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#4525713 - 09/25/17 12:01 PM Anyone here retired civil service?
grampi Offline


Registered: 10/08/06
Posts: 7762
Loc: OH
I'm approaching retirement soon and would like to find out how to handle my TSP. Unlike most, I don't need my TSP savings for retirement income, but rather I would like to use this money to pay off my mortgage and remodel our home. Some have said if I pull out all of my balance, or at least large chunks of it at a time, I could be required to pay 30% or more in taxes. This is far too much of a tax penalty to pay and was wondering if instead of doing this, what if I just kept making mortgage payments, only make them using my TSP account balance. Would pulling out money in smaller amounts each time make my taxable amount lower? Then there's the rule pertaining to TSP accounts where you have to start pulling out your balance at age 70. What do I do with it then to avoid having to pay huge tax penalties? And I thought the big tax penalties were only levied if you pulled money out before you reach the age of 59 1/2?

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#4525721 - 09/25/17 12:10 PM Re: Anyone here retired civil service? [Re: grampi]
cpayne5 Offline


Registered: 12/28/05
Posts: 604
Loc: Virginia
Fellow TSP'r here. I'm 20 years from retirement, though...

From how I understand it, it's taxed as income when you pull it out. So, just like your salary, the more you make, the more (potentially) it's taxed. If you want to pull large chunks out at a time, maybe a smart way to do it would be to do two smaller withdrawals on either side of January 1? This is not much more than a guess on my part, though.

If I were in your shoes I'd find a tax guy or financial adviser to go over things with.

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#4525722 - 09/25/17 12:12 PM Re: Anyone here retired civil service? [Re: grampi]
Astro14 Offline


Registered: 10/10/10
Posts: 8525
Loc: Virginia Beach
This isn't a civil service question. Your TSP is subject to the 401(k) rules.

So, anything you take out will be subject to ordinary income tax, which, if you take out a big chunk, will put you in a higher bracket and substantially increase your income tax burden. There are no penalties because you're over 59 1/2, but the top tax rate is 39.6% and you live in California, so, you can thank them for adding another 10%, so it's quite possible to lose almost half of your withdrawal to taxes if the sum is large enough.

At 70 1/2, you will have to start taking required minimum distributions.

Probably time to talk to a CPA or tax professional.


Edited by Astro14 (09/25/17 12:15 PM)
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#4525727 - 09/25/17 12:17 PM Re: Anyone here retired civil service? [Re: grampi]
pbm Offline


Registered: 04/19/04
Posts: 7591
Loc: New York
I agree that you need to talk to a tax professional.

When IRAs, 401Ks etc...were first introduced the selling point was that you were saving for retirement by 'deferring' taxes until then....the thought was that most would be in a lower tax bracket when they retired.
This is not always the case and many are finding out just how heavy the tax burden can be on these tax 'deferred' accounts. It's also wise to remember that our elected officials can change the rules (and tax rates) at any time in order to make up for their free spending ways.
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#4525733 - 09/25/17 12:21 PM Re: Anyone here retired civil service? [Re: grampi]
Wolf359 Offline


Registered: 04/27/12
Posts: 4741
Loc: MA
As others said, consult a tax professional. However the basics still hold. For a tax deferred account, you make the most money if you keep as much as possible in the account. So you normally want to make minimum distributions instead of taking it all out in a lump sum. In theory you should be in a lower tax bracket once you're retired. There's some table based on your age that you can consult that tells you what the minimum is that you have to withdraw, usually the administrator of the plan should be able to figure it out for you if it's a large company like Fidelity.

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#4525740 - 09/25/17 12:30 PM Re: Anyone here retired civil service? [Re: grampi]
Mr Nice Offline


Registered: 09/12/04
Posts: 21173
Loc: Orlando, FL
Originally Posted By: grampi
I'm approaching retirement soon and would like to find out how to handle my TSP. Unlike most, I don't need my TSP savings for retirement income, but rather I would like to use this money to pay off my mortgage and remodel our home. Some have said if I pull out all of my balance, or at least large chunks of it at a time, I could be required to pay 30% or more in taxes. This is far too much of a tax penalty to pay and was wondering if instead of doing this, what if I just kept making mortgage payments, only make them using my TSP account balance. Would pulling out money in smaller amounts each time make my taxable amount lower? Then there's the rule pertaining to TSP accounts where you have to start pulling out your balance at age 70. What do I do with it then to avoid having to pay huge tax penalties? And I thought the big tax penalties were only levied if you pulled money out before you reach the age of 59 1/2?


Wait till you're 59.5 a take a small distribution every year.

Yes, all distributions are considered income and taxed.



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#4525752 - 09/25/17 12:41 PM Re: Anyone here retired civil service? [Re: Astro14]
grampi Offline


Registered: 10/08/06
Posts: 7762
Loc: OH
Originally Posted By: Astro14
This isn't a civil service question. Your TSP is subject to the 401(k) rules.

So, anything you take out will be subject to ordinary income tax, which, if you take out a big chunk, will put you in a higher bracket and substantially increase your income tax burden. There are no penalties because you're over 59 1/2, but the top tax rate is 39.6% and you live in California, so, you can thank them for adding another 10%, so it's quite possible to lose almost half of your withdrawal to taxes if the sum is large enough.

At 70 1/2, you will have to start taking required minimum distributions.

Probably time to talk to a CPA or tax professional.


I live in OH...

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#4525807 - 09/25/17 01:50 PM Re: Anyone here retired civil service? [Re: grampi]
SrDriver Offline


Registered: 12/09/06
Posts: 2790
Loc: Southeast Alabama
Don't start taking it until you reach the age where you must take either a fixed amount or the amount required by government.

You will take a huge hit on taxes if you take money out + could end up in a higher tax bracket too paying more taxes on your total income. Intrest rates are low and you would be much better off taking a 2nd mortgage or refinance and take some cash for the remodel of your home and pay it off as soon with your retirement income.

Don't home improvements qualify you for a tax deduction too from income taxes?

I started drawing my TSP (401K) at around age 70 1/2 and only took the minimum required then.

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#4525814 - 09/25/17 01:55 PM Re: Anyone here retired civil service? [Re: SrDriver]
Wolf359 Offline


Registered: 04/27/12
Posts: 4741
Loc: MA
Originally Posted By: SrDriver
Don't start taking it until you reach the age where you must take either a fixed amount or the amount required by government.

You will take a huge hit on taxes if you take money out + could end up in a higher tax bracket too paying more taxes on your total income. Intrest rates are low and you would be much better off taking a 2nd mortgage or refinance and take some cash for the remodel of your home and pay it off as soon with your retirement income.

Don't home improvements qualify you for a tax deduction too from income taxes?

I started drawing my TSP (401K) at around age 70 1/2 and only took the minimum required then.


The only problem with refinancing when you're retired is that you no longer have the income to support the mortgage. So if you're planning on doing a refi, do it before your retirement date and don't let the bank know. It's one of those weird things, no age discrimination so if you're 80 and still working, you can still get a 30 year mortgage. All the other rules still apply.

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#4525819 - 09/25/17 01:58 PM Re: Anyone here retired civil service? [Re: grampi]
JayhawkRoy Offline


Registered: 09/12/04
Posts: 1017
Loc: Basehor, KS
You need to read this handbook very carefully:
https://www.tsp.gov/PDF/formspubs/tspbk02.pdf

After considering the options, I chose to take a monthly payout, starting at age 65. Looking into the future, it doesn't look like my tax bracket will get lower at all, so I chose to take payments now, rather than later. I assumed I would live to age 90 and a fund growth of 1% to choose my monthly amount (TSP calculator). Figure out what assumptions you need to make and then make your decisions.

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#4525881 - 09/25/17 02:57 PM Re: Anyone here retired civil service? [Re: JayhawkRoy]
Bronco1 Offline


Registered: 01/06/17
Posts: 137
Loc: Colorado
Originally Posted By: JayhawkRoy
You need to read this handbook very carefully:
https://www.tsp.gov/PDF/formspubs/tspbk02.pdf

After considering the options, I chose to take a monthly payout, starting at age 65. Looking into the future, it doesn't look like my tax bracket will get lower at all, so I chose to take payments now, rather than later. I assumed I would live to age 90 and a fund growth of 1% to choose my monthly amount (TSP calculator). Figure out what assumptions you need to make and then make your decisions.


Good advise! Also check out how Ohio will treat it at Smart Asset website (sorry no link, the censor function keeps bleeping out part of the url. Use smart asset.com/retirement/ohio-retirement-taxes with no space between smart and asset)

After you've looked at these, then go talk to your tax advisor. It will give you the knowledge to ask better questions.


Edited by Bronco1 (09/25/17 03:10 PM)
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#4525903 - 09/25/17 03:17 PM Re: Anyone here retired civil service? [Re: grampi]
wtd Offline


Registered: 06/25/02
Posts: 1915
Loc: southwest Mo.
In your case, probably the best option if you want to use that money is to take out monthly payments until your balance is gone. Otherwise, you can only take money out two times. You can take out part of it but the next time you take out money, you have to take out the rest of your balance.

You will pay taxes on the money when you receive it so whatever you take out will be tacked on as income to whatever you are getting from your pension. That could throw you into a higher tax bracket.

I don't know if this applies to you but for me(Federal Law Enforcement) You do not get accessed the 10% early withdrawal penalty if you are at least 50 years old when you retire. This could be because we have to retire by age 57.

As others have suggested, go to a tax person who understands the rules pertaining to TSP as well as all tax implications for receiving that money.

Wayne
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#4525947 - 09/25/17 04:00 PM Re: Anyone here retired civil service? [Re: grampi]
Astro14 Offline


Registered: 10/10/10
Posts: 8525
Loc: Virginia Beach
Sorry, thought it was CA.

Same principle- lower rate, but the total will still be distressingly high...
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#4526008 - 09/25/17 05:19 PM Re: Anyone here retired civil service? [Re: grampi]
Donald Offline


Registered: 03/21/04
Posts: 20446
Loc: Upstate NY
No way around it being considered normal income given current tax rules.

Are you planning on staying in current home after retirement?

There are retirement specialists who can calculate when best to take SSA, 401K, etc.
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#4526044 - 09/25/17 05:47 PM Re: Anyone here retired civil service? [Re: grampi]
ArrestMeRedZ Offline


Registered: 11/11/08
Posts: 931
Loc: Las Vegas
Don't confuse tax penalties on early withdrawal (before 59.5) with normal taxes on Required Minimum Distributions (RMDs) at 7O.5. The penalties on RMDs are only if you fail to make them the year you turn 7O.5, otherwise they are taxed at the normal income tax rate.

I am in a similar situation with a 4O1k as opposed to a TSP, but the rules are similar. I rolled it all into an IRA (no tax implications there), then started rolling that IRA into a Roth IRA each year, and paid the additional income tax on the rolled amount out of my savings. So far I have done it up to the edge of the 15% bracket, but I am thinking of raising that to the 25% bracket later this year or next year to maximize my tax free Roth account.

My reasoning is I believe tax rates must rise during my lifetime (not getting political here but under ether party government is getting bigger, doing more, and that costs), and with required minimum distributions I won't be in control of my taxes without being in a Roth. I just turned 66 and am also deferring Social Security until I get my IRA completely transferred to Roth. That way I will also minimize the amount of taxes on my Social Security income once I start taking it. I am currently in a no income tax state which may change in the future so I would save all state tax on distributions, which a Roth will do. For someone else the amount of money involved in a high tax state may dictate a change of residence while converting.

I realize our situations are different and this might not apply to you but a Roth conversion might be worth looking into.

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