Ask The Experts: Money Matters

By Mike Miles

Monthly TSP payments

Bookmark and Share

Q. Can I opt to use (say 10 percent ) of my TSP account monthly as a supplement with my FERS retirement to help me meet my debt obligations into my retirement?

A. You may request monthly payments from your TSP account after you retire, but you are limited to a fixed dollar amount each month (which may be changed once each year) or payments automatically computed based on your life expectancy (which vary in both dollar amount and percentage each year).

Tags: ,

Trustworthy advice

Bookmark and Share

Q: The main — and probably only — reason I need to transfer my money from TSP to a regular IRA is that I’ll be able to make withdrawals as I wish or as needed. You always advise your readers to consult someone trustworthy to advise us before we do this. My question is, how do we determine who’s trustworthy? I’ve been approached by my bank, credit union, some investment companies, etc., but I just don’t know what questions to ask or what to look for, other than their fees.

A: Unfortunately, it’s not easy. But, you can start by finding someone who works for flat fee only — no commissions or asset based fees to create conflict of interest. I generally prefer to see my clients stick with the TSP if possible — even if it means taking monthly withdrawals that will at least meet their needs and investing any excess in a taxable discount brokerage account. If you just can’t live with that, then roll over your TSP money to a discount brokerage account and use low cost exchange traded index funds. The substitutions are as follow: C Fund = S&P 500 index fund; S Fund = Russell 2000 index fund; I Fund = MSCI EAFE index fund; F Fund = Barclay’s Aggregate Bond index fund. Unfortunately, you can’t replicate the G Fund, which is a big reason to try to stick with the TSP. The closest you’ll be able come will be CD’s or a guaranteed income contract.

Tags: , , ,

Required minimum required distribution withdrawal

Bookmark and Share

Q. I am a FERS employee, still working and plan to retire on Jan. 12, 2013 when I will be 74 years of age (my initial RMD has been delayed as I am still employed). Note that 2012 has 27 pay periods. Since I will be employed through all of 2012, when I retire, will I be required to take a RMD for 2012? Will my first RMD be for 2013 payable by the end of 2014?

A. Your first required distribution will be for calendar year 2013 and the distribution will be due by April 1, 2014.

Tags: ,

TSP calculator

Bookmark and Share

Q. When I use the TSP website’s Monthly Payment Calculator to determine how long my payments will last at an amount selected, it asks what annual interest you expect to receive.  I plan on leaving all my money in the G Fund. What rate should I expect?

A. You’ve found the flaw in the calculator that makes it unreliable – pretty much useless in my opinion. Since its inception the G Fund has returned as much as around 9 percent in a year, and as little as 2.81 percent in 2010. If you’re not exercising a rigorous monitoring and management program over your portfolio along the way, you should probably set your estimate closer to the low end of the range.

 

 

 

Tags: ,

TSP withdrawals

Bookmark and Share

Q. What are the answers to the below questions if under age 55? For instance, taking a early retirement option at age 53 — how would the TSP 10 percent penalty apply using the original scenarios in the question??

Original question:

Q. I have read many of the articles and TSP literature and I am still a bit confused. As a federal law enforcement officer over age 55, I plan to retire later this year. I have read that if I want to take withdrawals from my TSP account prior to age 59½, I can do so without having to pay the 10 percent IRS penalty for early withdrawal, so long as I do it in an annuity (not interested) or, based on life expectancy (not interested as it provides more funds than I want at the beginning of my retirement), or as “substantially equal periodic payments. (not sure who determines this payment, me or IRS).

A. As long as you retire during or after the calendar year in which you reach age 55, you will not have to worry about the early withdrawal penalty, since it will not apply to you. You will have access to your TSP account through the various options offered by the TSP without further restriction.

My questions:

May I set the amount of the monthly payment, say $1,000 each month, and so long as I maintain that same payment amount each year until age 59½ or for five years, whichever is the later (in my case the five years)? If yes, will I still avoid the IRS early withdrawal penalty?

May I change the amount of the monthly payment (increase or decrease) prior to turning age 59½ or five years, whichever is greater and still avoid paying the 10 percent early withdrawal penalty?

A. You determine the Substantially Equal Payment Amount using one of three allowed methods – annuitization, amortization or life expectancy. Once commenced, the calculated payments must continue and may not be altered (although the life expectancy method of calculating the payment amount will produce changing payments each year) for the longer of 5 years or until you reach age 59 1/2, if you want to avoid the penalty. The rules for using a Substantially Equal Periodic Payments to avoid the early withdrawal penalty are complicated and rigid, so care, and perhaps some professional help, should be used.

 

 

Tags: , , ,

TSP fund when retiring

Bookmark and Share

Q. I am exploring the idea of retiring from the postal service as a CSRS with 32 years at age 55. Can I just leave my money in the TSP? Some answers I read say you can keep it in, but I have also read that I have to withdraw it when I retire. I prefer to leave it and not touch it for at least 10 years. So what is it?

A. You can, and should, leave your money in the TSP until you have to begin withdrawing it -– usually at age 70 1/2.

 

Tags: , ,

TSP

Bookmark and Share

Q. I am a CSRS 50-year-old employee who would like to withdraw $80,000 from my TSP to cover unsecured debt. Is this smart? My debt is strangling me. What is the tax hit and how can I avoid it?

A. You don’t have the option to make a withdrawal unless you can demonstrate financial hardship under the TSP’s definition. If you take a Financial Hardship withdrawal, you will owe tax on the amount you take and you will be subject to the 10 percent early withdrawal penalty.

You can, and should consider taking a loan, instead. Taking a loan will avoid the tax and penalty. Loans are limited to $50,000 or 50 percent of your account balance, whichever is lower. You can learn more at www.tsp.gov under the topics “In Service Withdrawals” and “TSP Loans.”

Tags: , ,

TSP withdrawals

Bookmark and Share

Q. I have approximately 200K in my TSP. I would like to leave the principle to my children and take a yearly withdrawal of the interest earned. What, and I know it is an estimation, would you think is a safe percentage to withdrawal yearly?

A. Interest does not accrue in a TSP account. The share values change in response to changes in value. The maximum safe withdrawal rate will depend upon a number of factors including your age, health and how the money is invested and managed over time. Calculating this estimate is beyond the scope of this forum.

Tags: ,

TSP withdrawals

Bookmark and Share

Q. I’m currently on active duty as a retired recall, servicing in Kuwait.  I will reach age 54 in December; can I withdraw my TSP funds in January without penalties?

A. From the TSP’s website: “Relief from the 10% early withdrawal penalty is availableto eligible Reservists called to duty for more than 179 days. The Reservist must have been activated after September 11, 2001 and must have received his or her TSP distribution between the date of the order or call and the close of the active duty period. The Reservist may also be eligible to repay the distribution to an IRA (not the TSP). Participants should consult with their tax advisors, legal assistance officers, or the IRS regarding this relief.”

Tags: , ,

TSP withdrawal

Bookmark and Share

Q. I am a federal worker, 51 years of age and am considering a withdrawal from my TSP account to pay off my substantial consolidated college student loans. If I pursue this plan what will be the tax ramifications  or any other penalties?  Another option for me is to take a loan out from my TSP account to pay the loans off and then begin to make payments back to the account. Is interest charged on these type of loans? Are penalties involved or any type of tax implications?  If I do not pay all the “loan” back before retirement, what penalties/taxes do I incur?

A. As long as you are an active employee covered by the TSP, you may not withdraw your money except in the case of demonstrable financial hardship. In this case you will be subject to income tax and the early withdrawal penalty. If you take a loan, you will be required to repay the loan in monthly installments, with interest. Keep in mind that the interest is paid into your TSP account, not to a third party. As long as you repay the loan, on time, there will be no tax costs or penalties. If you fail to repay the loan, the outstanding balance, including upaid interest, will be declared a distribution and you will owe tax and any penalty, if you do not roll over the distribution according to the applicable rules.

Tags: ,