This column will clear up confusion – some of it mine – surrounding three issues I’ve covered in recent columns: early withdrawals from the Thrift Savings Plan, moving Civil Service Retirement System voluntary contributions to a Roth IRA, and the Federal Employees Retirement System special retirement supplement.
In my July 23 column, “Avoiding TSP withdrawal penalties,” I stated that an employee who separates from federal service during the calendar year in which he reaches age 55 will have access to his TSP account without penalty immediately following separation. This statement was based on a review of applicable federal law and IRS publications and regulations. A question from a reader prompted me to do additional research, and it turns out the IRS interprets the law differently than I did. In practice, only withdrawals taken after the participant actually reaches age 55 are exempt from the penalty.
On more than one occasion, both in my June 26, 2006, Federal Times column, “Law helps CSRS employees save on taxes,” and subsequently in the Ask the Experts forum at FederalTimes.com, I have written about a strategy for moving CSRS voluntary contributions into a Roth IRA following separation from service. The benefit is that the account, which has already been taxed as income, is potentially exempt from taxes on future growth.
The strategy involves rolling over the contribution portion of your balance to a separate rollover IRA account and then converting that IRA balance to a Roth IRA. In 2008, the rules will allow the conversion of certain employer-sponsored retirement plan balances directly to a Roth IRA account, bypassing the intermediate rollover IRA.
Some have questioned the legitimacy of this strategy since the forms provided by the Office of Personnel Management to request the refund of voluntary contribution balances do not specifically accommodate the move. Additionally, OPM representatives are reluctant to comment on the strategy’s feasibility.
The rollover does not rely on the OPM’s recognition to be valid. It can be accomplished after the participant receives the refund of the voluntary contributions from OPM. IRS Publications 721 and 575 explicitly describe CSRS, including its component voluntary contribution account, as a qualified retirement plan capable of producing eligible rollover distributions. Further, Publication 575 specifically states that after-tax employee contributions to a qualified retirement plan are eligible for rollover to another qualified plan or traditional IRA, allowing for subsequent Roth IRA conversion. It only seems reasonable, in my opinion, to expect this treatment to continue under the provisions allowing for direct conversion to a Roth IRA, pending further guidance from IRS.
A prudent taxpayer will consult a certified public accountant or tax attorney – someone who will defend your position if it is questioned – before proceeding down such a path.
Finally, in my Oct. 8 column, “Assess retirement income,” I wrote about a quick approach to assessing your retirement readiness. I proposed a hypothetical scenario to illustrate how the approach might work. I’ve received comments from several readers asking if the numbers I used were correct or why those numbers didn’t match their own retirement income estimates. Specifically, the FERS special retirement supplement estimate seemed to bother some readers.
First, the retirement income estimates I used were not actual calculations. They were chosen to be realistic but simple to work with.
Second, the amount of the special retirement supplement can vary widely depending on individual circumstances. It is designed to replace the Social Security benefit that a FERS-covered employee, who retires before reaching age 62 and qualifying for Social Security benefits, would receive if Social Security provided such a benefit. The amount is based on the age at which you retire and your Social Security contribution record.
If you have a long history of making contributions to Social Security, the supplement will be larger than if your history is short. If your FERS history is short compared with your Social Security history, your supplement may look large compared with your FERS annuity payment. There is no fixed rule of thumb that relates the FERS annuity and special retirement supplement amounts. An easy way to roughly estimate a potential supplement amount is to use a number 5 percent to 10 percent below your estimated Social Security benefit at age 62. The closer to age 62 you are when you retire, the more accurate your
estimate will be.
Written by Mike Miles
For the Federal Times
Publication October 22, 2007