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TSP

Administered by the Federal Retirement Thrift Investment Board, this defined contribution plan for federal employees has roughly 4,614,874 participants, and over $358 billion in assets under management. Ask your TSP questions and post related topics here.

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KimInWis  
#1 Posted : Monday, July 20, 2020 10:20:40 AM(UTC)

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We are thinking about withdrawing all our TSP funds and closing the account.

We are 65 years old and feel we wouldn't have time (read will be dead) to recoup our losses (once again, and once again) if the market really tanks again. We held strong through all the other down times. Everything is paid off, no kids and don't plan on leaving anything to anyone except to donate to a non-profit. Pension has been enough so far.
Just playing with various Apocalyptic scenarios.

1. I know the TSP folks will automatically take out 20% for Federal Taxes.

2. I know we cannot roll it into a Roth.

So, would that withdrawal (minus the %20 tax) be added on our 2020 taxable income and put us into a higher tax bracket? Or since we would have already paid 20% tax on that amount would it be added then subtracted from our taxable income?

I guess I'm getting myself really confused and have googled myself to death and get more confused. Especially with this:

"TSP distributions are not considered earned income. They are considered ordinary income for tax purposes"

Then this:

"The funds in a participant’s traditional Thrift Savings Plan (TSP) account are taxed as ordinary income in any year that the TSP funds are withdrawn."

So Ordinary Income vs Earned Income???

I really have tried to research this on this site before asking the questions, but like I said, I just seem to get more confused.
Just trying to find the least painful way (read taxable) to withdraw this fund.

Thanks for any clarification you can provide this old fool.


ex-military  
#2 Posted : Monday, July 20, 2020 10:49:55 AM(UTC)
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Ordinary Income vs Earned Income : Earned income is from salary or wages. Ordinary income is anything else. For most people, the terms are interchangeable.

Your withdrawal will be taxable income in the year you take it out. So if you take it in 2020, when you file taxes in 2021 for the year 2020, that amount will be added to any other income for tax purposes. Example:
TSP withdraw : $100,000
Fed taxes withheld : 20,000
Total to you : $80,000
The entire $100,000 will be reported as income, but the 20,000 will show as payments made, just like when your taxes were withheld when you were working, you showed the total withheld against your tax due.

Now, if you have Roth TSP, that is not taxable, so you wont show that as income, nor should taxes be withheld on that amount.

Hope this helps.
Hired 2015  
#3 Posted : Monday, July 20, 2020 11:17:10 AM(UTC)
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Originally Posted by: KimInWis Go to Quoted Post
...

Just playing with various Apocalyptic scenarios....




Are you a fellow Badger? I get it. We prepare for everything up north on the tundra.

Remember the basics of preparing in case there is 10 feet of snow in July after you pickled the engine on the blower from the June snow, don't overlook the obvious. Check TSP web site. https://www.tsp.gov/living-in-retirement/




smithandjones  
#4 Posted : Monday, July 20, 2020 11:30:38 AM(UTC)

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Why aren’t you withdrawing in substantially equal payments? No reason to get hammered in taxes in one big withdrawal. Of course it goes on your 2020 taxable income (unless it is Roth). The 20% is tax already paid/withheld. But you can get it back or pay more as your income requires in the final calculation.. Depending on the amounts and other income - I would decide the most advantageous amount to withdraw each year. See line 4 c of the 1040.

Just put it in the G Fund until withdrawal if your nervous about the market.

Edited by user Monday, July 20, 2020 11:56:13 AM(UTC)  | Reason: Not specified

KimInWis  
#5 Posted : Monday, July 20, 2020 1:22:54 PM(UTC)

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Originally Posted by: ex-military Go to Quoted Post
Ordinary Income vs Earned Income : Earned income is from salary or wages. Ordinary income is anything else. For most people, the terms are interchangeable.

Your withdrawal will be taxable income in the year you take it out. So if you take it in 2020, when you file taxes in 2021 for the year 2020, that amount will be added to any other income for tax purposes. Example:
TSP withdraw : $100,000
Fed taxes withheld : 20,000
Total to you : $80,000
The entire $100,000 will be reported as income, but the 20,000 will show as payments made, just like when your taxes were withheld when you were working, you showed the total withheld against your tax due.

Now, if you have Roth TSP, that is not taxable, so you wont show that as income, nor should taxes be withheld on that amount.

Hope this helps.


So that 80K will be added to what I "made" (let's say 20K pension) in 2020 putting me in the 80K +20K=100K tax bracket instead of the 20K tax bracket, correct?
Roger.D  
#6 Posted : Monday, July 20, 2020 5:11:54 PM(UTC)
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What is your asset allocation?

The C fund has made up nearly all of it's losses.

February 12, $49.52
Apr 3 $36.57
Jul 20 $48.04


https://www.tsp.gov/fund...nce/share-price-history/

There is no reason to withdraw all the funds today and pay the taxes on it in a higher tax bracket.


What are you going to do with the money, put it in a bank and earn .01%? You would be better off moving it to the G fund. But I would not avocate that either. You need some stock exposure to provide some growth.


Is your pension/SS covering all your expenses?

Do a some calculations to see how much you can withdraw without bumping yourself into the next tax bracket.

Edited by user Monday, July 20, 2020 5:12:35 PM(UTC)  | Reason: Not specified

Roger.D  
#7 Posted : Monday, July 20, 2020 9:06:34 PM(UTC)
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Not only look to see how much you can withdraw before moving to the next tax bracket, what about can you withdraw until you meet the top of the NEXT bracket.

You are young. Do some traveling. See the regions of this wonderful country that you have never seen before. When things allow, maybe travel to Canada or Europe. Make your bucket lists.

Enjoy the fruits of your labor.
ex-military  
#8 Posted : Tuesday, July 21, 2020 3:34:56 AM(UTC)
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Originally Posted by: KimInWis Go to Quoted Post
Originally Posted by: ex-military Go to Quoted Post
Ordinary Income vs Earned Income : Earned income is from salary or wages. Ordinary income is anything else. For most people, the terms are interchangeable.

Your withdrawal will be taxable income in the year you take it out. So if you take it in 2020, when you file taxes in 2021 for the year 2020, that amount will be added to any other income for tax purposes. Example:
TSP withdraw : $100,000
Fed taxes withheld : 20,000
Total to you : $80,000
The entire $100,000 will be reported as income, but the 20,000 will show as payments made, just like when your taxes were withheld when you were working, you showed the total withheld against your tax due.

Now, if you have Roth TSP, that is not taxable, so you wont show that as income, nor should taxes be withheld on that amount.

Hope this helps.


So that 80K will be added to what I "made" (let's say 20K pension) in 2020 putting me in the 80K +20K=100K tax bracket instead of the 20K tax bracket, correct?


NO, the entire 100k is reported as income. That will be added to whatever else you made. So, in your example, if you have 20k in pension income, then you would report 100K + 20K = 120K.

Think about it like this, when you were working, you didnt report your NET income on your taxes. You reported your Gross. If you take out 100K, that is your Gross. Tax witholdings of 20k take you down to 80K NET to you. You will report the 100K.

(Before anybody pipes in about PreTax benefits reducing reportable Gross income, I know. I am just trying to simplify the explanation.)

Edited by user Tuesday, July 21, 2020 3:41:20 AM(UTC)  | Reason: Not specified

The HalfBreed  
#9 Posted : Saturday, August 1, 2020 8:56:19 PM(UTC)

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WHY don't you just roll it over, DIRECTLY into a REGULAR IRA with an outside firm, like Fidelity or Vanguard or the like ?

That would not be a taxable event. Take distributions as you normally would....monthly, yearly etc ...

Edited by user Saturday, August 1, 2020 8:58:20 PM(UTC)  | Reason: Not specified

RETIRED CSRS 12/19/2012 @ age 57 w/39 years.
Good Bye Tension...Hello Pension !
edalder  
#10 Posted : Sunday, August 2, 2020 9:18:11 AM(UTC)

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If you withdraw $100,000, the TSP will deduct 20% for Federal taxes. However, if you are like most folks, you probably have taxable income from your CSRS or FERS pension and perhaps, SSA retirement income.

In all likelihood, your tax bracket is higher than 20%. Most of that other income is also taxable income for you. (The rules are a little complicated as some of your SSA income, if applicable, and some of your pension income won't be taxable, but it will be only a relatively small portion of them.)

The $100,000 is what is reported to the IRS, not $80,000. If your tax bracket is higher than 20%, then you will owe additional tax on this withdrawal. If your tax bracket is lower than 20%, you won't. In fact, you should get a refund.

An additional consideration may be whether your state also has its own income tax.

If you are not sure of your tax bracket, you might want to consult with a financial pro or your tax preparer, if you have one. I figured out that we were probably in a 24% tax bracket, but your mileage may vary. I would not post actual numbers on a public forum like this one.
Kivi
kcman  
#11 Posted : Sunday, August 2, 2020 10:30:33 AM(UTC)
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Since you mentioned that you are both 65, I am assuming that you are currently enrolled in Medicare Part B. If so, you should remember that completely closing out your TSP will add all those funds to your income and could (depending on your current income and amount you have in TSP) move you up to a higher medicare premium. This increase will last for 12 months following the year that your adjusted gross income exceeds the limits. Proceed with caution.
<br />"The problem with socialism is that you eventually run out of other people's money." - Margaret Thatcher<br />
TheRealOrange  
#12 Posted : Monday, August 3, 2020 3:12:14 AM(UTC)
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Originally Posted by: edalder Go to Quoted Post
If you withdraw $100,000, the TSP will deduct 20% for Federal taxes. However, if you are like most folks, you probably have taxable income from your CSRS or FERS pension and perhaps, SSA retirement income.

In all likelihood, your tax bracket is higher than 20%. Most of that other income is also taxable income for you. (The rules are a little complicated as some of your SSA income, if applicable, and some of your pension income won't be taxable, but it will be only a relatively small portion of them.)

The $100,000 is what is reported to the IRS, not $80,000. If your tax bracket is higher than 20%, then you will owe additional tax on this withdrawal. If your tax bracket is lower than 20%, you won't. In fact, you should get a refund.

An additional consideration may be whether your state also has its own income tax.

If you are not sure of your tax bracket, you might want to consult with a financial pro or your tax preparer, if you have one. I figured out that we were probably in a 24% tax bracket, but your mileage may vary. I would not post actual numbers on a public forum like this one.

This definitely should be a consideration, and the OP will need to do some actual calculations. Just because their tax bracket may be 24% doesn't necessarily mean their overall taxes would be above 20%. They might owe far less than 20%, and they might not owe any additional taxes on the the withdrawal, depending on their other withholding. I assume their filing status would be married filing jointly. Let's assume $150,000 of other income just for an example. Add the $100,000 in and their income would be $250,000. The standard deduction for 2020 is $24,800. With no other deductions, credits, exemptions, etc., their taxable income would be $225,200. At that income, the marginal tax rate (the tax rate on the last dollar of income) is 24%, but effective tax rate would be only 16.9%.

$1,975 on the first $19,750 (10% rate; $0 to $19,750)
$7,260 on the next $60,500 (12% rate; $19,751-$80,250)
$19,976 on the next $90,900 (22% rate; $80,251-$171,050)
$12,996 on the next $54,150 (24% rate); $171,051-$326,600)

That's a total tax of $42,207 on the total income of $250,000, for an effective rate of 16.9%.

In that example, if they had 20% withheld from all of their income in 2020 ($50,000 withheld on $250,000 of income), that would be more than enough to cover the tax owed. So, yes, they need to run some calculations based on their specific situation, since whether the 20% withholding on the TSP withdrawal will be enough depends on numerous factors outside of what is known from the original post.

It's still a lot of tax owed on the additional income. If they do a rollover into a very conservative IRA, there would be no tax implications. They would still have access to the funds and their taxes owed in 2020 on the $150,000 income used in the example would be only $19,124 (effective rate of 12.7%; $19,124/$150,000). Another way of looking at it is that even though their overall effective rate would be 16.9%, the additional income added by taking the money increased their taxes by $23,083 ($42,207-$19,124). So, that added money was taxed at 23% ($100,000/$23,083). Whether paying that much in taxes is worth it is a call only the OP can make.
roger.d  
#13 Posted : Tuesday, August 4, 2020 6:13:10 PM(UTC)
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The OP is worried about the stock market dropping again and not recovering. Moving the money to another investment firm like Vanguard or Fidelity while still investing in the stock market will not change the fear of loosing money.

The TSP has the best "safe" place to have your money. That is the G fund. It has the highest "guaranteed" return with the lowest expense. The issue is will it keep pace with inflation? If I read their post correctly, their current income (pension/SS)is sufficient to meet their needs now.

The question that no one can answer is if they will need more money than that for future care. Be it a retirement home with limited medical care, or one with lots of medical care.
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