FERs Retirees, anyone?

[Maricar19]

Stoplight,
Source: The FERS Supplement - Little Known Benefit for Some FERS Federal Employees
"..Taxes and the FERS Supplement
Let’s say Jane’s FERS pension is $1,500 a month – or $18,000 a year. So let’s just stop right there - $20,000 of earned income + $18,000 of FERS Pension = $38,000.
Without even considering any other aspects of Jane’s income, we know that at least 50% of her FERS Supplement will be subject to Federal Income taxes.
And if she has additional income, perhaps money from her TSP, of more than $6,000 a year – 85% of her Supplement will be subject to Federal Income taxes..."

Others must read the whole article to understand the excerpts here.. Stoplight and I are having some discourse as to how the taxation of FERS supplement, other than earnings test, is treated the same as SS benefits.

 

[Stoplight]

MC,

Yeah, I saw that article, too ! Like I said...you can find lots of official-looking info to support either side of the discussion ! I saw a LEO site that said the same thing.

Here's my thought : A portion of your FERS Basic annuity is not taxed because we already paid tax on our contribution,,,,i.e., the CSRS payroll deduction (or whatever it's called now !). Tax on ordinary SS income is based on the reduced 85% or whatever, assuming because we also paid SS deductions on our paycheck. HOWEVER...we never “paid” in anything “extra” for the Supplement, so it makes sense to me that it is fully taxable ! Uncle Sam WILL get his cut...

Anyway....we can agree to disagree...I'm going to stick with the IRS person's advice, and continue to report it as ordinary income...I don't want any nasty surprises from the IRS, somewhere down the road !


Stoplight...

 

[Maricar19]

SL, I agree with you that the supplement is ordinary income, no disagreement on that part.

 

[Skorcher]

SL, I agree with you that the supplement is ordinary income, no disagreement on that part.

I work for the IRS and found the taxation of SRS very confusing until I did a little research. The form 1099-R is definitive. It will show you that 100% of the SRS is taxable no matter what your income is. It is not Social Security, it is a supplement to your FERS pension.

Some of the confusion stems from the fact that the SRS is treated the same as SS for purposes of the SS earnings test. In 2014 if your wages/earnings exceed $15,480 your SRS will be reduced by 50% for every dollar above that threshold. This reduction is not a tax. Every dollar that is subtracted from a retiree’s Social Security (or SRS) check gets credited back to the same individual – with interest – in the form of higher future benefits.

 

[Cactus]

Thanks for your research and input, Skorcher. It does sound reasonable in hindsight.

 

[Valkyrie]

[h=2]Types of Retirement

Changes in the Amount of the Supplement[/h]Like social security benefits, the FERS annuity supplement is subject to an earnings test. It is reduced if you earn more than the social security exempt amount of earnings in the immediately preceding year. The supplement is reduced by $1.00 for every $2.00 of earnings over the minimum level. It is possible that the supplement could reduce to $0. However, the FERS basic benefit will not be reduced. If you are receiving a supplement, you must report your earnings to OPM. You will receive instructions on how to report your earnings, once you begin receiving the annuity supplement.

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[h=2]Minimum Level of Earnings[/h]The amount you may earn without affecting your FERS annuity supplement is determined by the Social Security Administration each year. It increases with the annual increases in average wages for the national workforce.

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[h=2]Definition of Earnings[/h]The FERS basic benefit is not considered earnings when determining your earnings for the earnings test. Earnings for the year consist of the sum of wages for service performed in the year, plus all net earnings from self-employment for the year, minus any net loss from self-employment for the year.

 

[clester]

[h=2]Types of Retirement

Changes in the Amount of the Supplement[/h]Like social security benefits, the FERS annuity supplement is subject to an earnings test. It is reduced if you earn more than the social security exempt amount of earnings in the immediately preceding year. The supplement is reduced by $1.00 for every $2.00 of earnings over the minimum level. It is possible that the supplement could reduce to $0. However, the FERS basic benefit will not be reduced. If you are receiving a supplement, you must report your earnings to OPM. You will receive instructions on how to report your earnings, once you begin receiving the annuity supplement.

---

[h=2]Minimum Level of Earnings[/h]The amount you may earn without affecting your FERS annuity supplement is determined by the Social Security Administration each year. It increases with the annual increases in average wages for the national workforce.

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[h=2]Definition of Earnings[/h]The FERS basic benefit is not considered earnings when determining your earnings for the earnings test. Earnings for the year consist of the sum of wages for service performed in the year, plus all net earnings from self-employment for the year, minus any net loss from self-employment for the year.

This is an important point. It doesn't take effect though until you reach 55 or 56 I think. Anyway, not gonna try and work in retirement because of this.

 

[Maricar19]

Planning and Applying for Retirement FERS Chapter 40 has guidelines to assist future retirees in planning their retirement:

Section 40A2.1-2 Five-Year Period Before Retirement

Section 40A2.1-3 One-Year Period Before Retirement

Section 40A2.1-4 Six-Month Period Before Retirement
A. ClearupIndebtednesstoAgency
B. FileWaiverofMilitaryRetiredPay
C. MaximumAnnuity: 80PercentLimitation
D. DocumentMedicareEligibilityandFilingforMedicare

Section 40A2.1-5 Two-Month Period Before Retirement
A. General
B. Choose Exact Date

Note: This is only an excerpt and is incomplete.

 

[Maricar19]

Military Service
​

Credit for Military Service
As a general rule, military service in the Armed Forces of the United States is creditable for retirement purposes if it was active service terminated under honorable conditions, and performed prior to your separation from civilian service for retirement.

• Service Performed Before 1957 creditable without deposit
• Service Performed on or after January 1, 1957 -a deposit must be paid to credit the service to establish title to an annuity or to compute your annuity

Exception for individuals with a portion of their FERS annuity computed under CSRS rules
If your military service was performed before the effective date of your FERS coverage, the military service will be credited under CSRS rules.

Sidenote by Maricar19- Military Buyback makes a difference in the computation of your annuity$$. If you work for the USPS, you can pay pay it in installment by submitting a PS 3239.
Postal employees- if you need help, I can help you since I have done this process personally at least 3 times over the course of my career.

 

[Maricar19]

Civilian Service​

Under FERS, you can make a payment for the following types of service, in order to credit it toward your retirement:

• Any period of creditable civilian service performed before 1989 during which no retirement deductions were withheld from your pay.
• Any period of civilian service during which retirement deductions were withheld from your pay and refunded to you.
• Any period of Peace Corps or VISTA volunteer service (excluding training time) regardless of when the service was performed.

Payment cannot be made for

• Any other service which is not creditable under FERS.
• Periods of leave without pay.
• Time covered by a lump sum leave payment.

Sidenote by Maricar19-
Most postal employees were hired initially as casual appointments.
You can buyback this time(prior to 1989) and have it added to your service time.
Buyback makes a difference in the computation of your annuity$$. If you work for the USPS, you can pay pay it in installment by submitting a PS 3239.
Postal employees-if you need help, I can help you since I have done this process numerous times helping co-workers.

 

[Maricar19]

Note: FERS annuity pension is different from Annuity Supplement and each is calculated differently

Am I understanding the excerpt below that if I retire December 31 (which is the recommended date for FERS), what I earned for the year will not be included in the computation of my annuity supplement?
Advantages of retiring last day of the month/ year:

• you can cash in all your maximum annual leave plus what you earned for the year
• Annuity pension starts the following month, January

However, if I choose early January, example PP 26, I still can cash accrued and earned leave, but when does my pension start? Will it start February or March? Will my retirement supplement be computed including the earnings of the year immediately preceding my retirement? Or will PP 26 still be considered part of last year's earnings?

i guess, I have to figure out how much effect 1 year of earnings has on my annuity supplement and effect of a month's delay of FERS pension and not being able to maximize cashing of annual leave,

Retiree Annuity Supplement FERS Chapter 51, page 10
Section 51A2.1-1 Constructing Earnings History (Cont.)
E. Earnings in Year of Separation
1. General Rule
Earnings during the year in which an employee separates for an
immediate retirement are not included in the earnings history. 2. Exception
If the annuitant retired before the calendar year in which he or she reached the MRA under circumstances in which the annuity supplement does not begin until he or she reaches the MRA (see section 51A1.1-3, paragraph B), earnings in the calendar year of retirement are the retiree's annual basic pay for that year (even though he or she only worked part of the year). Earnings in calendar years after the year of separation, and before the MRA is reached, are deemed to be zero.

 

[Maricar19]

Military Service
​

Credit for Military Service
As a general rule, military service in the Armed Forces of the United States is creditable for retirement purposes if it was active service terminated under honorable conditions, and performed prior to your separation from civilian service for retirement.

• Service Performed Before 1957 creditable without deposit
• Service Performed on or after January 1, 1957 -a deposit must be paid to credit the service to establish title to an annuity or to compute your annuity

Exception for individuals with a portion of their FERS annuity computed under CSRS rules
If your military service was performed before the effective date of your FERS coverage, the military service will be credited under CSRS rules.

Sidenote by Maricar19- Military Buyback makes a difference in the computation of your annuity$$. If you work for the USPS, you can pay pay it in installment by submitting a PS 3239.
Postal employees- if you need help, I can help you since I have done this process personally at least 3 times over the course of my career.

Above is only an excerpt. Please read Chapter 22 -for more details.http://www.opm.gov/retirement-services/publications-forms/csrsfers-handbook/c022.pdf

 

[Maricar19]

Is it correct to say that if you chose "Life Expectancy"(LE) for your TSP distribution, you never have to worry about RMD?
i am asking this because I used the TSP Retirement Income Calculator and it showed a life expectancy and fixed dollar amount comparison. Unless I choose a pretty big amount for my fixed dollar amount, i always get a warning for RMD every year after I turn 70, but the LE never showed any warnings.

 

[Maricar19]

I have always been afraid that if I die, my beneficiaries will not know what to do with my TSP account and that because of this - they will get penalized or taxed unnecessarily by the IRS.

Here are the applicable publications. So far, I have read only Publication 32.
https://www.tsp.gov/PDF/formspubs/tspbk31.pdf
https://www.tsp.gov/PDF/formspubs/tsp-583.pdf
https://www.tsp.gov/PDF/formspubs/tspbk32.pdf
https://www.tsp.gov/PDF/formspubs/tspbk33.pdf

These are some excerpts from TSPBK32 (3/2014)
(Pertaining to initial investment of deceased’s TSP account)
A TSP account will be established if the TSP benefits will be more than $200.00 and will be invested initially in G Fund.
p. 0 -Consider making an interfund transfer to move your account balance into the investment funds of your choice. (Beneficiary participant accounts are initially invested 100% in the Government Securities Investment (G) Fund.)
p.12 - When your beneficiary participant account is first established, the entire balance is invested in the Government Securities Investment (G) Fund, a stable investment that has no risk of loss. Your money will remain in the G Fund until you make a different investment choice
(Pertaining to existence of beneficiary’s TSP account)
p. 2 - If you have an existing civilian or uniformed services TSP account, you can move the money from your beneficiary participant account into that existing account. (Treated as employee contribution not subject to IRS limitations)
p. 11 - If you have an existing TSP account from your own employment with the Federal Government or the uniformed services, you can move your beneficiary participant account into your existing TSP account.2 The money that you move will be treated as an employee contribution, but it will not be subject to the Internal Revenue Code (IRC) annual elective deferral limit.
(Pertaining to withdrawal options and roll overs) And this is where I am confused – they are allowed to roll over only if they choose any of the withdrawal options?
p. 5 - Death benefit payments from a beneficiary participant account must be distributed as cash payments. They cannot be transferred or rolled over into a traditional IRA, an eligible employer plan, a Roth IRA, or an inherited IRA. See pages 17-18 which allows you to roll over on certain conditions (withdrawal options)
p. 17-19 – Talks about Withdrawal options and RMD (they are basically the same if I/you were alive) and this is the only time you can do rollovers (?), I think.
TSPBK 33 https://www.tsp.gov/PDF/formspubs/tspbk33.pdf
Pros and Cons of combining your TSP and the beneficiary’s TSP:
p. 3 - There is no early withdrawal penalty tax associated with withdrawals from the beneficiary participant account established for you after your spouse’s death. There is, however, an early withdrawal penalty tax associated with regular civilian or uniformed services accounts. Therefore, if you have your own TSP account and you want to move your beneficiary participant account into that account, the early withdrawal penalty rules will continue to apply to all of the money in your existing account.

 

[Maricar19]

Wrong attachment..sorry.

 

[Scout333]

Thanks!

 

[Maricar19]

After reading TSP pub. 33, if beneficiary also has a TSP account, it is better not to merge the deceased's account with his/her account. If both accounts are merged, withdrawals will be subject to early withdrawal penalty. If left separately, then withdrawal from deceased account will not be subject to penalty. I hope I understood it correctly.

 

[Maricar19]

Retirement Calculators:
Best Retirement Calculator
The 3 Best Free Retirement Calculators - Can I Retire Yet?
Learning Center – State Farm
https://myretirementplan.wellsfargo.com/mrp/plan/terms_of_use

 

[Maricar19]

During weekends, I have plenty time to read the Forum and check on other tsptalkers' thread. One of the things that I kept reading was about TSP roll over to an outside IRA. Not knowing the advantages of a roll over, I called Vanguard. A youthful voice answered, must be an intern. I asked him if he is familiar with the TSP plan and that I would like to find out about the advantages of rolling over my TSP to a Vanguard IRA. He didn't bullshit me and he was honest to say that other than it is like a 401K, he is not really familiar with TSP, but that he can give me advantages of the IRA.

We talked for 10 minutes, and the only thing that my brain cells was able to retain was that with an IRA I can change my withdrawal schedule anytime and it can be stopped or continued anytime. For me, that is a great advantage of the roll over. With TSP, we can only change the withdrawal schedule once a year.

However, IRA withdrawals can only be made after 591/2. With TSP, you can withdraw upon retirement even if you are not 59 1/2.
Ergo, I will leave my Money with TSP, do the much needed withdrawals until I am 59 1/2 and then roll over to an IRA.

 

[Boghie]

During weekends, I have plenty time to read the Forum and check on other tsptalkers' thread. One of the things that I kept reading was about TSP roll over to an outside IRA. Not knowing the advantages of a roll over, I called Vanguard. A youthful voice answered, must be an intern. I asked him if he is familiar with the TSP plan and that I would like to find out about the advantages of rolling over my TSP to a Vanguard IRA. He didn't bullshit me and he was honest to say that other than it is like a 401K, he is not really familiar with TSP, but that he can give me advantages of the IRA.

We talked for 10 minutes, and the only thing that my brain cells was able to retain was that with an IRA I can change my withdrawal schedule anytime and it can be stopped or continued anytime. For me, that is a great advantage of the roll over. With TSP, we can only change the withdrawal schedule once a year.

However, IRA withdrawals can only be made after 591/2. With TSP, you can withdraw upon retirement even if you are not 59 1/2.
Ergo, I will leave my Money with TSP, do the much needed withdrawals until I am 59 1/2 and then roll over to an IRA.

See, the Vanguard dude gave good advice - and you knew the big issue for your personal situation. Try to get anything from TSP or your HRO. Zip, zero, nada - excepting maybe bad advice...

Here is another advantage of a self-directed IRA: You can diversify much better than you can in TSP. You can allocate a percentage of assets to commodities, to REITs, to various term bonds, to emerging markets. As an example, we only have one bond fund and it is behaving like a stock fund because of FED jiggering. That is, folks are investing in the underlying bonds for price appreciation rather than interest returns. In an IRA you could find a bond fund that is investing in quality interest returns.

In your case I would continue as you are and then at age 60 push it into a self-directed IRA allocated with the advice of a good financial planner. It does not have to happen now and it does not have to be all or nothing...