FER's Retiree: When to withdraw from TSP, start Social Security

[Blarney]

If you are under 59.5 years old and change your 72t monthly payment it will trigger penalties for all the years you used that rule. After 59.5 you can do the yearly change without penalty.

I am retiring this year at age 57 with 37 years service. I am choosing monthly payments until at least 59.5. Now, the 72t that you are referring to, is this what they mean by the equal monthly payment amounts? I see no mention of a 72t option in the withdraw choices given on the withdraw form. So, if I change the monthly amount after the first year when I am still 58, I will be hit with penalties for doing so? Probably wouldn't change anyway until 59.5 or 62 but I'd like to know if I would..

Thanks!

 

[clester]

I am retiring this year at age 57 with 37 years service. I am choosing monthly payments until at least 59.5. Now, the 72t that you are referring to, is this what they mean by the equal monthly payment amounts? I see no mention of a 72t option in the withdraw choices given on the withdraw form. So, if I change the monthly amount after the first year when I am still 58, I will be hit with penalties for doing so? Probably wouldn't change anyway until 59.5 or 62 but I'd like to know if I would..

Thanks!

I'm not quite sure in your situation. In FERS there is a provision that says if you retire in the year you turn 55 you are not required to pay penalties but I don't think that applies here. For 72t (IRS rule for early withdrawal. Under age 59.5) could apply at any age. It says that if you take monthly withdrawals based on life expectancy tables then you are exempt from penalties if you don't change your method. There are 3 methods. Check out www.72t.net for more info. You have to do this rule for 5 years or until 59.5 I think. Its been a while since I researched it. At that point you can have TSP change your payments each year to any amount you want. TSP only offers the "minimum distribution method" under this rule. I used the amortization rule. Interest rates were higher then. Use their calculators to determine your best choice.

 

[Blarney]

Thank you, I'll check those out!!

 

[RazorCat]

I am retiring this year at age 57 with 37 years service. I am choosing monthly payments until at least 59.5. Now, the 72t that you are referring to, is this what they mean by the equal monthly payment amounts? I see no mention of a 72t option in the withdraw choices given on the withdraw form. So, if I change the monthly amount after the first year when I am still 58, I will be hit with penalties for doing so? Probably wouldn't change anyway until 59.5 or 62 but I'd like to know if I would..

Thanks!

I retired in 2013 at age 56 (Fed LEO). I took a partial withdrawal in a lump sum and paid only income taxes. I also transferred about 60% of my total TSP to a traditional IRA (tax free).
In year three of retirement (age 58) I started taking a monthly distribution.
The following year I changed the distribution amount to take the minimum ($25.00), and started drawing from my IRA at 59.5. I paid only income taxes on the initial monthly withdrawal in year three, and after I changed the amount the following year. I was not required to pay any additional penalties on either. Being retired Fed LEO may have made a difference, but I don't believe that was the case. I was under the impression penalties only applied if you retired before the year in which you turn 55, or if you were withdrawing from an IRA, and not TSP.
I'll also try to research it later today.

 

[evilanne]

Based on your situation, over 55 at retirement, you wouldn't get any penalty. See Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits https://www.irs.gov/pub/irs-pdf/p721.pdf
Top of page 14, 2nd column:

additional tax doesn't apply in certain situations, including any of the following.
You receive the distribution and separate from government service during or after the calendar year in which you reach age 55.
You choose to receive your account balance in monthly payments based on your life expectancy.

The 2nd one is the 72(t) rule, otherwise known as SEPP - Substantially Equal Periodic Payments.

 

[Blarney]

Based on your situation, over 55 at retirement, you wouldn't get any penalty. See Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits https://www.irs.gov/pub/irs-pdf/p721.pdf
Top of page 14, 2nd column:
The 2nd one is the 72(t) rule, otherwise known as SEPP - Substantially Equal Periodic Payments.

OK, There are two options for choosing equal monthly payments. The amount I can choose or either let TSP determine the amount based on life expectancy. Would I be wrong in assuming either option would be treated the same under 72t rules? Thanks for the answers.

 

[evilanne]

OK, There are two options for choosing equal monthly payments. The amount I can choose or either let TSP determine the amount based on life expectancy. Would I be wrong in assuming either option would be treated the same under 72t rules? Thanks for the answers.

As long as your money is in TSP, you can do either without worrying about 72t rules since you are over 55. TSP will code Box 7 on the 1099R as either 2—Early distribution, exception applies. or 7—Normal distribution (assuming all your account is regular TSP contributions). For folks retiring before age 55 (50 for LEOs), they have to use life expectancy method or 72(t) in order to get exception to access TSP funds without penalty.

The TSP Retirement Calculator uses the life expectancy method to calculate annual withdrawals based on your assumptions until age 70.5 when it changes calculations based on RMDs https://www.tsp.gov/PlanningTools/Calculators/retirementCalculator.html. If you assume rate of return of 3.5 to 4%, the annual withdrawal rate should increase over time since the denominator decreases each year based on your age. Since the calculation is based on the end of year balance it may vary significantly with either large gains or losses experienced. I'm not sure if you can switch to life expectancy if you initially select monthly dollar amount, but it will allow a one time change to go from life expectancy to monthly payments https://www.tsp.gov/PDF/formspubs/tspbk33.pdf

If you roll over to an IRA prior to age 59.5, you can do the same thing but it may require additional effort to avoid any penalty, depending on how the brokerage codes your 1099-R, see https://www.irs.gov/pub/irs-pdf/p590b.pdf This is when you would need to be aware of the 72(t) rules. Based on my research, most online discount brokerages that you manage yourself will code it 1 - Early distribution, no known exception, so you may also have to do the calculation yourself and make sure you have the appropriate amount of cash available to make the payment(s).

Annuity. You can receive distributions from your traditional IRA that are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary, without having to pay the 10% additional tax,even if you receive such distributions before you are age 59 1/2. You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply. The “required minimum distribution method,” when used for this purpose, results in the exact amount required to be distributed, not the minimum amount.
There are two other IRS-approved distribution methods that you can use. They are generally referred to as the“fixed amortization method” and the “fixed annuitization method.” These two methods are not discussed in this publication because they are more complex and generally require professional assistance. For information on these methods, see Revenue Ruling 2002-62, which is on page 710 of Internal Revenue Bulletin 2002-42 at https://www.irs.gov/pub/irs-irbs/irb02-42.pdf

 

[Blarney]

Very helpful. I appreciate the help. Thanks.