Retirement at age 56

Managing your TSP and alternate investment options after retirement or separation from service.

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LONEWOLF
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Retirement at age 56

Post by LONEWOLF »

I will be retiring September 30, 2017 at age 56 (57 in November) 30 years of federal service and considering leaving money in TSP and withdrawing equal monthly payments sometime in 2018.
1. What are the federal tax provisions on this type of withdrawal.
2. Also heard I could not withdraw using this strategy without paying penalties ?

Thanks in advance,
LONEWOLF

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Aitrus
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Re: Retirement at age 56

Post by Aitrus »

Congrats Lonewolf!

From what I understand, as long as you retire and don't seek other work, then you will pay normal taxes because your TSP payments will be considered income. Since you retired and are receiving a pension check, it's not considered an early withdrawal to also receive monthly payments from your TSP.

You would pay extra taxes and penalties if you weren't retired, or if you simply separated and haven't yet begun receiving pension payments.

Somebody please correct me if I'm wrong.
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crondanet5
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Re: Retirement at age 56

Post by crondanet5 »

Savvy TSPers roll over their TSP Account to a rollover IRA so they can access it as needed. TSP is very difficult to get your money out in an emergency. A rollover IRA makes it easy and if no emergency you can invest it in ETFs that are similar to the TSP Funds. Strongly recommend you look into this.

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chief04010
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Re: Retirement at age 56

Post by chief04010 »

crondanet5 wrote:Savvy TSPers roll over their TSP Account to a rollover IRA so they can access it as needed. TSP is very difficult to get your money out in an emergency. A rollover IRA makes it easy and if no emergency you can invest it in ETFs that are similar to the TSP Funds. Strongly recommend you look into this.


What Cron said is true but remember that if you rollover to an IRA you will not be able to take distributions until age 59 1/2 without incurring a 10% penalty from the IRS, Taking withdraws after retirement (55 years or older) but before 59 1/2 will not incur this penalty if you withdraw from TSP.
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evilanne
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Re: Retirement at age 56

Post by evilanne »

LONEWOLF wrote:1. What are the federal tax provisions on this type of withdrawal.
2. Also heard I could not withdraw using this strategy without paying penalties ?

Any withdrawals from traditional TSP is taxed as ordinary income. Through TSP, it should be coded as a qualified distribution and not subject to the 10% penalty since you are retiring after you reach 55 years of age & you will also be receiving a pension (irregardless of whether you work somewhere else). If you make a large withdrawal from TSP it could put you in a higher tax bracket.
If you transfer it to an IRA, you can still withdraw penalty free, however, many of the online brokerages will not code the exception and you have to fill out special form to avoid the 10% penalty. I would recommend that you leave it in TSP at least until you are 59.5 to avoid any issues. See below links for more detail.

Copied from another post:
Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits https://www.irs.gov/pub/irs-pdf/p721.pdf
Tax on early distributions. Any money paid to you from your TSP account before you reach age 59 1/2 may be subject to an additional 10% tax on early distributions. However, this additional tax doesn't apply in certain situations, including any of the following.
—You receive the distribution and separate from government service during or after the calendar year in which you reach age 55.
—You choose to receive your account balance in monthly payments based on your life expectancy.
—You are totally and permanently disabled.
—You receive amounts from your Roth contributions since that represents a return of your cost (after-tax money). The earnings may be subject to the 10% tax depending on whether you met certain conditions. See Roth TSP balance, earlier.
For more information, see Tax on Early Distributions in Publication 575.

Publication 575 Pension and Annuity Income https://www.irs.gov/pub/irs-pdf/p575.pdf
Topic 558 - Additional Tax on Early Distributions from Retirement Plans Other Than IRAs
https://www.irs.gov/taxtopics/tc558.html
Same rules applies to IRAs, see Topic 557 - Additional Tax on Early Distributions from Traditional and Roth IRAs: https://www.irs.gov/taxtopics/tc557.html

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crondanet5
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Re: Retirement at age 56

Post by crondanet5 »

So roll it over at age 59 1/2. The important thing is access to your money in an emergency.

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evilanne
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Re: Retirement at age 56

Post by evilanne »

Before following crondanet5's advice, suggest you research your options

There are quite a few websites that will allow you to compare different brokers and their fees. e.g. http://www.stockbrokers.com/compare & https://www.thestreet.com/online-tra...e-brokers.html

Each mutual fund or EFT have fees or expenses that are outlined in their prospectus, which is in addition to any transaction or sales fee to purchase or sell http://www.investopedia.com/terms/p/prospectus.asp
Many of the discount brokerages allow you free trades for certain EFTs, however, there is generally a minimum holding period of 30 days, or you will be charged a frequent trading fee or penalty e.g. https://www.fidelity.com/etfs/ishares
Note: A short-term trading fee of $4.95 will be charged for any sales that occur within 30 days of the original purchase of the ETF with the oldest shares in the account being depleted first. The fee for shares sold on FAST, Fidelity's automated phone system, within 30 days of purchase is $12.95.

So even with a discount brokerage, you don't have unlimited trades without additional fees. If you rollover to full service brokerage for someone to actively manage, be aware that you will most likely end up in a fee based account that will charge you an annual percentage of the value of your account once they fully implement DOL rule for retirement accounts, which makes them a fiduciary.

crondanet5
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Re: Retirement at age 56

Post by crondanet5 »

Fidelity $4.95 a trade. Buy a thousand shares at a time and absorb the fee. But you have full access to your entire account if you need to withdraw the whole thing in an emergency. With the TSP Program you have no access because they don't believe you can handle it. Can you?

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evilanne
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Re: Retirement at age 56

Post by evilanne »

I'm not arguing whether anyone should or shouldn't roll over their account from TSP. Each individual situation is different and they should be fully aware of the options. There are advantages and disadvantages to each option depending on investment options; how much trading you actually do; how involved you want to be in managing your retirement account and complying with the IRS rules (avoiding penalties for non-qualified distributions or for not taking required minimum distributions). The grass may look greener on the other side of the fence but there are no absolute correct option everyone.

Had I decided to withdraw $500K from TSP in 2016, I would be paying between 35% and 49.6% in taxes and penalties on such withdrawal, whether or not it was directly from TSP or from a rollover IRA. Paying ~$210K to get $290K from any retirement account makes no sense to me. Without the penalty, if an exception applied, taxes would still be 25% to 39.6% (~$160K for $340K) so I personally would never use TSP or regular IRA as an emergency fund. A Roth IRA would be a possibility. I'm sure some would be willing to pay the price in certain situations. If they are not aware of the impact of their distribution, they might face another emergency at tax time with additional penalties for not withholding enough taxes.

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ArrieS
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Re: Retirement at age 56

Post by ArrieS »

Since we are talking about fees. At Merrily Lynch if your account balance is greater than $50k you get 30 free trades a month. With an account balance greater than $100k you get 100 a month. For a normal person that should be enough.

Also, something to consider is if you are retiring and if your income is lower, maybe consider converting any traditional IRA accounts into ROTH IRAs. I'm not saying all at once, but small amounts. This all depends on your current tax rate.

You could also do this with the TSP if you decide to roll it out early.
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ngood2345
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Re: Retirement at age 56

Post by ngood2345 »

I tried to make withdrawals from my TSP when I retired. I quickly found out if you withdraw above the governments magic number you will have to pay a 20% federal tax, regardless of your tax bracket. You have no choice. Also they will not withhold taxed for state. That is all on you.

So...First I would call TSP and ask them how much you can withdraw and how much federal taxes they will be withholding. Remember you do not have a choice. If the amount fits your needs, then consider leaving it in the TSP and moving it later.

This is why I moved my money out of the TSP. I can take money out, federal and state taxes are taken out at the amounts I want, not the government.

Good luck,

crondanet5
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Re: Retirement at age 56

Post by crondanet5 »

You know you could roll your TSP Account into a rollover IRA and buy VGR stock that currently yields 7.6% per year, and never make another trade.

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evilanne
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Re: Retirement at age 56

Post by evilanne »

ArrieS,
I'm thinking about using one time withdrawal to rollover a portion of my account prior to taking monthly withdrawals (life expectancy method) with the intent of converting it to Roth IRA over time. You should be able to roll over a portion of your account after you start monthly payments based on IRS rules, but TSP won't allow it which I don't like but I can work around this. I might be as upset as Crondanet about TSP if I didn't know the rules before starting monthly payments.

Really Cron?!? Invest everything in a tobacco company? :lol:

NGood,
I will probably owe at least 20% in taxes on my TSP withdrawals unless they ever get around to changing the tax code, but the mandatory 20% withholding is only applicable for your final payment or if payments will last 10 years or less based on your initial monthly distribution amount https://www.tsp.gov/PDF/formspubs/tsp-780.pdf.
If they withhold too much, you will get it back when you file your tax return or you can offset the amount by reducing your federal withholding with OPM. Luckily I don't live in a state with a state income tax--that would be annoying but you can always increase your state withholding on your OPM pension to offset. I would rather have too much withheld than not enough IOT avoid any tax penalty.

Most of the issues raised are temporary and there are ways to find a work arounds if you know the rules. I'm sure it will be a balancing act when I start making withdrawals.

crondanet5
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Re: Retirement at age 56

Post by crondanet5 »

VGR is mostly a high end real estate holding company. Examine its makeup. BTW, on the tobacco side of their business they sell every cigarette they manufacture. The yield is better than Verizon.

Buckeyedog
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Re: Retirement at age 56

Post by Buckeyedog »

I'm also planning on retiring at 56 in less than 3 years. I'm definitely rolling it over into an IRA. However, this talk about converting some to a Roth.........so how does that work and why do it? Is it because the taxes to convert it are cheaper than the "income" tax rate?? Just have never thought about this before.

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