Substantial Payments

[Wandering_Doug]

Greetings, All.

I am retiring at the end of the month, FERS air traffic control; I'm 51. I am well aware of the lump sum withdrawal penalties and taxes. My question has to do with also including a series of payments.

I was told outright at a retirement seminar that if I request a series of "equal and substantial" payments that last at least 5 years and don't end until I'm 59 1/2, then there will be no penalties associated with those payments. However, when I speak with someone at TSP over the phone, they tell me that I "may incur a 10% penalty" for those withdrawals.

I tend to infer that the TSP customer service answer of, "may incur a penalty" is kind of a CYA thing, since I know if I stop/change the payments before 5 years has elapsed, all withdrawals up to that point will be penalized. However, I cannot get a straight answer to my basic question. Here's the plan outright:

After retirement and in the new year (for tax purposes), we will be withdrawing approximately half of our TSP in a lump sum. I'm aware that I will take a 10% penalty hit, and that 20% will be withheld for tax purposes. Sub question: will the penalty come off the top of the withdrawal like the withholding, or will the penalty be assessed on my remaining balance?

The big question: we plan to withdraw the remainder of our account as a series of equal substantial payments. I intend to set the payment amount so that these payments will last at least until I turn 59 1/2. So, will I take 10% penalties on those withdrawals, or will I avoid the penalties by stretching the withdrawal out until 59 1/2?

Thanks in advance for the advice!

Doug

 

[clester]

You have to use 1 of the 3 approved methods for withdrawals to avoid the 10% penalty. They are all based on your life expectancy. Its a 72t rule withdrawal. At 59.5 you can change to a monthly payment of your choosing once a year that will start each January. No penalties after 59.5 just taxes.

 

[clester]

You have to use 1 of the 3 approved methods for withdrawals to avoid the 10% penalty. They are all based on your life expectancy. Its a 72t rule withdrawal. At 59.5 you can change to a monthly payment of your choosing once a year that will start each January. No penalties after 59.5 just taxes.

Be aware if you change the payment amount early you get charged all penalties from when you started the plan. Tsp will do the minimum payment version for you and cide it as exempt from penalties. If you use a 72t like I did you just have to claim your exempt on your tax return. No biggiem been doing it for 4 years. So, the amount you pick from a 72t is set in stone until 59 5. No cola for yourself. Also, supplement is set in stone too until age 62 when they move you over to social security .

 

[Bquat]

I get my 5 years in February but have to wait until December of next year to make the change. Wonder if I can take this years form and use it in March. Well at least I turn 62 this month and get a pay raise next month.

 

[weatherweenie]

Don't know if this helps, but it's from the TSP website:

If you receive a TSP withdrawal payment before you reach age 59½, in addition to the regular income tax, you may have to pay an early withdrawal penalty tax equal to 10% of any taxable portion of the payment that is not transferred or rolled over. However, if you are age 55 or older in the year you separate or retire, the 10% early withdrawal penalty tax does not apply.

https://www.tsp.gov/lifeevents/entering/enteringRetirement.shtml#early

 

[tsptalk]

Is there an exception to the tax for distributions in substantially equal periodic payments?

Yes. If distributions are made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary, the §72(t) tax does not apply. If these distributions are from a qualified plan, not an IRA, you must separate from service with the employer maintaining the plan before the payments begin for this exception to apply. If the series of substantially equal periodic payments is subsequently modified (other than by reason of death or disability) within 5 years of the date of the first payment, or, if later, age 59½, the exception to the 10% tax does not apply. In that case, your tax for the modification year is increased by the amount that would have been imposed (but for the exception), plus interest for the deferral period.

More: Retirement Plans FAQs regarding Substantially Equal Periodic Payments

[url]http://www.irs.gov/pub/irs-irbs/irb02-42.pdf
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