Ask The Experts: Money Matters

By Mike Miles

Rules for early TSP withdrawals

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Q: I am a 44-year-old Federal Employees Retirement System employee. I have a financial planner who wants to explore withdrawing part of my Thrift Savings Plan and rolling it into a Roth individual retirement account to take advantage of the two-year payout of taxes. I told the financial planner we only have two options for TSP withdrawals: One is for hardship, and the other applies if you are more than 59 1/2 years old.

Because I do not meet either requirement, it appears to me that I cannot make an in-service withdrawal. Are there other options for in-service withdrawals? The financial planner says he is working with a 54-year-old postal worker and his TSP allows for an in-service withdrawal and conversion to a Roth IRA. I have always been under the impression the TSP was governed by one set of rules. Does each agency have different rules governing withdrawals?

I am wondering if perhaps the postal worker is with the Civil Service Retirement System. Would a CSRS employee be allowed to make an in-service withdrawal in this situation?

A: I’m not aware on any special exception to the rules for in-service withdrawals. By the way, make sure that you carefully consider the motives of your “planner” for recommending such a move. Does he stand to gain from it? I generally advise against it.

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Hardship withdrawals

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Q: During the Obama campaign, there was talk of allowing up to $10,000 penalty-free 401(k)/Thrift Savings Plan withdrawals for hardship purposes. Have you heard whether this has been passed into law yet?

A: It is my understanding that penalty-free hardship withdrawals are permitted under certain circumstances. You should start with IRS Publication 590 or consult a qualified tax adviser for details. I recommend using someone who would be responsible for preparing your return for the year of the withdrawal.

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Either total withdrawal or monthly payments from TSP

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Q: I am a Federal Employees Retirement System employee with the Postal Service who plans to retire at the age of 60 with 27.5 years of service. I plan to take monthly withdrawals from my Thrift Savings Plan account to apply to my mortgage for ten years until I am 70 1/2 years old, rather than paying off my mortgage when I retire. My mortgage is a 30-year fixed at 4.75 percent. By leaving my money in the TSP and earning an estimated 8 percent while taking monthly withdrawals to make my mortgage payments, won’t I be ahead money at 70 1/2 ? Also, will I still be able to take a one-time withdrawal in the middle of this plan at a date after retirement, let’s say, at age 65?

A: I’m not going to do the math to determine whether the scenario you’ve laid out will work out to your advantage since the answer will ultimately depend upon your future tax returns and the rate of return earned each year on your TSP account — neither of which can be predicted reliably in advance. I can tell you that once you start monthly payments from your TSP account, you can’t interrupt them with a partial withdrawal. You would have to end the payments with a complete and final withdrawal.

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Withdrawing from TSP

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Q: I’m a postmaster ready to retire at the end of the year. I’m considering withdrawing from my Thrift Savings Plan account. I have a question about withdrawing funds. One of the options states a specific dollar amount on a monthly basis. Would I be allowed to withdraw a specific percentage of my account each month?

A: No.

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Mandatory withdrawals from TSP at retirement

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Q. Currently, I am 79. I had planned on retiring on April 30, 2011. My boss has asked me to extend another year because of the inability to replace my talent. If I retire on April 30, 2012, I will have a total of 33 years service. I am a FERS employee. Needless to say, since I have always contributed the max I am allowed under the IRS rules, the amount deposited has become fairly large.
My question is simple: “What amount of money or percentage thereof will I be required to withdraw from my TSP account each year? Will it be based upon my life expectancy? Am I required to take an annuity account with MetLife or may I leave the funds in the TSP? Is there a penalty if I do not take an annuity account? My reason for asking is my wife is 22½ years younger than I and I had hoped to leave the major balance of the account to her after I pass.

A. Your required minimum distributions will be based upon your life expectancy and your account balance each year. You are not required to purchase an annuity with your balance and may leave your funds in the TSP. I suggest that you spend some time at www.tsp.gov to, at least, familiarize yourself with the basic rules and options related to withdrawing your money after you separate.

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TSP withdrawals at 70 1/2 years of age

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Q. I recently retired from the USPS and plan to leave my TSP funds untouched until age 70 1/2. At the time I select monthly annuity withdrawals, does my TSP remainder continue to grow in the funds I had previously selected or is the total fund amount at that age frozen and become the total of my annuity to withdraw?

A. If you use part or all of your TSP balance to purchase an immediate annuity through the TSP, you forfeit your control of those funds and are entitled only to the income payments promised.

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Age-based withdrawals

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Q. I am 60 years old. I want to make an age-based withdrawal. However, I am paying back a loan made four years ago. The TSP Web site says I cannot make an a withdrawal if I have a loan application pending. Since my loan has been ongoing for four years, the load application is “NOT PENDING. May I still make an age-based withdrawal with an active loan?

A. Having a loan outstanding does not prevent you from taking an in-service withdrawal.

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TSP withdrawal

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Q. Once retired and taking distribution withdrawals from my TSP account, will I have control of which investment(s) in my TSP account the distribution withdrawal comes out of? An example would be G fund versus one of the stock index funds?

A. Your withdrawal be pro-rated across all the funds held in your account at the time the withdrawal is processed.

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TSP withdrawal requirements

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Q: I am retiring in August at age 57 due to mandatory law enforcement officer’s coverage. I understand that you can choose to take a monthly withdrawal amount as low as $25 per month from your Thrift Savings Plan. I also understand that you can change this monthly withdrawal amount at a designated time each calendar year. After my retirement date, is there a set period of time in which I have to let the TSP know that I want to take a set monthly withdrawal amount?

A: No, although you are subject to the IRS minimum withdrawal requirements beginning at age 70 1/2.

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TSP withdrawal

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Q: I have attempted to get answers on withdrawing my annuity but I am generally referred to the TSP page. Unfortunately, it doesn’t really answer my specific question. Can I purchase an annuity with part of my TSP and leave the balance in my TSP until I am 70½ and then start taking out monthly payments?

A: Yes, as long as you haven’t already used your one-time partial withdrawal allowance at the time you use it to buy the annuity.

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