Post TSP Retirement Options

[Relevant]

Last week I attended a FERS retirement class sponsored by my agency and thought I’d share some of my “eye opening” discoveries.

We basically have 4 options regarding TSP withdrawals after retirement but 3 of the 4 have some disturbing limitations, particularly if you retire under age 59 ½ .

1) Rollover all or some of your TSP to an IRA. But if you retire before age 59 ½ you can’t withdraw from an IRA without incurring a 10% penalty plus regular income taxes.

2) Request monthly payments from your TSP account. Monthly payments are taxable but free from penalties if you are at least 55. But you can only change the payment amount once a year in December. To add insult to injury, the withdrawals will be prorated across all of your TSP funds. For example, if you are invested 50% in C-Fund and 50% in F-Fund you cannot request withdrawals come from F-Fund alone. Half will be withdrawn from C and the other half from F.

3) Take a One-Time partial withdrawal - taxable but without penalty if at least 55. But if you do a partial rollover to an IRA you cannot also take partial cash withdrawal. The second withdrawal must remove all remaining funds from TSP.

4) Annuitize all or some of your TSP balance. Not a good deal now due to low interest rates.

I plan on retiring at age 56 but I don’t plan on tapping into my TSP for at least 5 years after retirement. In order to give myself the most flexibility I basically have 2 choices.

1)Don’t do anything with my TSP until I’m 59 ½.
a. If conditions change I can start, stop, increase or decrease monthly payments
every December.
b. The one-time partial withdrawal is still available if needed.
c. At 59 ½, I may consider annuitizing a portion of my TSP and rolling over the rest to
my IRA. I’m not a big fan of TSP’s prorated monthly withdrawals, the IFT limits, and
the limited investment choices, so the IRA rollover at 59 ½ makes “cents” to me. If
these issues aren’t a concern to you then sticking with the TSP makes the
most “cents”.
2) Do a partial rollover to my IRA when I retire at age 56.
a. Leave enough in my TSP in the event monthly withdrawals become necessary before
reaching 59 ½.
b. The trick is deciding how much to leave in TSP. Since I would have exhausted my
one-time partial withdrawal option by doing a partial rollover to my IRA I am left with
2 options. Monthly payments or cash out the entire balance and pay the tax man.
c. If all goes well I can rollover remaining TSP balance to my IRA or purchase an annuity
when I reach 59 ½.

Caveat – I haven’t independently verified these options outside of the classroom. If any of this info is not accurate please share.

BTW – I also learned some interesting things about the Roth TSP but that will have to wait until next week.

http://www.RelevantInvestments.com

[crondanet5]

What is especially interesting about post-employment TSP decisions is the value of playing the Fantasy Game because you start with a $100,000 and have no further monetary inputs into your account. All gains are due to your investment skills. This year has been especially frustrating. I follow the Leader by Account Balance. Yes, the leaders in front are from 2008/2009, but this year their balances have stalled. Up $10,000, down $10,000. No real gain. I decided the best option after retirement was to roll the whole thing out into a rollover 401k brokerage account. Why leave money in an account that only allows 2 unrestricted IFTs a month when you can make 5 in a rollover brokerage account? And don't financial advisors recommend moving your 401k out of a company plan when you leave that company? Now to further this important discussion, I recommend the majority of your rolled over TSP account balance be invested in dividend stocks yielding greater than 10% annually. The idea is to let the account generate sufficient dividend income so as not to touch it until neeeded past age 75 (assuming you pass my morbidity test and reach that age {Interesting thing, for every person who lives past age 81 someone must die before age 81 so the average life expectancy remains age 81. On which side of the bar do you fall? There are critical ages for males in their 40s, 50s, and 60s requiring careful medical consultation. But let's assume you make it so the conversation continues) and are doing okay meeting financial obligations without tapping that rolled over brokerage 401k account. Wasn't the intent of the 401k/IRA program to provide a source of cash to pay for old age medical costs associated with daily living and not the highly touted investment company claims that the 401k was a source of income in retirement? And is it not the best idea to leave the 401k alone until you reach age 70.5 and must commence minimum withdrawals or pay IRS penalties? And is there anything that says you must spend that money or could you not invest it in a taxable brokerage account and save it for a sickly day or contribute it to multigenerational financing? Kip, you should present your program here. IMHO.

[crondanet5]

Not that I am your financial advisor, but at what age are you planning to commence receiving your Social Security benefit? Have you had a face-to-face meeting with some of the best government employees? They really know their program and how best to play it. You should make an appointment soon. IMHO.

[skiehawk11]

Cron and Relevant,

Thank you for the information. Relevant, I look forward to your post on the Roth TSP. Kip, I look forward to your input.

Right now, I am contributing 5% to the traditional part of the TSP.

I've opened a Roth IRA with Optionshouse in which I trade options for the most part. Right now, I invest 250 dollars a trade in extremely high leveraged weekly options or monthly options of high ATR stocks (i.e. - AAPL, GOOG, CMG) with about 7 days left before expiration. The profits I make I hold in cash. Each month, I put the extra profits I make into a short term bond ETF. Right now, my goal is to preserve my profits and when the market tanks horribly, invest in REIT's, and some really stable high dividend paying stocks.

Cron, send me a pm or post some really good dividend securities for me. I am constantly on the lookout for such securities and keeping track of them.

After I max my personal Roth IRA, I am planning on working to max my Roth TSP. However, I am a little cautious on this. With my current investments, I am making a very large percentage return in my current Roth. It may be better to just open a brokerage account with the money I would've used for the Roth TSP and bite the bullet on the taxes. This is something that I'll need some advice on.

[dcramer29]

Relevant - What about taking the whole thing out at 59...and putting it into a normal brokerage account ?

I know you pay big time taxes on that...but it just seems better to get out of TSP.

Also - if that money is in a ROTH...then you take it out without tax penalty.

[dcramer29]

skiehawk11 - Thanks for your input. I'm also thinking about opening up an account to trade options or futures. Would like to talk to you more sometime about what exactly you're doing with your options trading.

Regarding the ROTH...just recently I started the TSP ROTH...putting 15% in that...and 1% into the traditional TSP.

Also have a brokerage account with Morgan Stanley. This brokerage account is not for retirement...but an attempt to pay my house off soon with quality earnings other than a savings account or money market.

[crondanet5]

Relevant: you cannot move your TSP/401k to a regular brokerage account or else you pay a huge penalty on the whole thing. I bet you knew that but now the audience is aware as well. That is why I said rollover 401k account.

[journeyman]

I just turned 28. This year I invested about 19% into the traditional TSP. Now the Roth TSP is available I want to contribute to that too (but we're still capped at $17k by the IRS) so I'm putting 80% of my contributions into the traditional TSP and 20% contributions into Roth TSP.

Some people have said it would behoove me to invest more into the Roth TSP first, and then the traditional second. So in January 2013, I may switch to 70% contributions Roth TSP, 30% traditional TSP until I hit the $17k limit for the 2013.

Thoughts?

In terms of investment accounts, I have the traditional TSP (to which I rolled over from my old private sector employer-eligible retirement accts), just started the Roth TSP, and I have the old John Hancock brokerage account (think it's a Roth IRA) which I'm thinking of switching to UBS Wealth Management, Vanguard, or possible Morgan Stanley.

dcramer29, my dad started an IRA for me at John Hancock when I was younger.
How has Morgan Stanley treated you?

[Relevant]

Relevant - What about taking the whole thing out at 59...and putting it into a normal brokerage account ?

I know you pay big time taxes on that...but it just seems better to get out of TSP.

Also - if that money is in a ROTH...then you take it out without tax penalty.

Ouch - Huge Tax Bite! When I said roll it over to an IRA, I meant roll it over to a self directed Traditional IRA Brokerage account. You cannot rollover traditional TSP to Roth.

At 59 1/2 I plan on withdrawing "x" amount from taxable IRA brockerage to non-IRA brckerage each year based on the tax rates at the time.

[Relevant]

skiehawk11 - Thanks for your input. I'm also thinking about opening up an account to trade options or futures. Would like to talk to you more sometime about what exactly you're doing with your options trading.

Regarding the ROTH...just recently I started the TSP ROTH...putting 15% in that...and 1% into the traditional TSP.

Also have a brokerage account with Morgan Stanley. This brokerage account is not for retirement...but an attempt to pay my house off soon with quality earnings other than a savings account or money market.

Are you FERS? If so, please check your recent transactions at TSP.gov to see if they are putting your 5% matching contributions in the regular TSP.

The book I received in the class states that ROTH TSP contributions DO NOT receive agency matching contributions. I hope they mean that matching contributions got to traditional TSP by default.

[MLKMAN]

Are you FERS? If so, please check your recent transactions at TSP.gov to see if they are putting your 5% matching contributions in the regular TSP.

The book I received in the class states that ROTH TSP contributions DO NOT receive agency matching contributions. I hope they mean that matching contributions got to traditional TSP by default.

Yes, that is what it means as the matching funds remain tax free until you take it out. Otherwise, you'd have to pay tax on what the government matches now, which wouldn't make sense.

[dcramer29]

Relevant - If you go with the ROTH...you still get the matching 5% funds.

These matching funds go into the traditional TSP though...not into the ROTH.

[TSPKip]

I left fed service 4 years ago, and, prior to that, I had to divide the regular TSP over the year to get the 5% monthly. If you pay it all in 2 months, you only get 5% of your salary, times 2 months, not all 12.

The single episode of partial withdrawal [TSP-77] can include both cash and transfer of regular and Roth TSP funds to other IRA's or 401-K's.

The full withdrawal [TSP-70] can include cash, transfers, annuity and monthly payments.

The yearly change in monthly dispursements [TSP-73 completed and delivered by 12/15] allows equal monthly IRA transfer payments, equal monthly cash payments, and/or a single closing.

See TSP for details.

[crondanet5]

Relevant - Why do you want to move tax deferred money to a taxable account at age 591/2? Why not devise a plan to leave it all in the tax deferred account, not necessarily in the TSP Program rather, a rollover 401k brokerage account? Taking money out early-- unless needed-- is like taking the Thanksgiving Turkey out of the oven before it is cooked. N'est-ce pas?

[hugehail]

skiehawk11 - Thanks for your input. I'm also thinking about opening up an account to trade options or futures. Would like to talk to you more sometime about what exactly you're doing with your options trading.

Regarding the ROTH...just recently I started the TSP ROTH...putting 15% in that...and 1% into the traditional TSP.

Also have a brokerage account with Morgan Stanley. This brokerage account is not for retirement...but an attempt to pay my house off soon with quality earnings other than a savings account or money market.

Im just curious why u are putting 1% in Traditional? You dont need to put anything in the traditional and the matching still goes in there.