Retired FERS-VERA/VSIP Considering 72(t) TSP Withdrawal Options

[evilanne]

I called TSP and found out that once you set up monthly payments (life expectancy), you cannot do a partial withdrawal without doing a full withdrawal so I would have to do a partial withdrawal before setting up payments. It appears that some TSP forms have option to transfer all or a part of monthly payments to an IRA, however, it excludes payments based on life expectancy and payments that will last for 10 or more years. Has anyone with Life Expectancy monthly payments found a way to get around this?

If I do a partial withdrawal to an IRA, my intent is to gradually transfer some (or all) to my Roth IRA. The purpose of adding Roth is (1) to serve as an tax free emergency fund (2) avoiding RMDs at 70.5, (3) to manage taxable income more effectively and (4) tax free growth for benificiary(s). Marginal tax rate should be 25% when I start TSP life expectancy withdrawals, but there is a lot of tax stuff that I don't understand (e.g. What counts as Ordinary Income? How the Tax ranges work when you have both Ordinary Income & Qualified Dividends/LT Capital Gains?). Twenty five percent seems like a lot of tax and my effective tax rate as calculation by Turbo Tax is generally at or under 15%, but that is calculated based on AGI before deductions/exemptions.

If anyone with both Roth & Traditional contributions, what percentage of your accounts are in Roth?

Referencehttps://www.irs.gov/publications/p590a/ch01.html#en_US_2015_publink1000230563 Excerpts:

Converting From Any Traditional IRA Into a Roth IRAAllowable conversions. You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution.

Application of one-rollover-per-year limitation. Beginning in 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 1-year period regardless of the number of IRAs you own. The limit will apply by aggregating all of an individual's IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit. However, trustee-to-trustee transfers between IRAs are not limited and rollovers from traditional IRAs to Roth IRAs (conversions) are not limited.

Converting From Any Traditional IRA Into a Roth IRA
Allowable conversions. You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply. However, a part or all of the distribution from your traditional IRA may be included in gross income and subjected to ordinary income tax.

Periodic distributions. If you started taking substantially equal periodic payments from a traditional IRA, you can convert the amounts in the traditional IRA to a Roth IRA and then continue the periodic payments. The 10% additional tax on early distributions will not apply even if the distributions are not qualified distributions (as long as they are part of a series of substantially equal periodic payments). [This is what I want to do with TSP but cannot]

Income. You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA.

 

[evilanne]

uscfanhawaii,
I don't have any issues with the withdrawal options since all of my contributions are traditional and same rules apply whether in TSP or in IRA for me (IRAs provide a little more flexibility than TSP with withdrawals). By the time they introduced Roth option, it didn't make sense for me but I wish I would have learned about advantages of Roth IRAs outside of TSP sooner as you can contribute to both TSP + outside Roth. This year will be last year I can contribute to Roth unless I decide to get a part time job in the future as you can only contribute earned income but I have small IRA that I'm considering transitioning to my Roth. I wish I would have thought about this back in January or February when the market corrected as tax impact would have been less. Reading the different threads have given me a better understanding of the different issues.

For those with Roth in TSP, it is possible to get Roth extracted but it would take some work to set up two separate accounts on the outside. I would suggest transferring traditional back to TSP because the G Fund pays interest while brokers don't pay interest on cash balances. It would be nice if they got rid of the proportional method for transactions and allowed you to designate the fund for withdrawals, which would increase chances of employees remaining in TSP after separation. For loans, they used to make you have a certain amount in the G Fund that would cover the loan amount--it would make sense to do the same for distributions as you wouldn't have to worry about volatility in the stock funds. You could designate the fund annually along with your or for those that put all their funds in a single fund that would be the only option. FRTIB is looking at possible changes to TSP, but unfortunately their process is very slow.

Buster,
I'm still learning and primarily concerned with capital preservation as the market has been difficult to read the last 2 years. Still waiting for a significant correction or signs of real improvement in the economy as I can't afford big losses like what happened in the last recession.
I have 2 nuerotic mutts, an adult:hmmm: son that is trying to find he way and an aging mother, but other than that I'm foot loose & fancy free

 

[uscfanhawaii]

Once you reach 71.5, you have to take RMDs in regular IRAs and TSP and they are designed to be depleted within your life time. The Roth doesn't require RMDs and can be used as an emergency funds later in life (as your IRAs are decreasing) or be passed along to your heirs.

And so you now have touched on another example of the poor withdrawal options of TSP!

TSP will not let you withdraw only Traditional TSP funds. So even though you are not required to withdraw TSP Roth funds by federal law, TSP will only let you withdraw both Traditional and Roth in prorated amounts. Not good!

 

[Buster]

WOW Anne!!..seems you've done your homework and have a pretty good grasp of your future finances...

No need to ask for advice here, we should be coming to you for the tips and tricks...Nice going my dear..BTW are you taken?

 

[evilanne]

Just and idea..

When I retired at 55 (CSRS-2010)..I took my TSP funds and rolled them over into an IRA account and let a financial management firm take control...I don't even make contributions any more..And I don't worry about it anymore either, just waiting til I'm 72, when I'll be forced to take my annuities ...They take care of my so-called portfolio and guaranty an annual yield of 5% no matter what the market is doing....so far, I've been seeing a 7% to 9% yield annually and so it grows..Yes I do pay a 1% brokerage fee...Pennies on the dollar..no muss no fuss.

Thank you for responding Buster,

I do have brokerage accounts outside of TSP, however, I think I've done better in my TSP account [annual TSP statement 31 Dec 2015 shows 5 years rate of return 9% even with barely any earnings in 2015; Brokerage account took big hit on oil related assets in 2015] Although there are some instruments with insurance companies tied to the market, they limit your potential gains if they guarantee you not to lose money. They cannot guarantee any specified rate of return with stocks or mutual funds and you pay fees whether you sell at a gain or loss, just look at any fund prospectus.

FERS is much different from CSRS. Under CSRS you are getting probably getting 2/3rds of your High 3 salary, whereas, I am currently getting less than 30%. Based on years of service, my pension is 45% less than what it would be using CSRS calculation (1.5% x 1st 5 years + 1.75% 2nd 5 years + 2% All years>10). The reason for TSP w/matching was to make up part of the difference under our 3 legged stool approach to retirement under FERS, with the last leg being Social Security. Since I'm under my MRA, I have to wait 4 years before I get the supplement and I won't get any COLA on my pension until age 62. Therefore, waiting until RMDs are required at 71.5 isn't a good option under FERS.

Financially, I could probably manage with just the pension for at least a few years since I have some passive income, savings and no mortgage, but it makes more sense to figure out a plan to manage income streams within a certain range. Once you reach 71.5, you have to take RMDs in regular IRAs and TSP and they are designed to be depleted within your life time. The Roth doesn't require RMDs and can be used as an emergency funds later in life (as your IRAs are decreasing) or be passed along to your heirs.

 

[MDWVcats]

I am 56 with 33 years and just beginning to look at possibilities. Any chance that you could let us know who the financial management firm is? Having a guarantied yield of 5% sounds great....

 

[Buster]

TSP Withdrawal Strategy under 55 & MRA
I’m currently trying to figure out a plan for TSP withdrawals—Soonest will be 2017. I will be locked into life expectancy withdrawals until age 59.5 once I start. I am ok with where I am right now. Since I will not get the supplement until 2020, it may be worthwhile to do a partial rollover in December 2019 to an IRA to lower the TSP monthly payments. I have always been open to transferring a portion of my account outside of TSP with adequate reason to do so. Not sure if this will work or not. If permissible, I can either leave it as an IRA or convert some gradually to Roth. Any thoughts?

Just and idea..

When I retired at 55 (CSRS-2010)..I took my TSP funds and rolled them over into an IRA account and let a financial management firm take control...I don't even make contributions any more..And I don't worry about it anymore either, just waiting til I'm 72, when I'll be forced to take my annuities ...They take care of my so-called portfolio and guaranty an annual yield of 5% no matter what the market is doing....so far, I've been seeing a 7% to 9% yield annually and so it grows..Yes I do pay a 1% brokerage fee...Pennies on the dollar..no muss no fuss.

 

[evilanne]

Tools & References
Calculators:
TSP's Retirement Income Calculator https://www.tsp.gov/PlanningTools/Calculators/retirementCalculator.html
72(t) Calculators https://72t.net & http://www.dinkytown.net/java/Retire72T.html
Marginal Tax Rate Calculatorhttps://www.dinkytown.net/java/TaxMargin.html
What is my life expectancy? http://www.calcxml.com/do/ins02
General Info:
TSP Withdrawals After Leaving Federal Service: https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals/withdrawals/index.html & https://www.tsp.gov/PDF/formspubs/tspbk02.pdf
Withdrawals After Leaving Federal Service:https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals/withdrawals/index.html& https://www.tsp.gov/PDF/formspubs/tspbk02.pdf
Investopedia Rule 72(t)
http://www.investopedia.com/terms/r/rule72t.asp
Turning Your TSP Into an Income Stream http://www.fedsmith.com/2016/07/12/turning-your-tsp-into-an-income-stream/
IRS Tax Topics:
Retirement Topics - Exceptions to Tax on Early Distributionshttps://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions
Tax Topic 557 - Additional Tax on Early Distributions from Traditional and Roth IRAs: https://www.irs.gov/taxtopics/tc557.html
Tax Topic 558- Additional Tax on Early Distributions from Retirement Plans Other Than IRAs https://www.irs.gov/taxtopics/tc558.html
IRS Publications:
721, Tax Guide to U.S. Civil Service Retirement Benefits https://www.irs.gov/publications/p721/ or https://www.irs.gov/pub/irs-pdf/p721.pdf
575, Pension and Annuity Income https://www.irs.gov/publications/p575/
590-B, Distributions from Individual Retirement Arrangements (IRAs)—(Appendix B Life Expectancy Tables) https://www.irs.gov/publications/p590b/ or https://www.irs.gov/pub/irs-pdf/p590b.pdf
Forms:
TSP-3, Designation of Beneficiary https://www.tsp.gov/PDF/formspubs/tsp-3.pdf
TSP-70, Request for Full Withdrawal https://www.tsp.gov/PDF/formspubs/tsp-70.pdf

 

[evilanne]

Actual retirement date: 29 Feb 2016 (Leap year seamed appropriate since everyone said they would never offer it to our career series.)
Planned retirement datewas July 2020 MRA
My organization offered VERA/VSIP end of FY15;
After submitting application, requested agency retirement estimate (Swapped AL taken for bereavement to SL IOT reduce SL balance that would not count & take more time off for holidays)
VERA/VSIP on hold decision placed on hold to FY16 CRA-no new expenditures even if it saves money.
FEHB Open Season Changed Insurance from BCBS to Foreign Service Benefit Plan (lower cost but must be current employee)
Sent in retirement Package after FEHB change registered in system
Army Benefits Center (ABC) recommend 60-90 advance but only start working package 30-45 days prior to actual retirement date. Last day of work 29 Feb 2016 (mid pay period) Age 51; 28.75 years FERS; I will get supplement at MRA.
Maximize TSP contributions in short period is challenging
Received payment of leave in final pay check

OPM processing has improved—no major complaints
—April 1, 2016 received partial payment from OPM (3 months)
—Mid June adjustment received and full payment started in July. My experience similar to what others have posted. Timing of notices & booklet and OPM web site info sometimes didn’t coincide.

VSIP Delay Issue: Contacted ABC re: VSIP, referred me to DFAS but they had no pending payment. April 8 after run around & no sign of VSIP payment in MyPay, I contacted local HR office that contacted ABC, who claimed they were missing form & it would be 4 weeks to process once they got it. (Provided documentation of form faxed to ABC 01 Feb. Due to their lies, I suggested that I may have to contact my congressional representative if payment wasn’t expedited, ABC supervisor contacted me to provide status on several occasions). Due to ABC’s error, DFAS issued check 04/28/16 rather than direct deposit.

Lessons that may be helpful to others
—ABC personnel vary, keep calling until you get an adequate answer. Few people understand how DFAS & our payroll system works—it is what is programed into the computer system that counts.
—You can apply 100% of your pay to TSP if you’re ok with no paycheck; if you use a percentage or dollar amount that exceeds available pay, no deduction will be made;
—VSIP require RPA issued by your organization that has funds to pay it.
—Make sure you have user name/password for systems you may need in retirement, e.g. DFAS MyPay
—Make sure you have copies of everything submitted, preferably in electronic format.
—No agency wants a congressional inquiry
—If your planning to move after retirement, use a national Fee for Service plan, which I prefer anyways.
—Under 55, only way to access TSP without penalty is life expectancy payments

TSP Withdrawal Strategy under 55 & MRA
I’m currently trying to figure out a plan for TSP withdrawals—Soonest will be 2017. I will be locked into life expectancy withdrawals until age 59.5 once I start. I am ok with where I am right now. Since I will not get the supplement until 2020, it may be worthwhile to do a partial rollover in December 2019 to an IRA to lower the TSP monthly payments. I have always been open to transferring a portion of my account outside of TSP with adequate reason to do so. Not sure if this will work or not. If permissible, I can either leave it as an IRA or convert some gradually to Roth. Any thoughts?