Thread: Leaving funds in TSP and taking 72t withdrawals

clester wrote:

Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in 72(t)(1) will not be applicable.

Clester you must understand what that means. It means that you elect an IRREVOCABLE SETTLEMENT OPTION which can NEVER be undone.

In other words YOU trade ALL the cash value of your TSP account for an INCOME STREAM during your life and/or the life of your spouse.

The cash asset NO LONGER exists. YOU DO NOT have access to any cash other than the monthly income payment. No one usually makes that type of life only IRREVOCABLE SETTLEMENT OPTION unless there is a compelling reason to do so. Many people simply rollover their TSP account when they retire to their own self-directed IRA and let it continue to grow until age 70 1/2 when they must begin taking their Required Minimum Distribution.

Regarding the 10% penalty for withdrawals prior to age 59 1/2. That applies to ALL qualified and non-qualified pension plans including IRAs, 401Ks and annuities.

You must qualify for a "hardship" withdrawal to escape the 10% penalty.

See THIS link. While the link is specific to 401Ks ALL qualified pension plans must follow the same IRS code.

But to discourage these early hardship withdrawals, in most all cases the IRS imposes a hefty financial penalty including a 10 percent early withdrawal penalty if you are younger than 59 1/2.



You may qualify to take a penalty-free withdrawal if you meet one of the following exceptions:

• You become totally disabled.
• You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
• You are required by court order to give the money to your divorced spouse, a child, or a dependent.
• You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
• You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)

Employers are not required to offer any type of hardship withdrawal, so you should check with your employer to see if it is available to you.

Originally Posted by GarySpicuzza

clester wrote:

Clester you must understand what that means. It means that you elect an IRREVOCABLE SETTLEMENT OPTION which can NEVER be undone.

In other words YOU trade ALL the cash value of your TSP account for an INCOME STREAM during your life and/or the life of your spouse.

The cash asset NO LONGER exists. YOU DO NOT have access to any cash other than the monthly income payment. No one usually makes that type of life only IRREVOCABLE SETTLEMENT OPTION unless there is a compelling reason to do so. Many people simply rollover their TSP account when they retire to their own self-directed IRA and let it continue to grow until age 70 1/2 when they must begin taking their Required Minimum Distribution.

Regarding the 10% penalty for withdrawals prior to age 59 1/2. That applies to ALL qualified and non-qualified pension plans including IRAs, 401Ks and annuities.

You must qualify for a "hardship" withdrawal to escape the 10% penalty.

See THIS link. While the link is specific to 401Ks ALL qualified pension plans must follow the same IRS code.

I believe there is one other exception - natural disasters. Victims of hurricanes, etc. qualify for hardship withdrawals. Hurricanes Katrina and Rita, for instance. I know for a fact that people were able to withdraw for that.

I'm not sure of what your talking about. The 72t methods are an exemption to the 10% penalty for 401k's and IRA's. Not an annuity. The money is still yours just as if it were in an IRA.

clester, the phase..."made for the life (or life expectancy) of the employee" means that one has "annuitized" their TSP account to ESCAPE the 10% penalty PRIOR to age 59 1/2. But you have to be at least 55 years old and you must take the payments for at least 5 years.

Your TSP account can be "annuitized" within the plan itself and once someone elects a settlement payout option it's IRREVOCABLE.

You have to trade the account value for an income stream, "made for the life (or life expectancy) of the employee".

Originally Posted by GarySpicuzza

clester, the phase..."made for the life (or life expectancy) of the employee" means that one has "annuitized" their TSP account to ESCAPE the 10% penalty PRIOR to age 59 1/2. But you have to be at least 55 years old and you must take the payments for at least 5 years.

Your TSP account can be "annuitized" within the plan itself and once someone elects a settlement payout option it's IRREVOCABLE.

You have to trade the account value for an income stream, "made for the life (or life expectancy) of the employee".

I disagree that its irrevocable. Its the same as an IRA 72t option.

What I'm saying is that you can figure your payments using 72t rules for say the amoritization method (just as if it were in an IRA) then request monthly payments from TSP in that amount. They won't know what your intentions are! Just follow 72t rules. That amount you choose for payments is set until 59 1/2 just like an IRA. What I'm saying is that you can treat your account in TSP just like an IRA.

Gary,
go to www.72t.net to see how this would work. There would be no 10% penalty and at 59 1/2 you can take a lump sum if you want. It's stiil your money.

Also remember, I'm talking about people like me (Air traffic controllers) who can and will retire before age 55 (I will be 49) and want income from their TSP.

clester wrote:

Also remember, I'm talking about people like me (Air traffic controllers) who can and will retire before age 55 (I will be 49) and want income from their TSP.

Clester when you take withdrawals out of your TSP "Qualified Pension Plan" from age 49 to age 59 1/2 YOU WILL pay a 10% penalty on the withdrawals in addition to ordinary income taxes.

You will receive a Form 1099-R from TSP that WILL designate the withdrawal as an early distribution from a Qualified Pension Plan.

I'm not being argumentative. You will not escape the 10% penalty prior to age 59 1/2 unless you would qualify for a hardship withdrawal or "annuitize" at age 55 for at least 5 years.

ALL qualified pension plans have the EXACT same distribution rules imposed by the IRS.

Originally Posted by GarySpicuzza

clester wrote:


Clester when you take withdrawals out of your TSP "Qualified Pension Plan" from age 49 to age 59 1/2 YOU WILL pay a 10% penalty on the withdrawals in addition to ordinary income taxes.

You will receive a Form 1099-R from TSP that WILL designate the withdrawal as an early distribution from a Qualified Pension Plan.

I'm not being argumentative. You will not escape the 10% penalty prior to age 59 1/2 unless you would qualify for a hardship withdrawal or "annuitize" at age 55 for at least 5 years.

ALL qualified pension plans have the EXACT same distribution rules imposed by the IRS.

Wouldn't a 72t be considered a roll-over and not subject to penalty?

squalebear, he's not talking about doing a rollover.

He's talking about taking income withdrawals prior to age 59 1/2 at his age 49.

He can do all the rollovers he wants and that's NOT a taxable event.

But if you take withdrawals prior to age 59 1/2 the IRS imposes a 10% penalty. This means you took constructive receipt of the money for the purpose of spending the money.

This applies to all qualified and non-qualified pension plans.

I don't want to say I do this for a living and have many former TSP owners as clients.

I'm going to be more declarative to get my point across....

If you take withdrawals from a qualified and/or non-qualified pension PRIOR to age 59 1/2 YOU WILL OWE THE IRS A 10% PENALTY PLUS ORDINARY INCOME TAX ON THE AMOUNT WITHDRAWN!

It's that simple.

Did I mention I do this for a living?

See THIS link.

5.3 Pensions/Annuities/Retirement Plans (i.e., 401(k), etc.): Types of Plans

In most cases, if you withdraw funds from your 401(k) plan before you are 59 1/2, you must pay the 10 percent additional tax on early distributions from qualified retirement plans on any amounts that are not rolled into an IRA. However, there are some exceptions listed in Publication 560, Retirement Plans for Small Business, and Publication 575, Pension and Annuity Income. You would not have to pay the 10 percent additional tax, for example, if you received the distribution after you left the company and you left the company during or after the calendar year in which you reached age 55 and your departure from the company qualifies as a separation from service. Tax Topic 412 and Tax Topic 558 are available for further guidance.

Originally Posted by GarySpicuzza

squalebear, he's not talking about doing a rollover.

He's talking about taking income withdrawals prior to age 59 1/2 at his age 49.

He can do all the rollovers he wants and that's NOT a taxable event.

But if you take withdrawals prior to age 59 1/2 the IRS imposes a 10% penalty. This means you took constructive receipt of the money for the purpose of spending the money.

This applies to all qualified and non-qualified pension plans.

I don't want to say I do this for a living and have many former TSP owners as clients.

I'm going to be more declarative to get my point across....

If you take withdrawals from a qualified and/or non-qualified pension PRIOR to age 59 1/2 YOU WILL OWE THE IRS A 10% PENALTY PLUS ORDINARY INCOME TAX ON THE AMOUNT WITHDRAWN!

It's that simple.

Did I mention I do this for a living?

See THIS link.

5.3 Pensions/Annuities/Retirement Plans (i.e., 401(k), etc.): Types of Plans

That is not correct. If you take out equal monthly withdrawals and are still in TSP starting the year you turn 55, and retire, there is no 10% penalty, an amount of your choice. We have been over this many times. The 59.5 age is if you roll it over to a private plan.

http://tsp.gov/forms/octax92-32.pdf