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I made it; now ? re TSP early w/d
Old 08-08-2007, 03:18 PM   #1
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I made it; now ? re TSP early w/d

This could be subtitled "stop me before I do something stupid". I retired 7/3/07 , at age 51 from a 26 year federal law enforcement career. I am thus happily one of the (dwindling, but I hope very slowly!) civil service pensioneer tribe.

I worked an "extra" year in part with the goal of getting more in my TSP, and did get the whole 2007 contribution in before I went. I am now considering taking some $ out of the account for the next several years via the substantially equal periodic payment route. I hate to stop growth in the account (I ended up with about $245K) but we have several investment property mortgages that will be finished in the next 5-10 years so I'm not too concerned.

Per my reading of the TSP forms, and my limited understanding of the IRS 72(t) stuff, I think I would avoid the IRS early withdrawal penalty if:

I withdraw using the periodic monthly payments that continue to I'm 59.5;
using a "specific dollar amount" based on fixed amortization method;
said amount pulled from calculator such as that Financial Calculators from Dinkytown.net offers;
which purports to be in step with current IRS (6.10% this month) assumptions. (This site, and others similar, offer 3 methods for calculating distribution amounts: life expectancy, amortized life expectancy, and annutized life expectancy.)

What gives me pause is the TSP person answering my questions was adamant that if I went with a specific dollar amount periodic payment option vs the monthly payments based on IRS life expectancy table (which are the only two "periodic payment" options TSP offers) I would definitely incur the 10% early penalty; where she said I would not, if I did the IRS form correctly, with the other.

My other sticking point is the withdrawal form is titled "Request for Full Withdrawal" and one TSP person told me there was absolutely no avoiding "full" withdrawal once I set down that path. But further reading & telephoning convinced me while I might not be able to totally stop the monthly payments once started, I do have the option to alter the amount to the minimum - which they tell me is $25 - once a year. Per my IRS reading, it seems like I'd best not alter anything until I'm 59.5, but after that point seems like I could effectively "stop" the withdrawal by changing payments to $25 yr.

So, can anyone tell me they have indeed made such (specific dollar amount) periodic withdrawals from their TSP account, and successfully avoided the IRS early withdrawal penalty? (And if so, is accounting for the payments each year at tax time fairly straightforward?) Or should I play it safe and go with the TSP offering based on life expectancy?

Meanwhile, I feel like I will continue to enjoy "summer vacation"... ad infinitum.
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Old 08-08-2007, 04:13 PM   #2
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Quote:
Originally Posted by zaniew View Post
This could be subtitled "stop me before I do something stupid". I retired 7/3/07 , at age 51 from a 26 year federal law enforcement career. I am thus happily one of the (dwindling, but I hope very slowly!) civil service pensioneer tribe.

I worked an "extra" year in part with the goal of getting more in my TSP, and did get the whole 2007 contribution in before I went. I am now considering taking some $ out of the account for the next several years via the substantially equal periodic payment route. I hate to stop growth in the account (I ended up with about $245K) but we have several investment property mortgages that will be finished in the next 5-10 years so I'm not too concerned.

Per my reading of the TSP forms, and my limited understanding of the IRS 72(t) stuff, I think I would avoid the IRS early withdrawal penalty if:

I withdraw using the periodic monthly payments that continue to I'm 59.5;
using a "specific dollar amount" based on fixed amortization method;
said amount pulled from calculator such as that Financial Calculators from Dinkytown.net offers;
which purports to be in step with current IRS (6.10% this month) assumptions. (This site, and others similar, offer 3 methods for calculating distribution amounts: life expectancy, amortized life expectancy, and annutized life expectancy.)

What gives me pause is the TSP person answering my questions was adamant that if I went with a specific dollar amount periodic payment option vs the monthly payments based on IRS life expectancy table (which are the only two "periodic payment" options TSP offers) I would definitely incur the 10% early penalty; where she said I would not, if I did the IRS form correctly, with the other.
Hi. I am not retired yet, but I have been to a number of excellent retirement seminars that my agency provided for us. From what I understand, the person you talked to on the phone was absolutely correct.

There are only two ways that I know of to get monthly payments from your TSP.

1) There's one based on life expectancy in which you may be able to avoid the 10% early penalty.

2) And there's one in which you tell them how much you want each month, and they'll send you that every month (unless you tell them to change the amount, which you can do once a year). I believe the minimum is $25. But as I understand it, this WILL cause you to have to pay the 10% early penalty.

Quote:
Originally Posted by zaniew View Post
My other sticking point is the withdrawal form is titled "Request for Full Withdrawal" and one TSP person told me there was absolutely no avoiding "full" withdrawal once I set down that path. But further reading & telephoning convinced me while I might not be able to totally stop the monthly payments once started, I do have the option to alter the amount to the minimum - which they tell me is $25 - once a year.
You are right - - as far as I know, once you start taking payments, you can't stop.

If you go to the TSP website, there's a booklet that will tell you all of your withdrawal options. There are quite a few. Under some circumstances you can make a partial withdrawal, or a mixed withdrawal. Here is the link to that booklet: http://www.tsp.gov/forms/tspbk02.pdf The booklet is for civilians, not military, but from what you say I gather you were civilian LEO.

Quote:
Originally Posted by zaniew View Post
Per my IRS reading, it seems like I'd best not alter anything until I'm 59.5, but after that point seems like I could effectively "stop" the withdrawal by changing payments to $25 yr.

So, can anyone tell me they have indeed made such (specific dollar amount) periodic withdrawals from their TSP account, and successfully avoided the IRS early withdrawal penalty? (And if so, is accounting for the payments each year at tax time fairly straightforward?) Or should I play it safe and go with the TSP offering based on life expectancy?

Meanwhile, I feel like I will continue to enjoy "summer vacation"... ad infinitum.
I can't wait until I am in your shoes! Three more years. You might want to ask your questions on the retirement and financial planning forum at FederalSoup.com - A place to share, debate and discuss. just to doublecheck any answers here. That's a forum for federal employees.
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Old 08-12-2007, 02:11 PM   #3
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Does TSP permit rollover to IRA? If so, you should consider that option and once funds are rolled over, you will find the 72t options are more manageable. I highly recommend Welcome to 72t on the Net as a resource. Even if TSP does not permit a rollover per se, you could probably do the withdrawal and initiate the rollover at Vanguard or other MF company. You WOULD likely have the withholding to deal with AND they are 15 basis point higher for SP500 Index Fund but having 2 close family member just retired from Federal Service, I would not be comfortable with answers from "the TSP person" as those folks seem to put everyone in the same boat.
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Old 08-12-2007, 05:59 PM   #4
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Let me enthusiastically recommend Welcome to 72t on the Net also. Don't make any early withdrawal without reading that site, and I would also recommend posting on the forum with the specific information regard your situation.

In general, you are allowed take a specific withdrawal each year from an retirement plan, as long as it doesn't exceed the maximum allowed via fairly complex calculation involving current interest rates and your age. Or you can use an required minimum distribution based on your life expectancy. You can change one time from the higher method to the lower RMD method.

Retirement plan administrators are free to add further restrictions. My guess (I want to emphasis the word Guess) is the TSP person gave you bad but safe advice.

The RMD method is safe because you can never run out of money. The most dangerous situation with any substantially equal periodic payment (SEPP) scheme is having your retirement plan run out of money before you reach 59.5. If that happens you owe 10% penalty plus interest and IRS penalties, and of course having exhausted your retirement plan finding that money is very hard.

As others have menitioned worse case you can roll the TSP into an IRA at Vanguard, Fidelity and do the withdrawal there, but given the very low expense of a TSP. Keeping your money in the TSP is probably a slight better option.
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Old 08-19-2007, 05:03 AM   #5
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Zaniew,

I was about halfway into a really great post talking about the 72(t) exemption for law enforcement & firefighters that allows them to retire at age 50 and receive their benefits without penalty. It's covered under section 828 of the Pension Protection Act of 2006. I retired from local law enforcement well before age 50 and had already made irrevocable retirement decisions before the law was passed - so my knowledge was a little fuzzy. Anyway, I had heard from some retired 1811 friends of mine that said there was talk of allowing federal LEO to have the same exemption - even though the law restricts it only to employees of states and subdivisions of states. Anyway, as I was writing I found that the law only covers "defined benefit" plans vs "defined contribution" plans, and alas TSP is the latter. The same law also allows "qualified" retired public safety officers to contribute up to $3,000 pre-tax annually to health insurance premiums. I had also heard that there were rumors amongst my fed friends that they thought they might qualify for this as well - but I don't know for sure.

Anyway, to answer address your original question. I think Want2retire answered your question accurately. Welcome to 72t on the Net is my source as well and I spent a lot of time with it a couple of years ago. Reading the IRS regs and the law and then comparing it to what I read at 72t.net found that it was very accurate - at least back then. If you look at the FAQ section of that website (72(t) Frequently Asked Questions [FAQ]) I think you'll find that you cannot do what you were considering.

There may be a way to do it, but it would be complicated and might require the folks at TSP to go along, and it would involve you opening at least one traditional IRA.

I may be reading between the lines - but I guess what you want to do is to take some money now, just not as much as the IRS tables say you should (based on the total amount currently in your TSP account and your age).

One question first before my proposal. Will TSP allow you to take SEP's directly from the plan? My pension consists of both a DB monthly payment and a DC that is treated similarly as an IRA. However, when I retired my pension people said I did not have the option to take 72(t) exempt SEPs directly from my DC account. I could either wait until I was 59 1/2, or roll it over to a traditional IRA (which is what I did). If I left my money in the DC account at the pension plan, I could withdraw whenever I wanted to - but I would incur the IRS penalty for taking an early distribution. I'm not sure if the pension plan's refusal to make SEPs was something internal or an IRS rule, but you might want to make sure that it is not the latter and would affect any SEPs you might want to make from TSP. I have this dim recollection that SEPs are only allowed from traditional IRAs, but I might be wrong.

Back to my idea. When setting up a SEP plan, you do not have to include all IRA accounts under the plan. If you have multiple IRAs you can designate which ones you want to include and make the SEP withdrawals from them and not the others. You can't split an account (i.e. designate half of a single IRA as being part of the SEP plan and not the other half), but if you had two IRAs you could say that IRA #1 is in the SEP plan but not IRA #2. It would seem that if you want to take a reduced amount, and could live with being forced to keep taking that amount until age 59 1/2, then you could just use one of the calculators at the 72(t) website and figure out how much money you needed in a single IRA to achieve the desired regular payments. Then you would roll over your TSP money (or just part of it if they allow you to do that) into an IRA that you designated as part of the SEP. Then, the other part would go into another IRA (or be left in TSP if that's possible).

However you did it, you would wind up with rollover IRA that had "some" of you TSP money that funded a SEPP that paid the desired amount and complied with the SEP exemption under 72(t). You would also (depending on the law and/or TSP rules) have the rest of your money still in TSP or under a separate traditional IRA that you saved for age 59 1/2 or later.

Of course I'm not a tax expert and you should research all of this yourself - but these readings indicate that would be possible:

Quote:
Q. Do All IRA Accounts have to be combined to determine the amount of the distribution?

A. Individual retirement plans do not have to aggregated for purposes of calculating these payments. If a taxpayer owns more than one IRA, any combination of the taxpayer’s IRAs may be taken into account in determining the distributions by aggregating the account balances of those IRAs. PLR 9050030. Also review PLR 9525062. It also deals with using multiple accounts to fund a single SEPP.
And

Quote:
Q. I have a SEPP that used one of my two IRA accounts, can I set up a second SEPP with the other account?

A. Since all accounts are treated individually, there is no reason that the second IRA couldn't be used to establish a second plan, totally independent of the first plan. Just make sure that the appropriate payment comes from the appropriate plan.
Let us know how this works out for you.
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Old 08-19-2007, 05:22 AM   #6
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Cruised my pension site and found this that seems to indicate I why could not do a SEPP from my DC plan (referred to as DROP or PROP here). It's apparently not an IRS issue, just a "we don't want to mess with it" issue. Maybe, if TSP will administer it, you could do one within TSP. Still, I'm pretty certain you would have to split the account into two separate accounts to achieve receiving a lower amount.


Quote:

Question:
I plan to retire before age 50. I can rollover all or part of my DROP monies to an IRA and set up a SEPP to avoid the 10% penalty. Can I rollover all or part of my DROP monies to PROP and set up a SEPP to avoid the 10% penalty and take advantage of the higher interest rates earned through PROP than other IRAs?

Answer:
You can set up a SEPP through your accountant or financial advisor and then take distributions of the required payments from your IRA account. HPOPS does not administer SEPPs and you must accept all responsibilities for creating and administering the SEPP and for taking the appropriate distributions from your PROP account.
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