions, your withdrawals will be subject to the early withdrawal penalty until you reach age 59½ . See Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf for details.
Tags: early withdrawal penalty, IRS, retirement, TSP, VERA
VERA and penalty-free lump-sum TSP withdrawal
July 9th, 2012 | Uncategorized
Q. If I receive a Voluntary Early Retirement Authority from the U.S. Postal Service, can I take a lump-sum withdrawal from my Thrift Savings Plan without paying a penalty? I am 57 years old with 27 years of service.
A. Yes.
Tags: lump-sum, penalty, Postal Service, TSP, VERA, 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
Retiring before vs. after VERA
June 7th, 2012 | Uncategorized
Q. I’m 57 years old, started with the Postal Service in June 1987, bought back five years and nine months of military time. What would be the difference in benefits between retiring if a VERA is offered and retiring before a VERA is offered? Would I be penalized on my Thrift Savings Plan? Can I get the Social Security supplement? Would I be able to collect Social Security supplement either way?
Mike Miles: Since you’d be retiring during or after the calendar year in which you reached age 55, you would have access to your TSP account without incurring the early withdrawal penalty.
Reg Jones: There wouldn’t be any difference. Since you already have the right combination of age and years of service, you can retire whenever you want to. Voluntary Early Retirement Authorities are only useful for those who wouldn’t otherwise be able to retire on an immediate annuity.
Tags: early withdrawal penalty, military buyback, Postal Service, Social Security, Special Retirement Supplement, TSP, VERA