Some of the questions find their way into the comments that readers make at the bottom of my columns. This week, I'll take on a few.
Thrift Savings Plan Withdrawal Taxes
Question: I was taxed 10 percent when I withdrew my full TSP savings account, in 2002, when I was 60 years old. Is it true that if a person is over age 55, there should be no tax on TSP withdrawals? If it matters, I was covered under the Federal Employees Retirement System. I'm confused, and could really use your help.
Related Question: I'm confused. I thought that you had to be 59 1/2 before you could start withdrawing money from the TSP (without penalty), but saw the age of 55 stated in your article. Could someone please clarify?
Answer: Whether you're in FERS or the Civil Service Retirement System, the money you've invested in your TSP account is tax-deferred, but not tax-free. All TSP withdrawals are subject to federal income taxes. However, different tax rules apply to the different withdrawal options. For detailed information about the rules, read this TSP notice: Important Tax Information About Payments From Your TSP Account.
If you receive a TSP distribution before you reach 59 1/2, in addition to the regular income tax, you may have to pay an early withdrawal penalty tax equal to 10 percent of any portion of the distribution not transferred or rolled over. The additional tax generally does not apply to payments that are:
- Paid after you separate from service during or after the year you reach age 55.
- Made because you are totally and permanently disabled.
- Paid as substantially equal payments over your life expectancy.
- Annuity payments.
- Ordered by a domestic relations court.
- Made because of death.
- Made in a year you have deductible medical expenses that exceed 7.5 percent of your adjusted gross income.
Law Enforcement Retirement
Question: What about 1811 criminal investigators who are FERS employees and have met the 20-year requirement but not the minimum age requirement of 50? Can that employee defer retirement benefits until 50 without receiving a reduced benefit or does that employee have to wait until 60 like all other FERS employees? I was recently told by a financial planner who specializes in the federal law enforcement retirement system that a FERS 1811 employee who left before 50 would have to wait until 55 or 57 to receive benefits. I think he is wrong.
Answer: I know this isn't what you wanted to hear, but your financial planner was correct. Employees who are covered under the special provisions for law enforcement officers and firefighters but who do not meet both the age and the service requirements to be eligible to retire with immediate benefits are eligible for a deferred FERS basic retirement benefit just like any other separating FERS employee. This includes the computation of the benefits as well as eligibility. The more generous law enforcement/firefighter formula for computing the FERS basic benefit would not be applied if the employee left federal service before meeting the age and service requirements for law enforcement retirement. Those requirements are:
- Age 50 with a minimum of 20 years service in a covered law enforcement position; or
- Any age with a minimum of 25 years service in such a position.
There are no special allowances made for a deferred retirement for law enforcement officers.
Question:If I make a deposit for military service, can I use those years toward meeting my required years of service to retire? I am 42 and have 17 years civilian government service as a law enforcement officer, plus an additional 6 years of military service. Can I retire under the special provision for LEOs in three more years, i.e., at 45 with 20 years civilian LEO service and six years military credit for total of 26 years of service? Or does the 25 years, any age, rule apply to strictly 25 years of LEO service?
Answer: To qualify to retire at any age with 25 years of service, it has to be 25 years of law enforcement service. (You can also retire at 50 with 20 years of such service.) Once you've met the law enforcement service requirement, then your military service can be added as additional creditable service and used to compute your FERS basic retirement benefit.
Question: I would like to get some clarification on my retirement eligibility. I am 50 and have 17 years of service under FERS. According to your chart, my minimum retirement age is 56. For some reason, I thought I had to be age 60 with 20 years of service.
Answer: There are specific age and service requirements that need to be met to qualify for immediate retirement benefits under FERS. I wrote about this earlier this year: Eligibility: Facts and Myths (July 6).
In your situation, you will have 23 years of service at your FERS minimum retirement age. To be eligible to retire with unreduced benefits at the MRA, you would need 30 years of service. At 60, the service requirement for unreduced, immediate retirement drops to 20 years. At 56, you would be eligible for a reduced "MRA+10" benefit, payable to people who have reached their MRA and who have at least 10 years but less than 30 years of service, or who are 60 or 61 with more than 10 but less than 20 years of service. You also could work four more years until you reach 60 and receive an unreduced benefit with 27 years of service -- and you would also be entitled to a FERS supplement.
Since there would be a big difference in the amount of your retirement between retiring at 56 and waiting until 60, I recommend that you request retirement estimates for both options from a retirement specialist in your agency's human resources office. There also may be a retirement calculator available on your agency's Web site. Or you could try this online do-it-yourself program that provides a quick way to estimate your retirement.
Question: I am a CSRS employee. I plan to retire when I have 30 years of service, but I'll only be 46. I've been told that I can retire, but it will be with a 2 percent penalty for every year that I'm not 55. Is this correct?
Answer: Unless you are eligible under the special authority and provisions for voluntary early retirement or discontinued service retirement, your separation would be a resignation rather than a retirement. If you are being offered early retirement by your agency, then you can read more about this type of retirement in one of my earlier columns: The Early Way Out (May 26, 2006).
There is a 2 percent penalty for early retirement under CSRS if an employee is under 55, but you first have to have an offer from your agency to be able to apply for this type of retirement.
Windfall Elimination Provision
Question: I have some years in CSRS (my service computation date is August 1977) and switched to FERS effective January 1988. Except for about two years since January 1988, I have been a federal employee. I read something on the Social Security Administration Web site regarding SSA offsets that sounds like I may be squeezed in what I receive in my retirement because I would need to work over, I believe, 19 years paying Social Security taxes before I can reduce offsets to my SSA benefits. Do you have any information on that?
Answer: Based on the information you've provided, you have about 10 years of service in a CSRS position that was not covered by Social Security. Because of this, you may be affected by the Windfall Elimination Provision. For more details on that, see this earlier column: Gone With the Windfall (Sept. 1, 2006). But you may be exempt or at least partially exempt from the effects, since you've been paying into Social Security since you transferred to FERS in 1988.
Question: Could you post some facts and myths on CSRS Offset for retirement?
Answer: CSRS Offset is very much the same as "pure" CSRS as far as eligibility and the basic computation of your retirement is concerned. The difference you will experience is when you are retired and qualified for Social Security. At that time, your CSRS benefit will be reduced (offset). To make up for the difference, you will need to apply for Social Security retirement. I wrote a column on CSRS Offset last year: Best of Both Worlds (April 14, 2006).
The FERS Supplement
Question: I plan on retiring at 60 with 22 years of service. Because I am a FERS employee, I also will receive a monthly FERS annuity supplement at 60. This supplement will last until I am 62. My question is: If I decide to resign at 59 and hold up my retirement until I am 60, can I still collect the supplement when I do take my retirement at age 60?
Answer: If you are not eligible for an immediate, unreduced FERS basic benefit, then you can't get the supplement. This is true even if you choose to postpone receiving your retirement until 60. For more details, see: Supplementing FERS (Jan. 26, 2007) and Supplementary Information (Feb. 2, 2007). I think I could do a Q&A column every week and never run out of questions. Thanks for reading --and writing. I'll keep doing my best to help you understand how to have a smooth transition to your federal retirement.
Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.