Withdrawal options

[ynotbop]

If you retire at 50 under FERS law Enforcement, can you leave your money in TSP and take a series of monthly payments computed by TSP based upon the IRS life expectancy tables and avoid the 10% early withdrawal penalty?

[Wheels]

Yes, but then you must continue with that withdrawal method until you are 59 and a half, otherwise you will have to pay the 10% on all the money you already took out.

Dave

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[Hybrid93Hatch]

In reference to the question above:

Can this amount be as little as you'd like on up to whatever you'd like?

Sorry to jack the thread but I also have questions about withdrawl @ retirement.....

I've asked many people about this and always get a different answer.

1) Is there a set ageto withdraw and not be taxed?

2) Is there a set amount of years you must be retired before withdrawing? 30 years service will put me at 55 years of age.

I am also a FERS employee. I think the first Q was my main concern. Thanks for any feedback :^

[Wheels]

If you retire during or after the year in which you turn 55, you can withdraw your money whichever way you want, however much you want, and you will not be assessed an extra ten percent penalty. You will of course pay federal tax on it. If you retire before the year in which you 55, then you will pay a 10% penalty on any withdrawals before the age of 59 1/2. UNLESS you take "substantially equal payments based on the IRS life expectancy tables". If you choose this method you must continue with this method for 5 years or until you turn 59 1/2, whichever comes later. Then you may take it penalty free. If you choose this method, the TSP computes the amount for you. You do not get to choose an amount. Figure on a rough estimate of 3% of your account balance per year, divided into 12 monthly payments (I've explained the 3% percent thing somewhere on this board in another thread - I won't bother with it now since this is already a lot to digest).

In your scenario, where you are looking at retiring at 55 this is all moot since you won't have to worry about the penalty (you don't even have to turn 55, just retire in the year you turn 55 - so if you have a late birthday you can go in Jan of that same year).

Hope this helps,

Dave

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[Birchtree]

ynotbop,

As an alternate withdrawl plan you might consider having your monthly distributions placed into an IRA of your choice - that way you avoid any tax or penalty considerations. At a later date if your AGI is undercontrol you might then begin to make distributions from your IRA into a Roth IRA - which is a much better deal all around, especially for any heirs. The difficult part will be to control your AGI to an effective lower rate - but the annuity along with social security will act to keep you in a higher tax bracket. It's a long drawn out process to keep what you have earned.

Dennis

[Pill]

But worth it, right Dennis?

[theoguins]

I just retired...I plan to take a lump sum of about $20K and roll the rest to a private annuity. I'm 58. My understanding is the lump sum will be taxed at 20%, but will not be subject to the 10% penalty. Is this right? Also, does anyone think rolling to an annuity instead of an IRA is not the way to go? I'm intrigued about rolling to an IRA then to a Roth later. This is the first I've heard about that scenerio. Discuss please.......Thanks

[Gilligan]

One of my co-workers is getting ready to retire. He was looking at the annuity option but decided against it, because it only pays about 4.5%. He also said that when he passes away the money in the annuity would be gone. If he leaves it in the G fund and takes withdraws, the interest will be the about same and may go up. When he passes away the remaining G funds will go to his kids. He is also looking into Self-Directed IRAs, to build a self-storage complex. Self Directed IRA seems to be the best bet if a person wants to get into real estate investing or start a business during retirement. (Bed-and-Breakfast; Antique Shop, ect). Has anyone here transferred their account to a Self Directed IRA?

[Wheels]

I just retired...I plan to take a lump sum of about $20K and roll the rest to a private annuity. I'm 58. My understanding is the lump sum will be taxed at 20%, but will not be subject to the 10% penalty. Is this right? Also, does anyone think rolling to an annuity instead of an IRA is not the way to go? I'm intrigued about rolling to an IRA then to a Roth later. This is the first I've heard about that scenerio. Discuss please.......Thanks

You will not owe a penalty. TSP will withhold 20% for federal taxes but that won't necessarily be what your effective tax rate is. It will depend on your other sources of income.

As far as the annuity is concerned, they are generally considered a bad idea. Understand, you are not "rolling" the money into an annuity. You are buying an annuity. You will then be paid monthly but the money will be gone. I suppose if you are alone and have no heirs and are expecting to live a long, long time, then it might not be a bad idea.

Dave
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[theoguins]

What do you think about purchasing an annunity through TSP.....the same? What's your opinion about leaving the money in TSP and placing the money in an LFund?

[EW_ret]

GovExec.com has a good summary on the withdrawal options for TSP accounts. It can be found here: http://www.govexec.com/dailyfed/0306/032406rp.htm

I personally would not buy an annuity because it’s a permanent contract that removes the control of your money. My family tree shows most die before 70, so I’ am better off leaving it in TSP, or transferring to a rollover IRA. The Lifecycle funds are a good alternative for those who do not want to oversee their TSP account management. It’s a simple solution that allows a retiree to enjoy life. You could set up a monthly withdrawal from an L 2010, or L 2020 fund, using a TSP-70 form to make a total withdrawal. The L Income fund, in my opinion, is too conservative for a young retiree.

[theoguins]

You will not owe a penalty. TSP will withhold 20% for federal taxes but that won't necessarily be what your effective tax rate is. It will depend on your other sources of income.

As far as the annuity is concerned, they are generally considered a bad idea. Understand, you are not "rolling" the money into an annuity. You are buying an annuity. You will then be paid monthly but the money will be gone. I suppose if you are alone and have no heirs and are expecting to live a long, long time, then it might not be a bad idea.

Dave
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Very helpful.......Thanks

[Birchtree]

theoguins,

First and foremost - welcome to the site. The fact that you engaged this lot tells me you are interested in independent thinking along with self preservation. You are still young at 58 - you run the risk of being retired more years than you worked. Your defined benefits plan has become an annuity - why take another?

Everything you do financially from now on will impact your AGI (adjusted gross income) and your AGI will impact everything you do. So anything you can do to control your AGI will save you money. For example, don't take early social security if you don't need the extra money. Idealy you should work toward a 15% tax bracket - that level will impact other financial decisions. Foe example, stock capital gains and dividends are taxed at 5% if you are in the 15% bracket. Currently if married and AGI is under $59,000. you are in the 15% bracket.

Leave your money in the TSP awhile and see how comfortable you are as your own money manager - the potential for some good gains in the years ahead are at your finger tips. My suggestion is to absorb as much bull manure from these guys as possible - that's what makes things grow. Moving money from your TSP to an IRA of your choice is a good idea - just do it in increments over several years - like a monthly dollar cost averaging strategy. Watch the fees and try to stay online and seriously consider going with individual stocks for the dividend reinvestments they offer - that way your money is always working. At a later date when you have that AGI under your thumb start the process of moving funds to a Roth IRA. If you open the Roth IRA with the same company you can simply transfer any stock position without a selling fee.

I know this is a lot of turf to cover and it does get complicated when dealing with the thought of potential heirs - but there is so much flexibility available to help you work around the hungary IRS. Take care

Dennis