Q: I’m retiring at end of year. I will collect my 33 percent and Social Security supplement. I am under law enforcement at federal prisons. I will be 52 with 20 years of service. I don’t want an annuity when I decide to collect from the Thrift Savings Plan. Can you explain why they will not penalize my other two, but they will penalize my TSP if I collect now? After all, this is part of my retirement just like the other two. Are there ways to avoid being penalized?
A: Because you will be retiring under the special provision for law enforcement officers covered by Federal Employees Retirement System, you will not only receive your FERS annuity but will also be eligible for annual cost-of-living adjustments to that annuity. You will also be eligible for the special retirement supplement, but only after you reach your minimum retirement age, which ranges between 55 and 57 depending on your year of birth. Until you reach your minimum retirement age, you may earn as much as you want from wages or self-employment without the SRS being subject to the Social Security earnings limit. After you reach your MRA, you will be subject to it. Your SRS and Social Security payments come from defined benefit pension programs, so they’re exempt from early withdrawal penalties. You could covert your TSP balance to a defined benefit pension by using it to buy an annuity and similarly avoid the penalty, but you choose not to — and I don’t blame you. You can also avoid the penalty and retain control of the principal by taking a series of Substantially Equal Periodic Payments (SEPP) under IRS rules. You may use any one of three methods to compute the required payments. The rules are complex and strict, however, so you should seek professional help from a CPA before proceeding.
— Mike Miles
