The availability of buyouts at many agencies and the upcoming elections are among topics prompting readers’ questions related to their Thrift Savings Plan investments. My answers may help other readers with similar concerns:
Q. With 25-plus years of service, I qualify for a buyout. If I take the buyout, what happens to my TSP account? May I purchase an immediate annuity or take a lump sum even though I am below the minimum retirement age? Would this cause me to have to wait until I am 59½ to access TSP if I take an early-out? Do you believe the $25,000 buyout and the extra six or so years of retirement payments I would receive with an early-out would make up for the growth in my TSP and the loss of the extra 1 percent a year I would have received for staying until my MRA?
A. Once you retire, you are free to access your TSP in any way usually allowed for retirees. The minimum retirement age does not apply to TSP accounts. You do not have to wait until you reach age 59½ to take money from your TSP account once you are retired, but withdrawals taken before reaching age 59½ might be subject to the early withdrawal penalty if you retire before the calendar year in which you reach age 55.
It’s impossible to say whether the early-out income will be enough to offset the potential TSP gains in the future without knowing how you’ll invest the TSP money along the way. But it’s likely that accepting the buyout/early-out offer will substantially reduce your maximum sustainable standard of living in retirement if you don’t continue to work.
I think it’s reckless to make such an important and irreversible decision without a clear understanding of the financial implications. Based on your questions, I suggest that you keep working and decline the buyout offer. This is the safer bet without the benefit of good decision analysis and support.
Q. I am sure the upcoming elections will affect the market. What would be the recommended fund to put my money into for this? Right now, I have about 90 percent in the C Fund the rest in the S Fund.
A. Assuming the Thrift Savings Plan is your only investment account, your current allocation is unnecessarily risky. If you’re not a competent investment manager, and your question makes it clear that you’re not, you should either engage trustworthy help or put your account balance into the L Fund with the target date that most closely matches your life expectancy. Trying to game the election is speculative rather than prudent and will increase the riskiness of your portfolio rather than reduce it.
Q. I will retire this year at age 70. Let’s say my annual TSP payout is $10,000. What is my annual tax liability for TSP payments? What should my withholding rate be?
A. The default withholding rate will depend on the amount of the distribution. Use the instructions in the Internal Revenue Service’s Circular E to estimate the default withholding rate for your monthly withdrawals. You may request a higher or lower withholding rate or waive withholding altogether. Note that withholding and tax liability are separate things. Withholding is an advance payment, a deposit, against what you may owe in taxes when you file your return for the year. The amount withheld may not match the amount you ultimately owe. If you withhold too little, you will owe the difference, and maybe interest and a penalty. If you withhold too much, the difference will be refunded to you after you file your return.
Q. As a federal law enforcement officer with 25 years of service, can I retire at age 47 and withdraw monthly payments from my TSP balance based on life expectancy without paying a 10 percent penalty? If so, at age 60, can I change monthly payments to a specific dollar amount without a penalty?
A. Yes, you may take monthly payments in amounts based on your life expectancy without penalty as long as the payments continue, without interruption or error, until you reach age 59½. After that, you may change the payments without penalty. The rules for avoiding the penalty are complex and strict, so you should consult a qualified tax adviser before proceeding.
Written by Mike Miles
For the Federal Times
Publication August 20, 2012