Thrift Savings Plan TSP
I am a federal employee age 50, next month, and will be retiring with 24 years service, special category. Part of my retirement consists of the TSP. I am seeking to withdraw on a monthly basis, but do not want to incur the IRS 10% penaly. The TSP offers monthly withdrawals calculated on life expectancy or a “series of periodic” withdrawals if they will last over 10 years (TSP.gov Calculators). With the later, you can indicate an arbitrary monthly withdrawal amount, as long as it will last 10 years. TSP does not indicate if this method qualifies for the 72t exception. They referred me to the IRS.
Can I do a 72t calculation of my own, say using the Amortization method, plug that monthly figure in as a monthly withdrawal (TSP Form 70) and claim it as a SEPP withdrawal on the IRS form 5329? The other question is that the TSP takes a while to process requests. So if I submit the TSP form 70 in early February, I may not start receiving monthly withdrawals until March or April. Would this be OK under the 72t as I would not be taking a full annual withdrawal in 2009. In 2010 I would based on an entire 12 month withdrawal. Also, if I submit my TSP 70 in February, what month Mid-Term Interest 120% calculation could I use ?
In the end, would it just be better to roll over the TSP into an IRA, say with Vanguard, and start a SEPP with them?
Thanks.
Dave
Permalink Submitted by Alan Spross on Wed, 2008-12-17 18:52
Yes, you would be better off using the IRA for your SEPP plan.
Here’s why:
While you can indeed calculate the amount needed to comply with IRS Regs for SEPP payments, and have that amount withdrawn from the TSP, the TSP does not actually support your plan. That means should anything go wrong, you may not have the flexibility to have it corrected in a manner that would save your plan. The TSP will not check your calculations for accuracy, and may not allow you to correct an error of theirs in missing a distribution or making too many by rolling back the excess funds, or taking a needed year end distribution. That would put you in the position of requesting an expensive letter ruling from the IRS should you feel that you did everything that you could, but in the end the TSP make an error. You also would not have good control on the starting month, which in turn limits pretty much forces you to use the latest interest rate month rather than one for two prior months. And you cannot use total distribution options for each stub year that would be available to you if you had full control of your distributions and the timing thereof.
While the TSP does have the lowest expense ratio there is, the difference between it and Vanguard’s lowest index funds or ETFs amounts to perhaps 3 or 4 basis points. But even with Vanguard you will have to file a 5329 to claim the exception because they will not issue a 1099R showing the exception code for a SEPP. That’s easy to do and the majority of SEPP participants now have to file it. It is NOT a red flag to the IRS.
In the end, YES, roll it over by direct rollover and use an IRA for your SEPP plan.
Permalink Submitted by dave burford on Wed, 2008-12-17 19:51
Alan:
Thanks for the information. I subsequently went ahead and opened an IRA with Vanguard. Will roll over the TSP into that, then do the SEPP later.
I really do appreciate your response and any others that follow.
Dave