72t and Thrift Savings Plan Withdrawals

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L1: 72t and Thrift Savings Plan WithdrawalsI am a Federal employee ,54, and I have been researching 72t tax law (mostly on this great website) since I realized I would have to retire this year. While I feel I understand how the plan should be set up and maintained, the TSP does not seem to be aware of this provision of the tax code. According to their rules, we are allowed to take a one time partial distribution using form TSP 77 and after that we must take a full withdrawal using TSP 70. This money can be distributed monthly in any amount (remaining in the account) or rolled over into an IRA. I plan on taking a full years distribution in either Nov. or Dec. as my retirement date is 10/31/09 & then 12 monthly installments which equal the same amount in the next 5 yrs or when the plan has been completed. Does this sound correct? TSP will not enter a 2 in form 1099 & I will have to use a 5329 in every years tax return until plan is done. TSP makes it tough. Thanks, SleepyDan2009-10-05 23:27, By: SleepyDan, IP: []
L2: 72t and Thrift Savings Plan WithdrawalsDan,
You are correct. While you can construct a 72t plan from the TSP, they do not actively support such a plan, similar to many private company defined contribution plans.
You are best suited to roll over the balance, or at least enough of the balance to an IRA that will produce a 72t distribution amount according to your needs until 59.5.
While you could calculate the 72t distribution needed and then request those exact distributions from the TSP, your marginal of error is reduced to about zero, since any execution error will bust the plan, and the TSP will not be able to fix the error, eg. they will not accept a roll back if they distribute too much. Therefore, I do not recommend taking the risk of starting a plan directly from the TSP.
When will you turn 55? If you turn 55 before the end of this year, you will not even need a 72t plan because the early withdrawal penalty will be waived by the age 55 separation exception. Another way to meet that exception would be to extend your termination date to January. The exception requires that you attain 55 by the end of the year of your separation. Avoiding the restrictions of a 72t plan is advisable if at all possible.
The 5329 issue is not much of a problem because the vast majority of custodians are now refusing to code 72t distributions will the exception on the 1099R.
2009-10-06 00:15, By: Alan S., IP: []

L3: 72t and Thrift Savings Plan WithdrawalsIf I roll these funds into an IRA, they will then become subject to NC state income tax. As long as these funds are kept in the TSP, withdrawals are exempt. My main concern is that the account balance is a moving target and I don’t need to make a mistake. I have the discipline to stay within the plan, just can’t afford a glitch. Thanks for your reply. SleepyDan2009-10-06 02:31, By: SleepyDan, IP: []

L4: 72t and Thrift Savings Plan WithdrawalsOK, I see that using the TSP could save you around 7% be eliminating the NC income tax. That means contrasting a sure 7% savings against the chance of a 10% loss, and that prospect is compelling.
If you proceed, the account balance should not be a problem, but you must choose a date after which you are sure that there are no further contributions including employer matches if any that can be made. Any contribution would either bust your plan or put you through a wringer proving to the IRS that the addition was one of the few types that there is an exemption for in employer plans.
Your calculation must include the entire starting balance using the correct max interest rates based on the month of your first distribution. You can take out the full amount for 2009 if you start this year or pro rate by the month of the first distribution, but taking the full amount added to your salary for most of the year will hit elevate your 2009 income taxes.
You would then have to determine the payout dates, and do NOT set them up late in the month, because if there is any hope of correcting a December error, you will need time to do that. So do not take your final distribution after early December. Based on payment frequency, rounding can also be a challenge.
Find out what options do exist with respect to changing the distribution, eg. if you want to make the one time switch to the RMD method.
These are just some, but I am sure there are more pitfalls to using the TSP for a 72t plan, but that is your call. You might want to see if you can locate any other retirees who are doing this who can alert you anything else you should know.2009-10-06 05:05, By: Alan S., IP: []

L5: 72t and Thrift Savings Plan WithdrawalsI have not met any other federal employees who are following a SEPP 72t nor have I met anyone who knows anything about the plan. Thanks to this site, I feel comfortable leaving the money in the TSP given the fact that the money is exempt from NC income tax (6 to 7.5%) for life as opposed to rolling into an IRA. A mistake and a possible 10% penalty for 5 years pales in comparision to 6 to 7.5 % state tax for life.
Thank for this site and the replies, SleepyDan2009-10-12 17:54, By: SleepyDan, IP: []