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TSP Talk - Thrift Savings Plan Talk

 The Groundwork for Your Retirement         

Success! You've reached retirement. Now what? It's time to get a grip on your income while keeping your taxes low. Know what money is coming in, what your expenses are, and how reduce taxes to ensure your savings sufficiently last and keep up with your desired lifestyle. 


Until recently TSP participants were allowed one partial withdrawal and a full withdrawal from their TSP accounts. Thanks to the TSP Modernization Act passed by congress, TSP participants now have a lot more flexibility and liquidity to their withdrawal options. The new changes officially took effect on September 15th 2019 and those who made withdrawal choices prior to the new rule are eligible to make changes under the new rules.

Under the new rules post-separation TSP installment payments can be spread out through monthly, annual, or quarterly payments. Changes to your payment plan including to start, stop, or change payment amounts can be made at any time during the year instead of the 3.5 month window under old rules.

Before TSP participants were allowed one partial withdrawal in their lifetime. As of September 15th 2019 TSP participants older than 59.5 years old who are still in service may take up to four withdrawals per calendar year. TSP participants who have left the federal service have no limit on partial withdrawals as long as requested are made 30 days apart. Partial withdrawals are also now available while receiving post-separation installment payments. This allows for easier access to money when life brings along unexpected expenses.

Another change made was the option to withdraw from a proportion of traditional TSP or Roth TSP accounts or strictly one or the other. Previous rules only took withdrawals at a proportional distribution. This gives more flexibility to TSP participants with choice that could benefit their taxes. taxes.

Required Minimum Distributions

Current tax rules don't let your defer withdrawals beyond the year you turn 70.5. There are required minimum distributions (RMD). This means you have to withdraw and pay taxes on a minimum amount from your TSP based on your age and assets. The IRS website has more information to help you determine your RMDs.

If you do not withdraw enough require by your RMD, the TSP is required to make the required distribution to you by April 1 of the following year. A consequence that could lead you to end up in higher tax bracket meaning more of your Social Security income will get taxed further taking more money out of your pocket.

Although you are not taxed on your Roth TSP contributions when you withdraw, the RMD total applies to both the traditional and Roth balances and are paid proportionally. Normal Roth IRAs are not subject to RMDs giving you more freedom on your withdraw amounts.

If your calculated RMD puts you in an unfavorable tax bracket or you wish to have more freedom to how much you want to withdrawal, you have the option to move your Roth TSP contributions into a Roth IRA that will not be subject to RMDs and give you the option to continue investing. This must be done before the year that RMDs begin to affect you.

Social Security Benefits

The two principal ideas on dealing with your Social Security retirement benefits are deciding when you should begin claiming your benefits and how to maneuver your income to prevent exposing too much of those benefits to taxation.

The amount received per month from Social Security benefits is determined by multiple factors and therefore situational. Lifetime earnings, marital status, total retirement income, retirement age, state tax laws, and age you start claiming your Social Security retirement benefits all have an effect on what you're entitled to for the rest of your life.

Once in your retirement years you have to decide when to begin claiming your benefits. This decision will affect your monthly benefit income for the rest of your life. Deciding when to start receiving your benefits is also very situational with the main factors being your need for money once qualified, your life expectancy, and optimal timing strategies if your spouse is also entitled to your Social Security retirement benefits.

The factors mentioned in the second paragraph dictate a predetermined amount of your monthly income from Social Security once you reach your full retirement age. Your full retirement age is determined by what year you were born and will land somewhere to the month between 66 and 67. Taking benefits before your full retirement age will result in a reduction to the monthly payments by slightly more than a half a percent per month you claim early. This will leave you with more Social Security checks but at a lower amount if you waited. Delaying to claim Social Security benefits will increase your monthly checks until you reach 70 when  waiting has no longer has benefits.

Waiting until 70 is not necessarily the best option. You have to decide whether your better off with more checks for a smaller amount or fewer checks for a larger amount. If you turn 62 and find yourself falling behind on your finances then it a good idea to start the checks early at the lesser amount. If this is not the case then it comes down to how long you expect to live. If you are not in the best health then you should lean towards taking the smaller checks earlier. If you are a health nut and expect to live past the average life expectancy then delaying the checks to let them grow may benefit you more.

If you have a spouse who is also expected to receive Social Security retirement benefits then you can plan accordingly. This may include claiming one of checks earlier and letting the other grow past the full retirement age. Keep in mind that when one spouse dies the surviving spouse receives the higher amount of the two Social Security checks, but not both. 

Taxes on Social Security Benefits

Social Security benefits alone as a sole source of income are not taxable. However these benefits can become partially taxable when you have other sources of income like withdrawals from your TSP. Up to 85% of Social Security retirement benefits can be exposed to taxation; but this high of a percentage is only the case for high income households.

The percentage of your Social Security benefits that will be exposed to taxation is determined by your provisional income. Your provisional income is determined by the sum of half of your Social Security benefits, working income, retirement savings withdrawals, pension plan income, dividends and capital gain, and non-taxable interest. It does not include Roth IRA withdrawals and most cash-value life insurance withdrawals.

There are certain threshold amounts of provisional income that once surpassed create taxable Social Security. Threshold amounts are different for single taxpayers or Head-of-Household from those of married couples filing a joint return. It basically comes down to the higher your provisional income, potentially the more of your Social Security retirement benefits for the year qualify to be taxed.

I won't get too into the number but there are provisional income tax calculators on the web. What is important is that Roth TSPs are included in your provisional income amount while Roth IRAs are not. This point favors moving money from your Roth TSP into a Roth IRA once you reach the age where you start collecting Social Security. This move will potentially lower the amount of taxes you pay on Social Security benefits as well as decrease your required minimum distributions and give you more control on your withdrawals. You can also continue to invest money that sits in your Roth IRA; an option you can't do once you decide to withdraw from your TSP.

I hope this information will inspire you to do your own research and search out help to narrow down the best option for you.  


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The Groundwork for Your Retirement


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