|
All about the TSPGO! and your TSP Withdrawl Options |
|
Withdrawal Options By Tammy Flanagan A big decision you will face when you begin retirement planning is what to do with the funds in your Thrift Savings Plan account. The procedure appears painless because your choices are laid out on one easy form, TSP-70. There are three basic options for a full withdrawal: a cash payment, a series of monthly payments or an annuity. But then it starts to get complicated. The cash payment can be transferred (or partially transferred) to another retirement account or paid directly to you. Plus, there are 18 types of annuities and two monthly payment options. You can mix and match these choices into hundreds of possible combinations. And that's assuming you want to make a full withdrawal. There's a different form, TSP-77, to request a partial withdrawal. This option allows you to get some of your money now and decide about the rest later. You will be taxed on the amount withdrawn unless you choose to transfer some or all of it to an IRA. This week, we will explore the withdrawal options available to retired federal employees and those who have resigned from government service, looking at the advantages and disadvantages of each. Tax Issues Since there are tax issues related to TSP withdrawals, be sure to take the time to understand the tax consequences of your decisions. Start by looking at the TSP's tax notice linked in the Resources section below. If you receive a TSP distribution before you reach age 59½, in addition to the regular income tax, you may have to pay an early withdrawal penalty equal to 10 percent of any portion of the distribution not transferred or rolled over. The additional 10 percent tax generally does not apply to payments that are: Paid after you separate from service during or after the year you reach age 55. Made because you are totally and permanently disabled. Paid as substantially equal payments over your life expectancy. Annuity payments. Ordered by a domestic relations court. Made because of death. Made in a year in which you have deductible medical expenses that exceed 7.5 percent of your adjusted gross income. This means that if you retire (or resign) in the year you reach age 55 or later, there is no early withdrawal penalty on your TSP distributions. This also means if you are eligible to retire and do so before age 55 (this could apply to law enforcement officers or those taking voluntary early retirement or discontinued service retirement), you will be subject to this penalty on most distributions taken prior to age 59½ . In this situation, you might want to postpone your TSP withdrawal until you reach 59 ½ or later, unless you are covered under one of the exceptions listed above. Below are three different TSP withdrawal options, and points to consider when weighing them: Transfer to an IRA or Employer's 401k This option provides more investment opportunities than the TSP's C, F, G, S and I funds, enabling you to diversify. Money in an IRA can be accessed when you need it. You can take as much out as you want, when you want it. The payment options available through the TSP require a monthly distribution payout. A spouse or a nonspouse beneficiary can inherit an IRA and distribute the amount over his or her life expectancy to reduce the tax burden. Conversely, only a spouse can keep an inherited TSP account tax-deferred, by transferring it to his or her own retirement account. Transferring money from the TSP requires some effort. You must set up the plan to accept the transfer and choose the investment mix. This takes some knowledge about investing, or the help of a professional. It can cost more than maintaining your investment in the TSP and at least initially involve a substantial investment of your time. Tax treatment of withdrawals from IRAs is a little different than the treatment of TSP withdrawals. This includes the tax on withdrawals by people under age 59½ and rules pertaining to minimum distributions required after age 70½. If you are willing to pay the taxes and are eligible, you may also transfer your TSP to a traditional IRA and then on to a Roth IRA for tax-free growth. Monthly Payments This option allows you to receive a steady flow of income on a monthly basis. There are two basic choices: Either a specific dollar amount (which can be changed annually and must be a minimum of $25), or a life expectancy computation, which divides your TSP balance by a factor based on your age. Such payments are recomputed each year. You can also change to a final single payment at any time. This would allow you to transfer the balance to an IRA in order to change the frequency of the payout or to reinvest the balance in other investments. You can make a one-time-only change from TSP-computed payments based on life expectancy to a specific payment amount of your choice. Changes to the amount of your payment will become effective only once a year - on Jan. 1, if your request is received by Dec. 15 of the preceding year. By choosing monthly payments, your balance still is available should you decide to do something different later on. If the dollar amount you choose for a monthly payment will result in less than 120 payments, you may choose to transfer a portion of each payment to an IRA. This would allow you to gradually reinvest the balance of your TSP account into another IRA over a period of up to 10 years. While you are receiving payments, the balance in your TSP account continues to be invested, stays tax-deferred, and you may continue to make interfund transfers. Let's look at some examples showing TSP distributions of monthly payments. First, some assumptions: Balance: $100,000 Age at first payment: 60 Projected future interest rate: 6 percent (balance in account continues to be invested in TSP funds) Now, for the examples: Elected payout: $1,000/month Number of payments until account is depleted: 139 Length of time before account is depleted: 11 years, 7 months Elected payout: $600/month Number of payments until account is depleted: 359 Length of time before account is depleted: 29 years, 11 months Life Expectancy Payout: Assuming your payments began in January of the year you are age 60, your estimated monthly payment amounts would be as shown in the table below: Age 60: $ 330.69 Age 75: $ 459.57 Age 61: $ 348.59 Age 76: $ 486.30
Age 62: $ 368.94 Age 77: $ 512.08 Age 63: $ 388.71 Age 78: $ 541.70 Age 64: $ 411.30 Age 79: $ 570.01 Age 65: $ 433.07 Age 80: $ 599.57 Age 66: $ 455.84 Age 81: $ 630.39 Age 67: $ 479.64 Age 82: $ 662.50 Age 68: $ 504.49 Age 83: $ 695.89 Age 69: $ 530.39 Age 84: $ 730.56 Age 70: $ 345.82 Age 85: $ 761.31 Age 71: $ 366.13 Age 86: $ 792.61
Age 72: $ 387.60 Age 87: $ 824.35 Age 73: $ 410.29 Age 88: $ 856.37 Age 74: $ 434.26 Age 89: $ 888.50 Age 90+ Payments continue until account is depleted, another option is elected or until death Annuities There are five basic types of lifetime annuities: Single with level payments Single with increasing payments Joint (spouse) with level payments Joint (spouse) with increasing payments Joint (nonspouse) with level payments There are two types of joint annuities: 100 percent to the survivor 50 percent to the survivor In addition, there are two additional options, depending on the kind of annuity you choose: a 10-year defined payment (available for single annuities only) or a cash refund (for either single or joint annuities). MetLife holds the contract for annuity purchases. The money you use to purchase an annuity is removed from your TSP account and sent to MetLife. And remember, you can't change your annuity or cash it out after it is purchased. In other words, this is a permanent decision. If interest rates go up, you are stuck with the rate on the annuity you purchased. Upon your death, the balance of your annuity will be paid according to the type of annuity you selected. If you don't protect the principal by adding a joint annuity, cash refund or 10-year defined payment, your heirs will not inherit the balance of your investment. An annuity is paid for life - you can't outlive it. Once it's purchased, you no longer have to manage your investment. The payments are computed and paid automatically. You will be taxed on the amount you receive each year. This option may be more attractive to older, healthy people who are worried about outliving their money. If you are older, the payments are larger since they are based on your life expectancy. If you are in good health, you may live longer than your normal life expectancy. Now let's look at some annuity examples. Assume that the amount used to purchase the annuity is $100,000, and that the interest rate is 4.5 percent. If a person chose to begin the annuity at age 60, he or she could get: Single life annuity with no added features: $669/month for life. Single life annuity with increasing payments and a cash refund: $438/month. Assuming a 3 percent annual increase, in 10 years the monthly payment would be $571. If the annuitant died before receiving $100,000 in payments, the beneficiary would receive the balance of the original principal. Joint life annuity with spouse (also age 60), 100 percent to the survivor, level payments and a cash refund: $564/month for life, regardless of whether one or both spouses are living. Now assume a person chooses to begin the annuity at age 75: Single life annuity with no added features: $981/month for life. Joint life annuity with other survivor (age 65), 50 percent to the survivor, level payments, and a cash refund: $777/month while both are living. When there is only one survivor, the payment is reduced to $388.50/month. Resources TSP Tax Notice TSP Calculators (to compute life expectancy, specific dollar amount and annuity payments) Withdrawing Your TSP after Leaving Federal Service Booklet Form TSP-70: Request for Full Withdrawal Form TSP-77: Request for Partial Withdrawal When Separated Checklist At Home: Begin to consider when you will need the money invested in your TSP. Some options include using this money to supplement your monthly retirement income; using some of it to pay off bills and keeping the rest invested for other needs that come up during retirement; and keeping the money invested until after you decide to retire permanently -- if you plan to continue working after you retire from federal service. Financial Planner: If you use the services of a professional planner, they will provide a plan for creating the best use of your retirement savings when viewed as a part of your big retirement picture. Internet: Become familiar with the tools available at the TSP Web site. It is very simple to use the calculators and the publications are written in a manner that is easy to understand. Remember, you are your own financial planner first. If you need assistance, seek it when necessary. |
|
RETIREMENT PLANNING November 3, 2006 Best Dates to Retire 2007 By Tammy Flanagan, National Institute of Transition Planning Of all the topics I write about, the one I'm focusing on this week generates by far the most interest. Since people already are e-mailing me to ask about the best dates to retire next year -- and in 2008 and even 2012 -- I decided not to wait any longer to write about the issue. The great thing about federal retirement planning is that if you understand the basic rules (and you have a long-range calendar), you can choose the best date under the Civil Service Retirement System or the Federal Employees Retirement System for any year. If you're still considering whether to retire by the end of this year, start by going back to my February column on best dates to retire in 2006. For those thinking about 2007 and beyond, let's look at the basics. You can retire whenever you want -- on your birthday, on the anniversary of when you started working in government, or on the date you wake up and decide it would be more fun to stay home than go to work. Choosing one of these dates might make your retirement more memorable, but it also could cost you hundreds or even thousands of dollars. The best dates to retire are at the end of the month, the end of a leave period or the end of the year. The date varies from employee to employee; for some, it might even be during the first few months of the year. To analyze this decision for yourself, here are the important rules: 1. Choose a retirement date at the end of a month. Voluntary retirement benefits commence the first day of the month following your retirement. So suppose John chooses July 20 as his retirement date and Joan chooses July 31. Regardless of which retirement system they are in (CSRS or FERS), both will receive their first monthly retirement benefit payment for the month of August (payable on Sept. 1). Joan would get her salary through her date of retirement, while John's salary would stop at the close of business July 20. He would receive no retirement compensation (or salary) until his first retirement payment on Sept. 1. Why does this matter? If John's salary were $65,000 per year, he would forfeit $1,744 in salary by leaving seven days before the end of the month. 2. Retire at the end of a leave period to earn another leave accrual. Title 5 of the U.S. Code says: "An employee is entitled to annual leave with pay which accrues one day for each full biweekly pay period for employees with 15 or more years of service." Unused annual leave hours for each of these leave periods are reimbursed in a lump sum payment upon separation from federal service. CSRS (and CSRS Offset) employees can retire on the first, second or third day of the month and be entitled to benefits beginning the day after they leave. FERS does not have this grace period. If a FERS (or transFERS) employee retires on any day of the month (including the 1st, 2nd or 3rd) their retirement begins the first day of the following month. So, for example, a CSRS employee could retire on Friday, Feb. 2, 2007, and accumulate the last leave accrual for leave period 2 and still be entitled to a retirement benefit for the month of February. But an employee retiring on Wednesday, Jan. 31, would not accrue leave for period 2 (unless he or she worked an alternative schedule and completed 80 hours of work by Wednesday afternoon). Here are some good dates in 2007 for both CSRS and FERS employees that would allow retirement to occur at the end of a month as well as the end of a leave period: * March 30 (leave period 6 ends March 31) * April 30 (leave period 8 ends April 28) * Aug. 31 (leave period 17 ends Sept. 1) * Sept. 30 (leave period 19 ends Sept. 29) Here are some good dates for CSRS employees that would allow retirement within the three-day grace period and also at the end of a leave period: * Feb. 2 (leave period 2 ends Feb. 3) * March 2 (leave period 4 ends March 3) * Aug. 3 (leave period 15 ends Aug. 4) For the purposes of calculating lump sum payments for leave, one eight-hour accrual of leave is computed as eight times an employee's hourly pay rate. So, for an employee making $65,000 per year ($31.14 per hour), eight hours of leave is worth $249. 3. Retire at the end of the year to get the maximum lump sum leave payment. This is just common sense. The leave year ends on Saturday, Jan. 5, 2008. So FERS employees should consider retiring on Dec. 31, 2007. CSRS employees can take advantage of the three-day grace period by retiring on Thursday, Jan. 3, 2008. If you work an alternative work schedule and finish your 80 hours of work on Thursday, you may earn leave for leave period 26 if you retire on Jan. 3, 2008. Most federal employees are limited to carrying over 240 hours of annual leave each year. In addition to the carryover leave, employees with more than 15 years of service accumulate an additional 208 hours of annual leave each year. Employees must use this accumulated leave each year to avoid losing it to the carryover limit -- except in the year they are planning to retire. For example, suppose Helen will carry over 240 hours of leave from 2006 and wants to save up her leave accruals in 2007 since she is planning to retire next year. By the end of December 2007 (through leave period 25), she will have 440 hours (240 hours from 2006 and 200 additional hours accumulated in 2007) of unused annual leave. Helen would receive payment for 440 hours of leave in a lump sum payment following her retirement on Dec. 31. The lump sum increases relative to the pay raise that General Schedule employees receive at the start of the new leave year. This is because the law requires that employees' lump-sum payments equal the pay he or she would have received had they remained employed until the expiration of the period covered by the annual leave. So, if Helen makes $65,000, and if a 3.5 percent general pay increase is granted on Jan. 7, 2008, here is how her lump sum annual leave payment would be computed: Her 2007 pay rate ($65,000) would apply to the first 32 hours of leave (covering Jan. 1-4) and the remaining 408 hours would receive the 2008 rate ($67,275). The gross amount of the payment would equal about $14,148, and the boost in salary would increase her annual leave payment by $445. Before you start spending this check, remember it is subject to federal, state and Social Security taxes. CSRS employees will not pay the FICA tax of 6.2 percent, but all employees will pay the Medicare tax of 1.45 percent. Expect the lump sum annual leave payment within 30 to 45 days of retirement. So even if you retire on Dec. 31, the payment will be taxable the following year. 4. A springtime retirement can provide some tax breaks. If getting a lump sum annual leave payment is not that big of an issue for you, you may wish to consider retiring earlier in the year to take advantage of some tax breaks. First, beginning this year, there are no percentage limits on your TSP contributions. This means that you could contribute your entire salary to the TSP -- tax-deferred -- until you reach the IRS elective deferral limit ($15,500 for 2007). In addition, if you are turning 50 this year (or are already have), you can contribute an additional $5,000 in catch-up TSP contributions (also tax deferred). FERS employees also will be entitled to the usual agency automatic and matching contributions during this time. This results in a reduction of taxable income of $20,500 for 2007. What a great time to cash in those savings bonds! If you signed up for a flexible spending account for 2007, you must incur expenses prior to your retirement to be able to use that year's health care allotment. For health care FSAs, the amount allotted for the year is available for reimbursement on Jan. 1 of the plan year. Dependent care FSA reimbursement is limited to the amount in the account at the time the claim is made. Employees usually have 14 and a half months to use the money allotted in their FSA accounts. So any funds in an account established for 2006 are available until March 15, 2007, and 2007 account funds are available from Jan. 1, 2007, through March 15, 2008. The annual limit for health care FSAs will be $5,000 in 2007 -- the same as this year. If you need some expensive medical care, this could result in lowering your 2007 taxable income by up to the FSA limits. But you must take advantage of it before your retirement date. If you have reached your full Social Security eligibility age (from 65 to 67, depending on your year of birth), you may begin receiving Social Security benefits even if you continue working. If you are under your full Social Security age but at least age 62, an earnings limit applies. Those eligible for Social Security benefits can begin receiving them on Jan. 1 of the year of their retirement rather than waiting until after they retire. If your earned income for the year will not exceed the limit, you may be eligible for benefits before you actually retire. Retirement annuity income does not count as earned income. Your lump sum annual leave payment also is not considered earned income since it was "earned' prior to your retirement. Resources * Flexible Spending Accounts * Social Security Administration * OPM Fact Sheet on Lump Sum Annual Leave Payment * CSRS Retirement Application * FERS Retirement Application * 2007 Leave Chart Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits. This document is located at http://www.govexec.com/dailyfed/1106/110306rp.htm |
