Misconceptions about the TSP

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galveston1
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Misconceptions about the TSP

Post by galveston1 »

From FEDweek:

Perhaps the most widely held misconception about the TSP is that one will face a 10% early withdrawal penalty on anything they take out of the TSP before they reach the age of 59 ½. Not true in almost all situations. If you are a regular employee that separates and withdraws money from the TSP in the year in which you reach the age of 55 or later there is no early withdrawal penalty. If you are a special category employee, the age is 50. It’s Individual Retirement Arrangements (IRAs) that assess early withdrawal penalties for money taken out before age 59 ½. The TSP (and other employer sponsored plans) do not.
The situation where the TSP will impose an early withdrawal penalty is if an employee separates before the year in which they reach the age of 55 (50 if a special category employee). Even that penalty can be avoided if the employee follows a life expectancy based withdrawal methodology for the longer of 5 years or until they reach 59 ½.

Another misconception is that those who participate in both the Traditional and Roth TSPs have two separate TSP accounts. Not so; they have two separate balances within their one TSP account. This creates a problem because, if one has both pre-tax (i.e., Traditional) and post-tax (i.e., Roth) money in the same account, all withdrawals must be made proportionally. An individual cannot elect to withdraw money from only one of their TSP balances.

Many feds believe that they cannot contribute to an IRA if they are fully funding the TSP; nothing could be further from the truth. Though the TSP and IRAs are related (they are both devices with which you save for retirement), they are different, as one is an individual plan and the other is an employer sponsored plan. If you haven’t been contributing to an IRA because you have been fully funding the TSP, you have been missing out on an opportunity to set aside another $5,500 ($6,500 in the year you turn 50 and later). Though there are income based restrictions on deducting your contributions to a Traditional IRA and on contributing at all to a Roth IRA, any one (even Bill Gates) can fund a Traditional Non-Deductible IRA.
In investing, what is comfortable is rarely profitable

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ArrieS
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Re: Misconceptions about the TSP

Post by ArrieS »

I would like to add you can fund an IRA for your spouse, even if they don't work. That's an extra $5,500 a year.
OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February. - Pudd'nhead Wilson's Calendar

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galveston1
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Re: Misconceptions about the TSP

Post by galveston1 »

ArrieS wrote:I would like to add you can fund an IRA for your spouse, even if they don't work. That's an extra $5,500 a year.


ArrieS - That is a great piece of information. Honestly I had heard of that but until you mentioned it I had completely forgotten about it.

Thanks for the reminder!
In investing, what is comfortable is rarely profitable

Buckeyedog
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Re: Misconceptions about the TSP

Post by Buckeyedog »

I've tried to contribute to an IRA during tax time, but it always tells me that we are ineligible. I'm guessing we make too much $ or something.

Josiedog
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Joined: Sat Feb 14, 2015 9:01 pm

Re: Misconceptions about the TSP

Post by Josiedog »

Galeston1 - is there an OPM link that says you can withdraw at 55 without penalty. I haven't been able to find that.

thanks

catfish
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Joined: Sat Apr 01, 2017 1:22 pm

Re: Misconceptions about the TSP

Post by catfish »

Josiedog wrote:Galeston1 - is there an OPM link that says you can withdraw at 55 without penalty. I haven't been able to find that.

thanks


Section 5. Other Tax Rules on the TSP-536.

https://www.tsp.gov/PDF/formspubs/tsp-536.pdf

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Chamorrita
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Re: Misconceptions about the TSP

Post by Chamorrita »

Just what I needed. Thanks.
Susie

BigBrenda
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Re: Misconceptions about the TSP

Post by BigBrenda »

Buckeyedog wrote:I've tried to contribute to an IRA during tax time, but it always tells me that we are ineligible. I'm guessing we make too much $ or something.


Have you reached your max maybe?

GlobalHawk
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Re: Misconceptions about the TSP

Post by GlobalHawk »

Good info.

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mjedlin66
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Re: Misconceptions about the TSP

Post by mjedlin66 »

If someone makes over 133k as an individual, or over 196k as married filing jointly, then they are not eligible to contribute to an IRA.

https://www.fidelity.com/retirement-ira ... -deadlines
Owner/creator of TSPcalc.com - "Know your numbers"

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ArrieS
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Re: Misconceptions about the TSP

Post by ArrieS »

mjedlin66 wrote:If someone makes over 133k as an individual, or over 196k as married filing jointly, then they are not eligible to contribute to an IRA.

https://www.fidelity.com/retirement-ira ... -deadlines


Nope, nope, nope, nope. They are not eligible to contribute to a ROTH IRA, that table is for ROTH IRAs.

From that same page, "Traditional IRA contributions are not limited by annual income." Only limitation on income and Traditional IRA contributions is if you can claim a tax deduction.

However, at the moment, you can open both a Traditional IRA and a ROTH IRA account. Contribute $5,500 to a Traditional IRA and immediately call your broker and tell them you want to re-categorized your contributions from Traditional to ROTH. This is called a backdoor ROTH.

http://www.rothira.com/what-is-a-backdoor-roth-ira
OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February. - Pudd'nhead Wilson's Calendar

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mjedlin66
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Re: Misconceptions about the TSP

Post by mjedlin66 »

ArrieS wrote:
mjedlin66 wrote:If someone makes over 133k as an individual, or over 196k as married filing jointly, then they are not eligible to contribute to an IRA.

https://www.fidelity.com/retirement-ira ... -deadlines


Nope, nope, nope, nope. They are not eligible to contribute to a ROTH IRA, that table is for ROTH IRAs.

From that same page, "Traditional IRA contributions are not limited by annual income." Only limitation on income and Traditional IRA contributions is if you can claim a tax deduction.

However, at the moment, you can open both a Traditional IRA and a ROTH IRA account. Contribute $5,500 to a Traditional IRA and immediately call your broker and tell them you want to re-categorized your contributions from Traditional to ROTH. This is called a backdoor ROTH.

http://www.rothira.com/what-is-a-backdoor-roth-ira


You are right about the IRA limits only applying to Roth. However, the limit for Roth IRA + Traditional IRA is still $5500. The backdoor only works if you exceed the income limits for a Roth IRA or you already have a traditional IRA balance. Otherwise, it does nothing.
Owner/creator of TSPcalc.com - "Know your numbers"

Duval
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Re: Misconceptions about the TSP

Post by Duval »

If a person is 50 or older I think the limit is $6,500.

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evilanne
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Re: Misconceptions about the TSP

Post by evilanne »

Good Info Galveston1 & ArrieS. When in doubt, check the TSP or IRS publications.

Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits
https://www.irs.gov/pub/irs-pdf/p721.pdf
Publication 575 Pension and Annuity Income https://www.irs.gov/pub/irs-pdf/p575.pdf
Publications 590-A & 590-B for IRAs https://www.irs.gov/publications/p590b/ or https://www.irs.gov/publications/p590a/

Retirement Topics - Exceptions to Tax on Early Distributions https://www.irs.gov/retirement-plans/pl ... tributions
Topic 558 - Additional Tax on Early Distributions from Retirement Plans Other Than IRAs
https://www.irs.gov/taxtopics/tc558.html
Topic 557 - Additional Tax on Early Distributions from Traditional and Roth IRAs: https://www.irs.gov/taxtopics/tc557.html

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ArrieS
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Re: Misconceptions about the TSP

Post by ArrieS »

evilanne wrote:Good Info Galveston1 & ArrieS. When in doubt, check the TSP or IRS publications.

Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits
https://www.irs.gov/pub/irs-pdf/p721.pdf
Publication 575 Pension and Annuity Income https://www.irs.gov/pub/irs-pdf/p575.pdf
Publications 590-A & 590-B for IRAs https://www.irs.gov/publications/p590b/ or https://www.irs.gov/publications/p590a/

Retirement Topics - Exceptions to Tax on Early Distributions https://www.irs.gov/retirement-plans/pl ... tributions
Topic 558 - Additional Tax on Early Distributions from Retirement Plans Other Than IRAs
https://www.irs.gov/taxtopics/tc558.html
Topic 557 - Additional Tax on Early Distributions from Traditional and Roth IRAs: https://www.irs.gov/taxtopics/tc557.html


You mean do work! That's not the point of this site. Seriously, most people just come here to get told what to do.
OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February. - Pudd'nhead Wilson's Calendar

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