72T applicable to TSP?
L1: 72T applicable to TSP?I have been receiving conflicting information from the Thrift Savings Board and the IRS. I am covered under the FERS retirement system and as a law enforcement officer I can retire at age 50 with 20 years of service which I already have. I would like to keep my money in the TSP 401 (because of the very low administrative fees) and start withdrawing when I retire at age 51. Does the 72T rule apply to my situation where I wish to withdraw money as a federal government retiree who is under 55 directly from the TSP without the 10% penalty in light of the fact that I have not rolled it over to an IRA? The TSP people tell me that the 72T is not applicable and the IRS tells me it may be applicable but I would have to work it out with the plan’s administrator which happens to be the TSP! I would appreciate your assistance in getting to the bottom of this issue especially in that there will be a growing number of employees in my situation in the coming years. Thanks.2008-11-11 08:27, By: jim, IP: [126.96.36.199]
L2: 72T applicable to TSP?Jim,The provision in the Pension Protection Act reducing the retirement age to 50 only applies to defined benefit plans for govt employees. The TSP is a defined contribution plan.A defined contribution plan can execute a 72t plan if the plan allows, however many will not. If I recall correctly, the TSP offers a flat installment plan that could effectively serve as a 72t plan, but tremendous risk is placed on the employee without any control. In other words, you could develop the calculations for your 72t distribution and then translate them into periodic installments that would meet IRS requirements without the TSP having a clue on what you were doing. But if they mess up, you are on your own without the flexibility to make corrections like you could with an IRA account. For example, if they miss the December distribution, the year ends and the plan is busted. If you still want to take this risk, at least set up the distributions for very early in the month so you have a chance to fix anything that goes wrong. There is always an element of added risk when the custodian is not aware of 72t plans and is just being used as a disinterested intermediary with respect to the plan.As for the IRS, there is no problem if your distributions meet the requirements of a 72t regardless of whether the TSP even knows what a 72t is. You will get a 1099R from the TSP coding your distributions as “early”, and you would have to attach a 5329 to your return to claim the penalty exception for SEPP payments. This has also become true for many IRA custodians including Vanguard.Another Jim who posts here has clients with govt plans and may confirm or correct this info. Perhaps there has been some recent changes in the TSP. I think they also are about to add a Roth option.2008-11-11 19:57, By: Alan S., IP: [188.8.131.52]
L2: 72T applicable to TSP?Refer to TSP Form-70, Section IV, Line 23 c, middle line for you to fill in your calculated,monthly, fixed dollar, SEPPdistribution amount. Sounds simple enough, but it’s not.You will note that you do not have anywhere on the form to indicate what date to start distributions, which is a problem. I just called the service center and confirmed their distribution rules. When they receive your TSP Form-70 “in good order,”they will process the paperwork and begin distributions to your bank by EFT. NOTE: You do not know on what date the first distribution will occur, and you have no control over setting this date. So if you are planning on doing it in 2008 I would seriously consider waiting until after 1-1-2009 to send in the paperwork and let it start next year. Like Alan said, you want distributions early in the month so you may have some flexibility to correct errors. Give yourself a whole year and not just one or maybe two months at the end of the year should errors occur.Once the distributions are set up, you can change them only once each year. This presents problems if you plan to use the “recalculation method.” My advice is to do one calculation for the Amortization method and let the amount remain the same for your period. Now since you will have about 10 years to run due to your age, if you need to switch to the RMD method in a future year, then plan on processing a IRA Rollover and work from that platform and forget about TSP. Granted the fees with TSP are cheap, but you have the cost of loss of flexibility, and flexibility is a really big element you will need during the entire SEPP process.I have worked with TSP from both ends.At it’s inception in 1986 & 1987, I was an Air Force officer, supervising civilian contracting personnel and I had to explain the system to them. Today as a Financial Planner I work with retirees to help them with their decisions how to best use their TSP funds. Based on the desires of my clients and what they want to accomplish for themselves and their families, I have never found a situation where leaving the funds with TSP was the best plan. OK, I know you may be thinking that I’m just being self-serving, but TSP is really designed for accumulating funds and not for distributing funds. I hope this helps.Jim2008-11-12 10:01, By: Jim, IP: [184.108.40.206]
L2: 72T applicable to TSP?Alan, thank you for your most informative response.The TSP.GOV websiteseems to be intentionally vague on what the mechanism is for those federal retirees in my category who wish to withdraw money from ages 50-55 without incurring the penalty. Itseems to say that if you are55 or over then you stand a far greater chance of not incurring the 10% early penalty withdrawal via TSP. Based on what you mentioned,thatit is safer to roll over my TSP to an IRA and utilize the 72T rule to withdraw money without getting hit with the penalty. (one would think that it is in TSP’s financial interest to keep us from rolling the money over to an IRA) Manyindividualsin my category are in uncharted waters as most retirees are in the other retirement system,CSRS, which the TSP is generally not a component of said retirement system. We FERS future retirees have been strongly advised to hire a financial planner who knows all of the “hidden” fees to maximize the IRA account. I have much to learn and I am glad I found this website.2008-11-12 10:31, By: jim, IP: [220.127.116.11]
L2: 72T applicable to TSP?Thanks Jim. I think we posted our last messages near the same time. I am going to carefully read your message. It seems I am getting a better handle on this sticky situation. It does seem however that hiring a financial planner is the way to go. I will respond after I read your message in more detail. Thanks again. Jim2.2008-11-12 10:39, By: jim, IP: [18.104.22.168]
L2: 72T applicable to TSP?The first sentence of Alan’s post has two elements which I will split out for you:The provision in the Pension Protection Act reducing the retirement age to 50 only applies to defined benefit plans for govt employees. The TSP is a defined contribution plan.FERS consists of two elements; a Defined Pension Plan (DBP) and a Defined Contribution Plan (DCP) which is your TSP. (The original Civil Service Retirement System (CSRS) is a DBP, with TSP optional for participation.) Each has different rules for when you may make penalty-free withdrawals. Because of your job description you may begin withdrawals from the DBP portion by retiring at orafter age 50. However, penalty-free withdrawals from the DCP/TSP can only begin if you retire at or after age 55. Remember, the TSP website and TSP personnel you may talk with can only address TSP. For information about the DBP portion you need to talk with the folks in your personnel office or maybe at the Office of Management and Budget (OMB). Two separate retirement systems … two separate offices that handle each.So when you retire at age 51, you can begin withdrawals from the DBP without penalty. However,you will need to use Section 72(t) to set up a SEPP Plan for penalty-free withdrawals from either TSP directly or from your Rollover IRA after you transfer from TSP.Hope this helps.Jim2008-11-12 13:01, By: Jim, IP: [22.214.171.124]
L2: 72T applicable to TSP?Thanks Jim. Your information does most certainly help and is greatly appreciated. I think I have a handle on this issue(s). I guess the most easiest way for me to avoid the 10% penalty (should I leave my money in the TSP and being under 55) is to take a straight annuity from the TSP. I understand thatI would lose total control of its entire balance as the money is no longer mine. Of course the only advantage is that I will receive payments for the rest of my life with less paperwork and oversight. Trying to apply the 72T to the TSP is a risky situation as Alan and you have pointed out. I do have a handle on my FERS annuity and how that works and the FERS special supplement which is paid by OPM.It seems my best bet is to have my entireTSP balance rolled over to an IRA when I retiree at age 51 and have someone apply the 72T rule. I think my next question should be addressed in a new topic as it relates to the roll over. Thanks again to both you and Alan.Jim2008-11-12 14:14, By: jm, IP: [126.96.36.199]