Thirft Savings Plan (TSP) Forfeiture Question

[OhSoClose]

I went to a financial planning pitch, and the planner pointed out the following provision in TSP form TSP-775:​

1. Deadline for Withdrawing Your TSP Account​

By April 1 of the year following the year you become age 70 ½ and are separated from Federal service,

the TSP requires that you withdraw your entire account balance in a single payment, begin receiving monthly payments, purchase a TSP annuity, or use a combination of these withdrawal options. This withdrawal deadline is the same as that stated in Internal Revenue Code (I.R.C.) rules for “required minimum distributions,” described in Section 2.

If you do not withdraw your account by the required deadline, your account balance will be forfeited to the TSP. You can reclaim your account, but you will not receive earnings on your account from the time the account was forfeited. In order to reclaim your account, you must make a full withdrawal election.​

So this planner was trying to convince folks, upon retirement, to roll their TSP balances into an IRA, which I generally think is a bad idea. The planner, however, was using the forfeiture statement above as an argument to get out of the TSP. He stated that there is no similar forfeiture in the IRA for failure to take RMD, and that the TSP reclamation process is lengthy, and that if you die after you forfiet but before you file to reclaim your forfeited TSP balance, the forfeiture is absolute (i.e., because your estate cannot file to reclaim). This all seems draconian and likely untrue. But I see the form language above, and am afraid of turning 70 with Alzheimers or something, and wondering about all this. Anyone have any resources or insight on this?

Thanks!

OhSoClose
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[W2R]

I don't know anything about the forfeiture, but I plan to withdraw according to RMD requirements anyway so it shouldn't affect me.

There are many ways to deal with the RMD problem but yes, it should be addressed. As I understand it, the idea of having an RMD is to require retirees to use tax advantaged retirement funds for retirement, not just to sit on them and then pass them on to their kids.

I am presently taking monthly payments from the TSP. If I don't change the amount of the monthly payment, it stays the same. And, the amount I am planning to withdraw from here on out will be much greater than the RMD from here on out, at present rates of yield.

If I begin to suffer from Alzheimer's, I will have to see a lawyer and among other things, give someone Power of Attorney. The person with POA can notify the TSP to shift my withdrawal schedule to one that satisfies the RMD requirements just to play it safe.

Someone will have to do my taxes, too, if for any reason I can no longer accomplish that task by myself. Luckily Alzheimers does not run in my family, but then you never know what could happen.

 

[Nords]

But I see the form language above, and am afraid of turning 70 with Alzheimers or something, and wondering about all this. Anyone have any resources or insight on this?

Fear marketing!

If you have Alzheimer's and end up forfeiting your TSP, how would you know?

I suppose that if you could roll out of the TSP to an IRA at any time, then you could do so when you feel it's appropriate. Otherwise I'd want to stay in the TSP for the fund choices and the low expense ratios.

 

[OhSoClose]

Fear marketing!

If you have Alzheimer's and end up forfeiting your TSP, how would you know?

I suppose that if you could roll out of the TSP to an IRA at any time, then you could do so when you feel it's appropriate. Otherwise I'd want to stay in the TSP for the fund choices and the low expense ratios.

I guess it seems funny, but it wasn't meant that way. Alzheimers runs in the family. And its my beneficiaries, not me, that I would be concerned about.

I guess I will write the TSP folks for an explanation of why this forfeiture provision and for assurances about the reclamation process.

 

[FinanceDude]

Doesn't surprise me all that much. The IRS is trying to get the TSP folks to treat their TSP like an IRA of sorts. Much like IRAs, where the IRS is trying to get you to liquidate the money over about a 20 year actuarial timeframe, so the same with TSP. They just want to get their mitts on the taxes on deferred money. The forfeiture thing if you die sounds a lot like SS for single people, if you die too soon, they keep the money.........

 

[Nords]

I guess it seems funny, but it wasn't meant that way. Alzheimers runs in the family.

It's only funny if you can see the humor in it.

I lost my grandfather after at least 15 years of senile dementia, during the first few of which he was still living on his own and hid it very well while he essentially stopped taking care of his affairs. If he'd had a TSP he would have lost it.

My father (Grandpa's son) is in the process of heading down the same road. Even though he's been on the other side of dementia, now that he sees it coming he doesn't care to do anything about it. My brother and I are about to repeat the same experience with him that he had with his father. Now he says that he doesn't think getting POAs was a big deal back then, and he'll let us know when he's ready to give us POAs. Of course none of us have any idea if he remembers saying that.

So if there's a genetic component to Alzheimer's/dementia, then I'd rather make jokes than feel bad about it. Because of course I'd never put my kid through that experience. Nope.

And its my beneficiaries, not me, that I would be concerned about.

From other threads on that subject on this board, I suspect that your beneficiaries are much more concerned about you than about your assets or their potential inheritance. I wouldn't worry on their behalf.

Or if you are worried about it, then make yourself feel better by giving them a power of attorney to do what needs to be done with your TSP when the time is right. It's a lot easier to get a POA now than it is to get one when the grantor is of diminished capcity.

I guess I will write the TSP folks for an explanation of why this forfeiture provision and for assurances about the reclamation process.

Or you could avoid the whole issue by rolling your TSP over to an IRA whenever you feel the time is right instead of waiting until you're up against their age 70.5 deadline.

In our case we'd need to roll spouse's TSP into an IRA and convert it to a Roth before her pension starts in 2022 and shoves us into a higher tax bracket.

But you have to do what you feel is right for you.

 

[OhSoClose]

Doesn't surprise me all that much. The IRS is trying to get the TSP folks to treat their TSP like an IRA of sorts. Much like IRAs, where the IRS is trying to get you to liquidate the money over about a 20 year actuarial timeframe, so the same with TSP. They just want to get their mitts on the taxes on deferred money. The forfeiture thing if you die sounds a lot like SS for single people, if you die too soon, they keep the money.........

Yes, but social security is a sort of defined benefit stream, and you expect that to end when you die. The TSP, on the other hand, is a defined contribution plan like a 401(K). That is several hundred thousand dollars of my money I put in that TSP (including earnings, and some match), and like a 401(k) you expect to be able to access it while you live and pass the remainder on to your heirs when you die. Any possibility that me or my family might forfiet the entire balance because of one careless mistake makes no sense. In contrast, if you don't take the proper minimum withdrawal at age 70 on the IRA, you don't forfiet your entire account balance. My understanding is the IRS just puts a hefty tax on the withdrawal amount you should have taken from the IRA.

Basically, I know the TSP is great, with very low expenses and the fantastic G Fund option for the low risk portio of the portfolio. As Nords suggested I will just have to carefully plan -- well in advance of age 70 -- as for the proper minimum withdrawal or perhaps move the funds to an IRA as I approach 70. But I will also contact the TSP for some explanation of why this stupid forfeiture possibility.

 

[donheff]

I don't believe the marketer. The TSP undoubtedly pesters you to begin setting up RMDs or to pull your funds when you hit 70 but that is a good thing - it keeps you from being penalized. The reaction to a failure to respond sounds a little extreme but it would certainly provoke action. If you died there is no way on earth the TSP is going to seize your funds and keep them from your heirs. But you might have to muck about to satisfy IRS before you got them. The bottom line is that bottom feeding advisers want to suck you away from a good thing to their fee machines.

 

[Lakedog]

This withdrawal deadline is the same as that stated in Internal Revenue Code (I.R.C.) rules for “required minimum distributions,” described in Section 2.

If you do not withdraw your account by the required deadline, your account balance will be forfeited to the TSP. You can reclaim your account, but you will not receive earnings on your account from the time the account was forfeited. In order to reclaim your account, you must make a full withdrawal election.​

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All this is saying is that TSP has the same RMD requirement as an IRA or 401k. According to the last paragraph you quoted, you don't lose anything if you do not start withdrawals by age 70.5 but you then must withdraw it in a lump sum (or rollover to an IRA). You just have to start withdrawing by age 70.5 (not take all of the funds out by that age).

 

[OhSoClose]

The bottom line is that bottom feeding advisers want to suck you away from a good thing to their fee machines.

I think you are exactly right, that was the motivation in him highlighting this TSP form language. Believe it or not, my agency hired this guy to give us "financial planning" classes. I have already complained to OHR about some other things this guy said.

 

[ziggy29]

I for one wouldn't take it out of the TSP even if the language is making it sounds like that's what you should do. Nowhere else do you have an investment option like the G fund.

 

[meierlde]

Note that if you are subject to inheritance tax (next year $1mill unless raised) you loose 45% of the IRA/401k to the estate tax and then pay income tax on the rest at whatever rate so that you get to keep no more that 45 cents on the dollar. The best assets to give away to charity are these because the amount to charity escapes the estate tax, and the charity does not pay the income in respect of decedent tax.

 

[Khan]

Note that if you are subject to inheritance tax (next year $1mill unless raised) you loose 45% of the IRA/401k to the estate tax and then pay income tax on the rest at whatever rate so that you get to keep no more that 45 cents on the dollar. The best assets to give away to charity are these because the amount to charity escapes the estate tax, and the charity does not pay the income in respect of decedent tax.

Inheritance tax and extate tax are different things. There is no federal inheritance tax.

 

[John Galt]

I have a couple questions about the TSP.

How long are you allowed to contribute to it, only as long as you are on active duty?

Also, what happens to it when you leave, do you get to keep your money in those funds or do you have to cash out? Like, if I roll my TSP into a Roth IRA (is that possible) could I still have the G fund in there?

And could I continue to buy shares of the G fund as a civilian? Thanks.

 

[Khan]

I have a couple questions about the TSP.

How long are you allowed to contribute to it, only as long as you are on active duty?

Also, what happens to it when you leave, do you get to keep your money in those funds or do you have to cash out? Like, if I roll my TSP into a Roth IRA (is that possible) could I still have the G fund in there?

And could I continue to buy shares of the G fund as a civilian? Thanks.

Can only contribute while employed as fed/active duty.

Can move money between funds even after employed.

TSP can be moved to IRA; movement to Roth requires paying taxes.

G fund only available within TSP.

 

[donheff]

Can only contribute while employed as fed/active duty.

Although you can roll another IRA/401K into the TSP. I rolled an old traditional IRA into my TSP after I retired.

 

[Khan]

Although you can roll another IRA/401K into the TSP. I rolled an old traditional IRA into my TSP after I retired.

Yes. But only before you start taking withdrawals.

 

[Nords]

I have a couple questions about the TSP.
How long are you allowed to contribute to it, only as long as you are on active duty?
Also, what happens to it when you leave, do you get to keep your money in those funds or do you have to cash out? Like, if I roll my TSP into a Roth IRA (is that possible) could I still have the G fund in there?
And could I continue to buy shares of the G fund as a civilian? Thanks.

You can contribute up to 92% of your active duty or Reserve pay, up to the various limits listed on the TSP website (they change annually). (The other 7.45% of your pay is reserved for FICA/SS/Medicare deductions.) I'm not sure about National Guard or ANG.

If you have less than a certain amount, certainly <$1800, they'll cash you out and you'll have to roll it to an IRA. (That's what happened when I ER'd.) Otherwise you can leave your funds in the TSP until you start taking mandatory RMDs.

You can roll a portion of your TSP into an IRA or you could leave it all there and use the TSP for your asset allocation of index funds at the world's lowest expense ratios.

If you're in federal civil service then you'll have a separate TSP and could also buy "G" fund shares in that account.

I don't think the military's eventual implementation of the Roth 401(k) would let discharged veterans contribute to the TSP, but it could happen. I think the military would rather use the Roth 401(k) as a retention/bonus program.

 

[meierlde]

Note that if you are subject to inheritance tax (next year $1mill unless raised) you loose 45% of the IRA/401k to the estate tax and then pay income tax on the rest at whatever rate so that you get to keep no more that 45 cents on the dollar. The best assets to give away to charity are these because the amount to charity escapes the estate tax, and the charity does not pay the income in respect of decedent tax.

Oops make that estate tax, although if you think about it, if you leave the money to charity, it gets by untaxed so the estate tax really walks more like an inheritance tax as its take depends on who gets the money.

 

[zinger1457]

A ROTH option has been approved for the TSP plan but it's not expected to be available until 2011.