Q: My wife wants to withdraw money from her TSP to pay off financial obligations. How much can we expect to pay in taxes if she withdraws $65,000? A: Her withdrawal may be subject to withholding. You can review the information in the document at https://www.tsp.gov/PDF/formspubs/octax92-32.pdf. How much you wind up owing in tax will depend upon the specifics of your tax return for the year of the withdrawal.
Monthly Archives: April, 2011
Q: I am 62 years old and will retire this year under the Civil Service system after 41 years. I want to take all of my TSP out to pay off my second trust on my home this year. I was told when I withdraw my TSP I will pay a 26 percent withdrawal tax. Will I also have to pay an income tax on that money when 2011 income taxes become due? A: Your withdrawal will be subject to 20 percent tax withholding, which will be applied as a credit against your tax liability when you file your tax…
Q: I am 27 and I’ve been in the federal service for five years. All my contributions to the TSP are in the L2040. Since I do not expect to retire before 2040, I think the smartest move should be investing in the new L2050 fund. But my question is, should I move all the money that I already have to that fund, or should I just start investing in the L2050 and leave whatever I have in the L2040? A: The TSP recommends that you invest all of your account assets in the L Fund that corresponds most closely…
Q: I am a 54-year-old FERS employee who will be forced to retire soon. My 6.2 percent mortgage will eat up over half my pension. Would it make sense, upon retirement, to withdraw enough from my TSP to payoff the mortgage and leave the remaining funds? I will need 65,000 and have about 170,000 in my TSP. A: Whether it’s a good idea or not will depend upon how the move fits into your overall retirement strategy. Without a clearly defined strategy for managing your resources through retirement, it is impossible to say whether the move will help or hurt.…
Q: With it taking up to 12 months to start receiving a full retirement check once you retire, how long will it take to receive my TSP lump-sum payment after I retire? A: I can’t tell you, exactly, but based on my experience, it shouldn’t take more than a couple of weeks.
Q: Two of the biggest selling points of placing assets in a revocable living trust is that when you die your assets can be distributed privately and without the need for probate. But if everything is done privately and no probate court is involved, how would the IRS know whether or not the decedent’s estate was subject to estate taxes? A: The decedent’s estate is required to file tax returns, trusts or no trusts.
Q: My wife, a federal employee, has a traditional IRA. Some of the contribution made to the IRA was with money that was considered a deduction when it was contributed, thus no taxes were paid on those contributions. Some of the contributions over the years were made with after tax money. She could not deduct those contributions because of our combined income. My wife would like to know if she can transfer the money from her IRA to her TSP? Can all the increase in the value of the IRA be transferred to the TSP, even if the increase occurred…
I recently interviewed Kimberly Palmer, author of “Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back.” Palmer recommends young professionals save at least 25 percent of their pretax income as they earn it. She adds that up-and-coming feds should take advantage of their retirement benefits, particularly the Thrift Savings Plan. I advocate the TSP as the best retirement investment vehicle available anywhere. Its low expenses, efficient design and simplicity make it better than any other defined contribution retirement plan I know of. I agree with Palmer’s advice to maximize your TSP contributions. Generally, I prefer to see…
Q: I will be rebalancing my portfolio biannually to the initial allocation until I reach an age that justifies a change to a more conservative approach. To complete this action, do I process both an interfund transfer and a contribution allocation? Is biannually OK? A: You’re asking for specific, individual investment advice, which I can’t provide through this forum. In general, I recommend that Thrift Savings Plan investors using this do-it-yourself strategy set the contribution allocation to 100 percent G Fund and then periodically rebalance the existing assets to their selected allocation. I recommend that you rebalance no more frequently…
Q: I withdrew money from my Thrift Savings Plan and now it’s tax time, so we have to pay quite a bit. Will I be able to change the Code 1 into an “L” on Form 1099 so we do not have to pay so much in taxes? A: No, you can’t just change the code on a 1099 to avoid paying taxes or penalties. If you took an early distribution and don’t meet one of the IRS exceptions, you’ll owe the penalty. Maybe you should consult a CPA before filing your return.