Category Archives: Rollover

Beware the Quirks of the TSP in retirement

The TSP (Thrift Savings Plan) is a retirement savings and investment plan for Federal employees. It offers the kind of retirement plan that private corporations offer with 401(k) plans.

Here is a little information about he investment options in the TSP.

The TSP funds are not the typical mutual fund even though the C, F, I, and S index funds are similar to mutual fund offerings.

The C Fund is designed to match the performance of the S&P 500

The F Fund’s investment objective is to match the performance of the Barclays Capital U.S. Aggregate Bond Index, a broad index representing the U.S. bond market.

The I Fund’s investment objective is to match the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index.

The Small Cap S Fund’s objective is to match the performance of the Dow Jones U.S. Completion Total Stock Market Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index.

The G Fund is invested in nonmarketable U.S. Treasury securities that are guaranteed by the U.S. Government and the G Fund will not lose money.

One advantage of the TSP is that the expenses of the funds are very low.  However, if you plan to keep your money in the TSP after you retire you need to understand your options because there are traps for the unwary.

The irrevocable annuity option.  

This option provides you with a monthly income.  You can choose an income for yourself or a beneficiary – such as your spouse – that lasts your lifetime or the lifetime of the beneficiary.  The payments stop at death.  Once your annuity starts, you cannot change your mind.

Limited withdrawal options. 

You can’t take money out of your TSP whenever you want.  When it comes to taking money out you have two options.

  1. One time only partial withdrawal. You have a one-time chance to take a specific dollar amount from your account before taking a full withdrawal.
  2. Full withdrawal.   You can choose between a combination of lump-sum, monthly payments or a Met-Life annuity.

Limited Monthly Payment Changes

If you take monthly payments from your TSP as part of your full withdrawal option you can change the amount you receive once a year, during the “annual change period” but it takes effect the next calendar year.  If you choose this option, make sure that you know how much you will need for the coming year.

Proportionate distribution of funds

When you take money out of your TSP you have no choice over which fund is liquidated to meet your income needs.  It comes out in proportion to which your money is invested.  This means you can’t manage your TSP and decide which of the funds you will access to get your distribution.

If you want to give yourself greater flexibility once you retire you have the option of rolling the TSP assets into a rollover IRA without incurring any income tax.

 

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Putting RMDs to Work

When you’re over 70 ½ and have a retirement plan you have to start taking money out of the plan (with rare exceptions).  But even if you remember to take annual RMDs (Required Minimum Distributions) you could use help preparing for and managing the process. This includes reinvesting RMDs you don’t need immediately for living expenses.

It isn’t as simple as “Here’s your RMD, now go take it.”  Baby Boomers often retire with IRA and 401(k) balances instead of the defined benefit plans their predecessors often had.  And the rules are often complicated.  Take the retiree who has an IRA and a 401(k) that he left behind with a previous employer.

Many are surprised to learn that they have to take separate RMDs on their 401(k) and their traditional IRA.  RMDs must be calculated separately and distributed separately from each employer-sponsored account. But RMDs for IRAs can be aggregated, and the total can be withdrawn from one or multiple IRAs.  That’s one of the reasons that advisors suggest rolling your 401(k) into an IRA when leaving an employer for a new job or when retiring.

Steep penalties apply.  The failure to take a required minimum distribution results in a penalty of 50% of the RMD amount.

According to a 2016 study from Vanguard, IRAs subject to RMDs had a median withdrawal rate of 4% and a median spending rate of 1%. For employer plans subject to RMDs, the median withdrawal rate was 4% and the median spending rate was 0%.  A mandatory withdrawal doesn’t mean a mandatory spend.  Most retirees don’t need the income they are required to take from their plans.  As a result the money usually goes right back into an investment account.

If you have an investment account that is designed for your risk tolerance and goals, the money coming out of your retirement account should be invested so as to maintain your balanced portfolio.

For questions on this subject, please contact us.

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Questioner asks: “Should I roll my SEP IRA into a regular IRA or a Roth IRA?”

There are two issues to consider in answering this question.

  1. If you roll a SEP IRA into a regular or rollover IRA, assuming you do it right, there are no taxes to pay and your money will continue to grow tax deferred until you begin taking withdrawals.  At that point you will pay income tax on the withdrawals.
  2. If you decide to roll it into a Roth IRA you will owe income tax on the amount rolled over.  However, the money will then grow tax free since there will be no taxes to pay when you begin taking withdrawals.

If you roll your SEP into a Roth, be sure to know ahead of time how much you will have to pay in taxes and try to avoid using some of the rollover money to pay the tax because it could trigger an early withdrawal penalty – if you are under 59 1/2 .

It’s up to you to decide which option works best for you.  If you are unsure, you may want to consult a financial planner who can model the two strategies and show you which one works better for you.

As always, check with a financial professional who specializes in retirement planning before making a move and check with your accountant or tax advisor to make sure that you know the tax consequences of your decision.

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What happens if you are 70 ½ and you have an IRA and a 403(b)?

RMDs, or Required Minimum Distributions have to be taken after you become 70 ½ if you have a retirement account such as an IRA or 401(k).   To determine the amount you are required to take, the value of all of your retirement accounts have to be added together.  If you have multiple retirement accounts you can take the RMD from only one account and leave the others alone … unless you have a 403(b) plan.

403(b) plan accounts must be added to the total of the retirement accounts to determine the RMD.  But  you can’t use distributions from IRAs to satisfy the RMDs from 403(b)s, nor can you use 403(b) distributions to satisfy IRA RMDs.

However, if you have several different 403(b) accounts, you can take the RMD from just one of the accounts, as long as it’s at least as much as the RMD based on the sum of all of the 403(b) accounts.

If you are retired, you may be able to simplify your life by rolling all of your retirement accounts into an IRA.  That way you can eliminate a lot of confusion, and the potential penalties that go along with making a mistake.

If you have questions about retirement accounts, call us.

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Avoid These Common Retirement Account Rollover Mistakes

If you are one of the people who are uncertain of the basic financial steps to take when you retire, you are not alone. Author and public speaker Ed Slott recently recounted how little most people really know about what to do with their 401(k)s, IRAs and other retirement assets when it comes time to leave work.

Most people do not know what to do with their retirement plans (commonly referred to with obscure names like 401(k), 403(b), 457, and TSP) once they retire. Many people simply leave the plan with their former employer because they don’t know what else to do. But that could end up being a mistake. Others know they can roll their plan into a Rollover IRA, but are not aware that if they don’t do it exactly right, they could be faced with a big tax bill.

Handling IRAs is often fraught with danger. There is a big difference between a rollover and a direct transfer. Rollovers are distributions from a retirement plan. Sometimes they are paid directly to you via check. You then have 60 days to move the assets into a new IRA or you will be taxed. If the rollover is paid directly to you, it is customary to have 20% automatically withheld for taxes. Counter-intuitively, you have to replace the 20% withholding when you fund the new IRA or that amount will be considered a taxable distribution and you will owe tax on the amount withheld. You can only make one rollover per 12 month period. If you make more than one rollover per year, you will be taxed.

A direct transfer is one where your IRA assets are moved from one custodian to another without passing through your hands. Under current law you can make as many direct transfers per year without triggering a tax penalty and there is no withholding.

When you are retired and reach the age of 70 ½, you will encounter Required Minimum Distributions. If these are not handled correctly, they can trigger huge tax consequences. If an individual fails to take out the Required Minimum Distribution (RMD) from a retirement plan, there is a 50 percent penalty tax on the shortfall.

Even many people in the investment industry do not understand the rules well. Slott notes that many financial companies do not provide advice on these topics because they are so focused on accumulating assets that they do not train their advisors on “decumulation.” Decumulation is a term that applies to retirees once they begin to take money from their retirement plans to supplement their other income sources.

“Every time the IRA or 401(k) money is touched, it’s like an eggshell; you break it and it’s over…. You mess up with a rollover and you can lose an IRA.”

Retirement is a time when people want to relax and pursue their leisure activities. Unfortunately, the rules actually get even more complicated. Make sure that you take time to learn the rules, or find a professional that does, before you move money from a retirement account.

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