Just wondering if anyone out there has used this option to draw on their TSP account? If so, did you leave your money in the TSP to do it, or did you roll it over into something else. I am planning on maybe leaving it in the TSP and using the 72T option at age 53. Just to make sure, I am right in assuming you can leave your money in the TSP and use this option if so desired, right?
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TSP/ 72t option.
- Thread starter diggusa
- Start date
Bquat
Well-known member
I left mine in TSP. I figured 5% of my account and divided it into equal monthly payments. I'm locked into this monthly amount for 5 years because of the 59 1/2 rule. When I turn 62 I will probly raise it to 7.5% because of good gains. I checked about transfering to and IRA but they only would offer me 5 1/2 % and 25 points for suvivor benifits and they get control of you money. Might be an option for my wife later because she can't trade. Made 11.35 % this year in an even market and emailed the accountant. She was impressed and must be used to working with the financial illiterate. They control your money, invest it and make as much as you on your money. He husband does work for the government and asked me for directions to this site. Her company has the contract for the teachers and staff at UTEP and make them 3%. So they get paid to manage it and make profit off it too. The 3% may just be for this "bad" year. I told her I keep sending her updates each year to show that they don't offer much. I was trying to get her boss to allow 7% but he wouldn't. They might go back up when interest rates go up. I might consider 8% some time down the road. My funds are under my controll and I can beat them with the help of this site.
At what age did you do this? I was told you had to let TSP figure your monthly amount under the life expectancy tables to keep from getting hit with the 10% penalty. I started another thread hoping I could get someone to explain all options for early withdrawal.
Kaufmanrider
Member
What is the 591/2 rule? I thought that if you started withdrawal from your TSP in monthly payments (either on life expectancy or a specfic dollar amount) you could write TSP once a year and change the amount. At least that's what I was told at Retirement Training.
Bquat
Well-known member
I think you might be able to change it slightly like you say but I don't know for sure. When I did it they said I couldn't change it until 59 1/2 or 5 years whichever came later.. I didn't whant to take a chance. I thought the yearly change was for those over 59 1/2.
clester
Well-known member
This is wrong. If you start a 72t plan prior to age 59.5 you cannot change it. If you do you will incur the retroactive penalty for all years. Also, it has to last at least 5 years before changing. After age 59.5 you can change to monthly payments and change the amount.
There are 3 options under 72t rules. I took amortization so I could take out the max. If you are interested I reccommended www.72t.net . It has all the info you will need. I started mine at age 51. So, I cannot change the monthly payments till I am 59.5. Also, I left it in TSP. if you use minimum distribution, they will calculate it for you each year. This method does change each year based on your balance. If you choose another method you will need to do the calculations yourself and request monthly payment from tsp in that amount. When you file taxes you will have to file a form 5329 to claim exemption from 10% penalty. If tsp does the min dist for you you don't have to do this.
So you are saying I can decide the amount of monthly payments I want as long as they add up to being over 120 payments making them considered periodical?
Kaufmanrider
Member
I did some checking very confusing. Different answers from different people. Even the IRS isn't sure, especially in my case, as I am a Federal LEO, so things are slightly different for us. On one hand, there is an IRS Publication that defines eligible Public Safety Officers (PSO) as State, Count, City. They can withdraw by law at 50 with no penalty. The term Public Safety Officer is used in many places/forms by the IRS uses two definitions? Supposedly one for withdrawal of funds from TSP and one for deducting health insurance premiums from Federal Taxes. The State/County/City came out around 2001. However, in 2006 the Public Safety Officer Pension Protection Act was passed, allowing among other things, a 3,000 annual health insurance tax deduction for PSO's. According to the IRS they use the US DOJ definition of PSO's, which would include Federal PSO's.
I contacted a friend who retired from my agency in the year in which he turned 50 (which I will probably do). He took all his TSP, lump sum (I'll do monthly payments). The next year, after filing taxes, the IRS informed him he did not qualify for the exception and owed the 10% penalty. He spoke to the IRS and ended up mailing them some documents they requested to prove he qualified. Our agency, upon our retirement, issues us a certificate of service, verifying we retired from Federal Service as a LEO/PSO. He sent that in, with a nice letter quoting the IRS Publication regarding PSO exemptions and the Federal definition of PSO's in Title 42, USC, and Title 5, USC, and Attorney General.
Long story short, they ruled in his favor and told him he, as a Federal LEO, qualified.
Now I don't want to to lump sum, monthly payments are fine, but I may want more than the 72T provides. I might just have to roll the dice, follow his lead, and see if I can get by if they audit me. I'll do more research and time will tell. Someone told me the IRS has to except a prior IRS determination regarding a similiar tax issue? Anyone know?
Just wanted to throw that out there for any LEO's in the group.
clester
Well-known member
On 72t.Net |IRC Section 72(t) | 72t Distribution | 72t Calculators | SEPP Plans there are lots of irs decisions where people have challenged and won. They probably will know about using past cases. I know it costs a lot to challenge.
SkyPilot
Well-known member
Been through this before... our TSP account is not a defined benefit, but rather a 401k style self directed retirement fund (rather, a "defined CONTRIBUTION plan".
Our defined benefit is our pension, (that is, there is a specific formula for calculation and payout based on years of service, high salary, etc.) and that we receive without penalty.
It really is not about being an eligible "public safety officer" so much as it being that our TSP accounts are not a "defined benefit".
This is how it has been explained to me...
http://www.opm.gov/oca/leo_report04/part_ii.asp
http://en.wikipedia.org/wiki/Federal_Employees_Retirement_System
Our defined benefit is our pension, (that is, there is a specific formula for calculation and payout based on years of service, high salary, etc.) and that we receive without penalty.
It really is not about being an eligible "public safety officer" so much as it being that our TSP accounts are not a "defined benefit".
This is how it has been explained to me...
http://www.opm.gov/oca/leo_report04/part_ii.asp
http://en.wikipedia.org/wiki/Federal_Employees_Retirement_System
Kaufmanrider
Member
Thanks for the links Skypilot, but they really don't answer the tax question. I agree the TSP is a defined contribution plan, simliar to a 401K, not a defined benefit. As such, accordingly it is taxed and treated by the IRS as a 401K.
So the question is, under 55, can we withdraw money without a 10% penalty? Do we have to follow the 72T rules, or can we claim the Public Safety Officer exemption for withdrawals?
That's the question. I had one IRS employee tell me they were not sure, and one who told me yes we could. My agency tells me no I can't. But I know a retiree who did, and won.
I don't think anyone really knows. I guess it's a roll of the dice?
The only way to know for sure is for the IRS, or President/Congress to spell it out. I know AFGE has been working on it since 2009. Hopefully we will get a resolution before we retire.:cheesy:
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SkyPilot
Well-known member
No, we may not withdraw from the Defined Contribution plan without penalty.
The PSO exemption applies only to the Defined Benefit (pension), of which we do draw on without penalty already.
PSO's other than LEO's who might have Defined Contributions (similar to our TSP) as well are not exempt from penalties either.
It is only pensions that are allowed the exemption, not Defined Contributions i.e., TSP accounts.
Therefore, it is quite clear, with nothing to be confused over...
Specifically, it is Defined Benefit (pensions) that may be subject to exemption. There is no reference anywhere I can find for anyone that gives a penalty exemption to withdrawal from a Defined Benefit, except that we as LEO's already receive an exemption if we begin to withdraw in the year in which we turn 55, otherwise we have to wait until 59 and 1/2.
The PSO exemption applies only to the Defined Benefit (pension), of which we do draw on without penalty already.
PSO's other than LEO's who might have Defined Contributions (similar to our TSP) as well are not exempt from penalties either.
It is only pensions that are allowed the exemption, not Defined Contributions i.e., TSP accounts.
Therefore, it is quite clear, with nothing to be confused over...
Specifically, it is Defined Benefit (pensions) that may be subject to exemption. There is no reference anywhere I can find for anyone that gives a penalty exemption to withdrawal from a Defined Benefit, except that we as LEO's already receive an exemption if we begin to withdraw in the year in which we turn 55, otherwise we have to wait until 59 and 1/2.
SkyPilot
Well-known member
Frequently Asked Questions About Pension Plans And ERISA
What are defined benefit and defined contribution pension plans?
Generally speaking, there are two types of pension plans: defined benefit plans and defined contribution plans. A defined benefit plan promises you a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service - for example, 1 percent of your average salary for the last 5 years of employment for every year of service with your employer.
A defined contribution plan, on the other hand, does not promise you a specific amount of benefits at retirement. In these plans, you or your employer (or both) contribute to your individual account under the plan, sometimes at a set rate, such as 5 percent of your earnings annually. These contributions generally are invested on your behalf. You will ultimately receive the balance in your account, which is based on contributions plus or minus investment gains or losses. The value of your account will fluctuate due to changes in the value of your investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans. The general rules of ERISA apply to each of these types of plans, but some special rules also apply. To determine what type of plan your employer provides, check with your plan administrator or read your summary plan description.
A money purchase pension plan is a plan that requires fixed annual contributions from your employer to your individual account. Because a money purchase pension plan requires these regular contributions, the plan is subject to certain funding and other rules.
What are defined benefit and defined contribution pension plans?
Generally speaking, there are two types of pension plans: defined benefit plans and defined contribution plans. A defined benefit plan promises you a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service - for example, 1 percent of your average salary for the last 5 years of employment for every year of service with your employer.
A defined contribution plan, on the other hand, does not promise you a specific amount of benefits at retirement. In these plans, you or your employer (or both) contribute to your individual account under the plan, sometimes at a set rate, such as 5 percent of your earnings annually. These contributions generally are invested on your behalf. You will ultimately receive the balance in your account, which is based on contributions plus or minus investment gains or losses. The value of your account will fluctuate due to changes in the value of your investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans. The general rules of ERISA apply to each of these types of plans, but some special rules also apply. To determine what type of plan your employer provides, check with your plan administrator or read your summary plan description.
A money purchase pension plan is a plan that requires fixed annual contributions from your employer to your individual account. Because a money purchase pension plan requires these regular contributions, the plan is subject to certain funding and other rules.
SkyPilot
Well-known member
In the attached document, the AFGE asserts how unfair it is that FLEO's due to the use of the terms Defined Contribution and Defined Benefit, may not receive an additional exemption to the penalty imposed on all other federal employees who would withdraw from their Defined Contribution plan (no penalty for withdrawal beginning in the year in which one turns 55).
The document asserts very clearly that present law does not allow FLEO's to receive an additional exemption (beyond the first exemption i.e., age in which one turns 55 as opposed to waiting until 59 1/2).
Therefore the AFGE understands that there is no IRS additional exemption for Defined Contribution plans beyond what is already in place, and that we enjoy now what law gives to non federal PSO's in that we owe no penalty when we receive our pensions (Defined Benefit).
http://www.cpl33.info/files/Leg_Drop_Sheets_Dec.pdf
The AFGE wants exemptions for both Defined Benefit and Defined Contribution beyong what we already enjoy, and beyond what non federal PSO's have.
Non federal PSO's who may have TSP like Defined Contribution plans do not receive the Defined Benefit exemption on their Defined Contribution plans either.
The document asserts very clearly that present law does not allow FLEO's to receive an additional exemption (beyond the first exemption i.e., age in which one turns 55 as opposed to waiting until 59 1/2).
Therefore the AFGE understands that there is no IRS additional exemption for Defined Contribution plans beyond what is already in place, and that we enjoy now what law gives to non federal PSO's in that we owe no penalty when we receive our pensions (Defined Benefit).
http://www.cpl33.info/files/Leg_Drop_Sheets_Dec.pdf
The AFGE wants exemptions for both Defined Benefit and Defined Contribution beyong what we already enjoy, and beyond what non federal PSO's have.
Non federal PSO's who may have TSP like Defined Contribution plans do not receive the Defined Benefit exemption on their Defined Contribution plans either.
Kaufmanrider
Member
So the IRS made a mistake with they audited and reviewed the case of a friend of mine when they granted him the exemption from the penalty when he took the lump sum withdrawal at age 50? It took them over two weeks to render a decision to him.
Either that, or they simply just don't want to advertise it?? Something to think about.
Either that, or they simply just don't want to advertise it?? Something to think about.
SkyPilot
Well-known member
Yes, either the IRS has given the wrong answer, or they have given the correct answer but your friend has not accurately discerned the ruling and is wrongly applying the response to the wrong benefit of the two. In any regard, he may want to revisit the question so as not to end up in the "penalty box". I first became aware of this discussion as an investment adviser who claimed to be a FLEO invest expert was encouraging soon to be retired employees to roll their TSP accounts into his companies IRA products, and claimed that they could probably be "exempt" from this penalty (referring to those who had not yet reached the year in which they would turn 55)... He did not understand the difference between Defined Benefit and Defined Contribution either. Was bummed when he came to understand that our Defined Contribution (TSP) account was off limits!
SkyPilot
Well-known member
One more question...
When he took the lump sum withdrawal, did he put it into another non accessible fund i.e. "rollover", that mirrored the TSP 401k, such as an IRA, etc... if so, then there would be no penalty as he is still not accessing the money before 59 1/2. If this is the case, then no penalty would apply as no access has been made.
When he took the lump sum withdrawal, did he put it into another non accessible fund i.e. "rollover", that mirrored the TSP 401k, such as an IRA, etc... if so, then there would be no penalty as he is still not accessing the money before 59 1/2. If this is the case, then no penalty would apply as no access has been made.
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Kaufmanrider
Member
He took all of his TSP out as a lump sump in the year that he turned 50. The year he retired. The IRS ruled that he, as a Federal Law Enforcement Officer, qualified as a Public Safety Office in accordance with the law (Pension Protection Act) and qualifed for the age 50 PSO exemption.
He had a face to face, and presented his retirement doc's provided to him by Grand Prairie. They said that was all they needed. Got back with him a couple weeks later via a letter informing him he was good.
I think the confusion is the IRS uses two different definitions of a qualified Public Safety Officer in their assessment of the Pension Protection Act of 2006. On one hand they say a PSO is a State, County, City, PSO in regards to the 10% withdrawal penatly. Then for the $3000 Health Insurance/Long Term Care Insurance deduction, they ruled that Federal, State, County, and City, PSO's qualified.
I know the AFGE and a couple Congressman have previously asked the IRS for clarification on the PSO issue. To date, none has been provided that I know of. So I guess it is a crap shoot, case by case if you try and get it.
I heard, I think it was from the FOP, that they were told the IRS would use the DOJ and US Code definition of a Publice Safety Officer, from I think 1968, which includes states Fed's, State, City, County etc, Law Enforcement, Fire Fighters, Chaplains (working in a LEO agency of Fire Department), and I think Emergency Medical Services personal.
I have a year and some months till I need to consider which way I am going to go. I'll continue to research. And I do have the sample letters my friend sent. And down the road if needed, he told me he would give me a copy of his IRS letter for additional ammunition, if needed.
I'll keep you posted.
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SkyPilot
Well-known member
We as FLEO's do qualify for the exemption as PSO's, and receive it for our Defined Benefit Pensions just as non FLEO's do.
Non FLEO PSO's do not have an exemption for a Defined Contribution Plan (non pension) and neither do we.
The question is not whether or not we are PSO's.
The question is "what do PSO's qualify for"?
All PSO (federal and otherwise) qualify for the exemption related to the Defined Benefit (Pension).
FLEO's have an extra benefit exemption as we are exempt from the 10 penalty imposed on withdrawal of our Defined Contribution Plan (TSP) if we retire in the year in which we turn 55.
The IRS would need a law change to allow any PSO (Federal or otherwise) to receive an exemption beginning at age 50 to withdraw penalty free from a Defined Contribution Plan i.e., TSP, 401k, IRA, etc...
In summary, all PSO's must pay a penalty if they withdraw from their Defined Contribution plan early, outside of the prescribed allowance, that being the year in which they turn 55 or 59 and 1/2 respectively.
Non FLEO PSO's do not have an exemption for a Defined Contribution Plan (non pension) and neither do we.
The question is not whether or not we are PSO's.
The question is "what do PSO's qualify for"?
All PSO (federal and otherwise) qualify for the exemption related to the Defined Benefit (Pension).
FLEO's have an extra benefit exemption as we are exempt from the 10 penalty imposed on withdrawal of our Defined Contribution Plan (TSP) if we retire in the year in which we turn 55.
The IRS would need a law change to allow any PSO (Federal or otherwise) to receive an exemption beginning at age 50 to withdraw penalty free from a Defined Contribution Plan i.e., TSP, 401k, IRA, etc...
In summary, all PSO's must pay a penalty if they withdraw from their Defined Contribution plan early, outside of the prescribed allowance, that being the year in which they turn 55 or 59 and 1/2 respectively.
Kaufmanrider
Member
Or, if under 55, in accordance with rule 72T, monthly payments based on life expectancy.
I wonder how many PSO's who retired before age 55, and I a sure there are many, are aware, or pay any penalty on TSP monthly distributions?
