Leaving funds in TSP and taking 72t withdrawals

[clester]

I wanted to start a new thread to address this issue. Here is what I have found about taking withdrawals from TSP if you will retire before age 55.
Many of us are ATC or LEO and need options.

From the TSP website

"The Internal Revenue Code, in 26 U.S.C Subsection 7701(j), states that the TSP is to be treated as a trust qualified under 26 U.S.C. Subsection 401(a) which is exempt from taxation under 26 U.S.C. Subsection 501(a).

From the IRS revenue ruling 2002-62 (describes the 72t particulars)

72t(1) Section 72(t) provides for an additional income tax on early withdrawals from qualified retirement plans (as defined in 4974(c)). Section 4974(c) provides, in part, that the term "qualified retirement plan" means (1) a plan described in 401 (including a trust exempt from tax under 501(a)), (2) an annuity plan described in 403(a), (3) a tax-sheltered annuity arrangement described in 403(b), (4) an individual retirement account described in 408(a), or (5) an individual retirement annuity described in 408(b).

Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in 72(t)(1) will not be applicable.

The 3 methods are then listed. (amoritization, annuitization, and minimum distribution)

So, it seems pretty clear TSP would qualify for 72(t).
You would file a form 5329 with IRS each year to claim the exemption from the 10% penalty.

This is just my opinion. Do your own research.

 

[GarySpicuzza]

clester wrote:

Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in 72(t)(1) will not be applicable.

Clester you must understand what that means. It means that you elect an IRREVOCABLE SETTLEMENT OPTION which can NEVER be undone.

In other words YOU trade ALL the cash value of your TSP account for an INCOME STREAM during your life and/or the life of your spouse.

The cash asset NO LONGER exists. YOU DO NOT have access to any cash other than the monthly income payment. No one usually makes that type of life only IRREVOCABLE SETTLEMENT OPTION unless there is a compelling reason to do so. Many people simply rollover their TSP account when they retire to their own self-directed IRA and let it continue to grow until age 70 1/2 when they must begin taking their Required Minimum Distribution.

Regarding the 10% penalty for withdrawals prior to age 59 1/2. That applies to ALL qualified and non-qualified pension plans including IRAs, 401Ks and annuities.

You must qualify for a "hardship" withdrawal to escape the 10% penalty.

See THIS link. While the link is specific to 401Ks ALL qualified pension plans must follow the same IRS code.

But to discourage these early hardship withdrawals, in most all cases the IRS imposes a hefty financial penalty including a 10 percent early withdrawal penalty if you are younger than 59 1/2.



You may qualify to take a penalty-free withdrawal if you meet one of the following exceptions:

• You become totally disabled.
• You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
• You are required by court order to give the money to your divorced spouse, a child, or a dependent.
• You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
• You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)

Employers are not required to offer any type of hardship withdrawal, so you should check with your employer to see if it is available to you.

 

[luv2read]

clester wrote:

Clester you must understand what that means. It means that you elect an IRREVOCABLE SETTLEMENT OPTION which can NEVER be undone.

In other words YOU trade ALL the cash value of your TSP account for an INCOME STREAM during your life and/or the life of your spouse.

The cash asset NO LONGER exists. YOU DO NOT have access to any cash other than the monthly income payment. No one usually makes that type of life only IRREVOCABLE SETTLEMENT OPTION unless there is a compelling reason to do so. Many people simply rollover their TSP account when they retire to their own self-directed IRA and let it continue to grow until age 70 1/2 when they must begin taking their Required Minimum Distribution.

Regarding the 10% penalty for withdrawals prior to age 59 1/2. That applies to ALL qualified and non-qualified pension plans including IRAs, 401Ks and annuities.

You must qualify for a "hardship" withdrawal to escape the 10% penalty.

See THIS link. While the link is specific to 401Ks ALL qualified pension plans must follow the same IRS code.

I believe there is one other exception - natural disasters. Victims of hurricanes, etc. qualify for hardship withdrawals. Hurricanes Katrina and Rita, for instance. I know for a fact that people were able to withdraw for that.

 

[clester]

I'm not sure of what your talking about. The 72t methods are an exemption to the 10% penalty for 401k's and IRA's. Not an annuity. The money is still yours just as if it were in an IRA.

 

[GarySpicuzza]

clester, the phase..."made for the life (or life expectancy) of the employee" means that one has "annuitized" their TSP account to ESCAPE the 10% penalty PRIOR to age 59 1/2. But you have to be at least 55 years old and you must take the payments for at least 5 years.

Your TSP account can be "annuitized" within the plan itself and once someone elects a settlement payout option it's IRREVOCABLE.

You have to trade the account value for an income stream, "made for the life (or life expectancy) of the employee".

 

[clester]

clester, the phase..."made for the life (or life expectancy) of the employee" means that one has "annuitized" their TSP account to ESCAPE the 10% penalty PRIOR to age 59 1/2. But you have to be at least 55 years old and you must take the payments for at least 5 years.

Your TSP account can be "annuitized" within the plan itself and once someone elects a settlement payout option it's IRREVOCABLE.

You have to trade the account value for an income stream, "made for the life (or life expectancy) of the employee".

I disagree that its irrevocable. Its the same as an IRA 72t option.

What I'm saying is that you can figure your payments using 72t rules for say the amoritization method (just as if it were in an IRA) then request monthly payments from TSP in that amount. They won't know what your intentions are! Just follow 72t rules. That amount you choose for payments is set until 59 1/2 just like an IRA. What I'm saying is that you can treat your account in TSP just like an IRA.

 

[clester]

Gary,
go to www.72t.net to see how this would work. There would be no 10% penalty and at 59 1/2 you can take a lump sum if you want. It's stiil your money.

 

[clester]

Also remember, I'm talking about people like me (Air traffic controllers) who can and will retire before age 55 (I will be 49) and want income from their TSP.

 

[GarySpicuzza]

clester wrote:

Also remember, I'm talking about people like me (Air traffic controllers) who can and will retire before age 55 (I will be 49) and want income from their TSP.

Clester when you take withdrawals out of your TSP "Qualified Pension Plan" from age 49 to age 59 1/2 YOU WILL pay a 10% penalty on the withdrawals in addition to ordinary income taxes.

You will receive a Form 1099-R from TSP that WILL designate the withdrawal as an early distribution from a Qualified Pension Plan.

I'm not being argumentative. You will not escape the 10% penalty prior to age 59 1/2 unless you would qualify for a hardship withdrawal or "annuitize" at age 55 for at least 5 years.

ALL qualified pension plans have the EXACT same distribution rules imposed by the IRS.

 

[Guest2]

clester wrote:


Clester when you take withdrawals out of your TSP "Qualified Pension Plan" from age 49 to age 59 1/2 YOU WILL pay a 10% penalty on the withdrawals in addition to ordinary income taxes.

You will receive a Form 1099-R from TSP that WILL designate the withdrawal as an early distribution from a Qualified Pension Plan.

I'm not being argumentative. You will not escape the 10% penalty prior to age 59 1/2 unless you would qualify for a hardship withdrawal or "annuitize" at age 55 for at least 5 years.

ALL qualified pension plans have the EXACT same distribution rules imposed by the IRS.

Wouldn't a 72t be considered a roll-over and not subject to penalty?

 

[GarySpicuzza]

squalebear, he's not talking about doing a rollover.

He's talking about taking income withdrawals prior to age 59 1/2 at his age 49.

He can do all the rollovers he wants and that's NOT a taxable event.

But if you take withdrawals prior to age 59 1/2 the IRS imposes a 10% penalty. This means you took constructive receipt of the money for the purpose of spending the money.

This applies to all qualified and non-qualified pension plans.

I don't want to say I do this for a living and have many former TSP owners as clients.

I'm going to be more declarative to get my point across....

If you take withdrawals from a qualified and/or non-qualified pension PRIOR to age 59 1/2 YOU WILL OWE THE IRS A 10% PENALTY PLUS ORDINARY INCOME TAX ON THE AMOUNT WITHDRAWN!

It's that simple.

Did I mention I do this for a living?

See THIS link.

5.3 Pensions/Annuities/Retirement Plans (i.e., 401(k), etc.): Types of Plans

In most cases, if you withdraw funds from your 401(k) plan before you are 59 1/2, you must pay the 10 percent additional tax on early distributions from qualified retirement plans on any amounts that are not rolled into an IRA. However, there are some exceptions listed in Publication 560, Retirement Plans for Small Business, and Publication 575, Pension and Annuity Income. You would not have to pay the 10 percent additional tax, for example, if you received the distribution after you left the company and you left the company during or after the calendar year in which you reached age 55 and your departure from the company qualifies as a separation from service. Tax Topic 412 and Tax Topic 558 are available for further guidance.

 

[saturneptune]

squalebear, he's not talking about doing a rollover.

He's talking about taking income withdrawals prior to age 59 1/2 at his age 49.

He can do all the rollovers he wants and that's NOT a taxable event.

But if you take withdrawals prior to age 59 1/2 the IRS imposes a 10% penalty. This means you took constructive receipt of the money for the purpose of spending the money.

This applies to all qualified and non-qualified pension plans.

I don't want to say I do this for a living and have many former TSP owners as clients.

I'm going to be more declarative to get my point across....

If you take withdrawals from a qualified and/or non-qualified pension PRIOR to age 59 1/2 YOU WILL OWE THE IRS A 10% PENALTY PLUS ORDINARY INCOME TAX ON THE AMOUNT WITHDRAWN!

It's that simple.

Did I mention I do this for a living?

See THIS link.

5.3 Pensions/Annuities/Retirement Plans (i.e., 401(k), etc.): Types of Plans

That is not correct. If you take out equal monthly withdrawals and are still in TSP starting the year you turn 55, and retire, there is no 10% penalty, an amount of your choice. We have been over this many times. The 59.5 age is if you roll it over to a private plan.

http://tsp.gov/forms/octax92-32.pdf

 

[clester]

clester wrote:


Clester when you take withdrawals out of your TSP "Qualified Pension Plan" from age 49 to age 59 1/2 YOU WILL pay a 10% penalty on the withdrawals in addition to ordinary income taxes.

You will receive a Form 1099-R from TSP that WILL designate the withdrawal as an early distribution from a Qualified Pension Plan.

I'm not being argumentative. You will not escape the 10% penalty prior to age 59 1/2 unless you would qualify for a hardship withdrawal or "annuitize" at age 55 for at least 5 years.

ALL qualified pension plans have the EXACT same distribution rules imposed by the IRS.

Your wrong. a 72t or (SEPP) qualifies for the exemption to that 10% penalty. Read my first post. You will get a 1099-R showing a early distribution, but you would file a form 5329. That will give you the option to tell the IRS you are exempt because you are using a SEPP. You will not pay the penalty. Go to www.72t.net and look around.

The file is too large to upload, but search for IRS rev. ruling 2002-62. It is the ruling that gives you the exemption.

 

[clester]

Here is the paragraph you need to read.

Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in 72(t)(1) will not be applicable.

If you read the entire document I think you'll find that after 5 years or age 59.5 whichever is longest, you can terminate the SEPP and take money as you need it.

 

[clester]

Here is the paragraph you need to read.

Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in 72(t)(1) will not be applicable.

If you read the entire document I think you'll find that after 5 years or age 59.5 whichever is longest, you can terminate the SEPP and take money as you need it.

I know a 72t is legal. What I'm suggesting is that you could do a 72t while leaving your funds in TSP. I would like to have opinions on that topic.

 

[GarySpicuzza]

That is not correct.

Is NOT correct.

If you take out equal monthly withdrawals and are still in TSP starting the year you turn 55, there is no 10% penalty, an amount of your choice.

IF, distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in 72(t)(1) will not be applicable.

The made for the life part means you have elected an irrevocable settlement option that's allowed at age 55 IF paid out over at least 5 years. YES, you won't pay the penalty but you will pay ordinary income tax on the distributions. And you certainly WILL NOT escape the 10% penalty at age 49 without a hardship exception.

And you DO NOT and WILL NOT have access to your funds over and above the irrevocable settlement option that was selected. This means for easy numbers if you had an account of $100k and were age 55 you could elect payments to be made over a ten year certain period. This means you would be paid $10,000 per year for the next 10 years. If after 3 years you wanted $70,000 out of your plan you could not take that. You would be paid $10,000 ONLY for the remainder of the ten year certain settle option.

THAT is what is meant by, "amoritization and/or annuitization"

We have been over this many times.

Perhaps, but you've not yet comprehended what's been written.
I'm NOT being argumentive.
Did I mention I DO THIS FOR A LIVING?

The 59.5 age is if you roll it over to a private plan.

Absolutely WRONG! The age 59.5 has to do with the 10% early withdrawal penalty from ANY qualified or non-qualified pension plan.

You can quit, get fired, retire at age 49 and rollover your TSP account to any self-directed IRA offered by any bank, investment firm or insurance company WITHOUT any penalty or tax due whatsoever. And you can do this as many times as you like. The next distribution requirement doesn't occur until age 70.5 when one must take their Required Minimum Distributions or face a 50% penalty plus tax on the amount that should of been withdrawn.

READ the link above I provided from the IRS. You are "personalizing" your TSP plan as if its something "different" than any other qualified pension and it is NOT. The rules governing these things are the same regardless of your employer being the Federal Government or a Private Sector Company.

I promise you, if you simply withdraw money from your TSP account PRIOR to age 59.5, EXCEPT for the age 55 "amoritization and/or annuitization" OPTION you will face a 10% penalty.

 

[GarySpicuzza]

See THIS link.

What are the components of the fixed amortization method?

The fixed amortization method consists of an account balance amortized over a specified number of years equal to life expectancy (single life or uniform life or joint life and last survivor) and a rate of interest that is not more than 120 percent of the federal mid-term rate published in revenue rulings by the Service. Once an annual distribution amount is calculated under this fixed method, the same dollar amount must be distributed under this method in subsequent years.

What are the components of the fixed annuitization method?

The fixed annuitization method consists of an account balance, an annuity factor, and an annual payment. The age annuity factor is calculated based on the mortality table in Appendix B of Rev. Rul. 2002-62 and a rate of interest that is not more than 120 percent of the federal mid-term rate published in revenue rulings by the Service. Once an annual distribution amount is calculated under this fixed method, the same dollar amount must be distributed under this method in subsequent years.

 

[clester]

Please read the IRS revenue ruling 2002-62 (all of it) and then respond!

Thousands of people are using 72t's. Go to www.72t.net and you will see. They do not pay the penalty

 

[RAE]

Gary - you're wrong, or you are not understanding what Clester is saying. I copied and pasted this paragraph from the first link you posted earlier today:

You may qualify to take a penalty-free withdrawal if you meet one of the
following exceptions:
You become totally disabled.
You are in debt for medical expenses that exceed 7.5 percent of
your adjusted gross income.
You are required by court order to give the money to your divorced
spouse, a child, or a dependent.
You are separated from service (through permanent layoff,
termination, quitting or taking early retirement) in the year you
turn 55, or later.
You are separated from service and you have set up a payment
schedule to withdraw money in substantially equal amounts over the
course of your life expectancy. (Once you begin taking this kind
of distribution you are required to continue for five years or
until you reach age 59 1/2, whichever is longer.)

Note that the last item above is exactly what Clester is talking about - taking penalty-free withdrawals using the life expectancy method (as he said, thousands of people are doing this as we speak). You can do this from an IRA, and you can do it from your TSP account also.

If you don't believe that, here is a quote from Ed Zurndorfer, moderator over at federalsoup.com:

"There are two ways that a pre-age 55 Federal annuitant may receive
penalty-free (no 10% early withdrawal IRS penalty) TSP distributions.
One way is monthly withdrawals based on life expectancy (the monthly amount is recomputed each year) and the other way is through the purchase of a TSP annuity.

Also, the tsp.gov website provides instructions on how to set up penalty-free withdrawals from a TSP account using the life expectancy method, and even provides a calculator on what the monthly payments will be.

So where is the misunderstanding here??

 

[saturneptune]

See THIS link.

Let's forget about the LEO and ATC for a minute, and just use a federal worker. If a person retires the year in which he turns 55, he can take out equal monthly distributions of his choice changed once a year without the penalty. He can also take an annunity or a payment based on IRS life expectancy. Go to tsp.gov under civilian features on how taxes are treated.