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Financial Questions & Answers

Financial Questions & Answers

Question:

I am a retired government employee with a Thrift Savings Plan (TSP) and an Individual Retirement Account (IRA). Since 2009, the Obama administration has had hearings on taking over all IRAs and 401ks and giving a small additional amount to Social Security checks. With the reelection and the vast amount of executive orders circumventing Congress and increasing taxes, I am worried if I do not withdraw my TSP funds or transfer some of them to an annuity that I will lose all my hard earned savings and be left with nothing. My thought is to take half in cash and the other half in an annuity. I want to pass on some of it to my children. I know I will get hit hard on taxes on the cash withdrawal, but I will get zero if they take my money. What options do I have? Thanks. -Alan

Answer:

You would need a crystal ball (that I don’t have!) to accurately forecast what will or will not happen in Washington. However, I would be very surprised if your TSP and IRA were confiscated by our government. So, if you are intent on protecting against that unlikely eventuality, I would recommend you do so in a very measured manner. 

As you know, any withdrawal from the TSP or your Traditional IRA will result in taxable income. For example, if you did a lump sum withdrawal of $250,000 you would add an extra quarter of a million dollars to your current income when you complete your tax return.Depending on your filing status, other income and state income tax rate this could easily result in a 40 percent income tax hit (I’m assuming you’re over age 59 ½. If not, you may have to add an extra 10 percent). That’s a quick way to turn $250K into $150K, ouch.

Instead, consider assessing where you stand with respect to the current tax brackets and tactically withdrawing money over the coming years.For example, in 2012, if you file jointly you can have taxable income (that’s adjusted gross income less deductions and exemptions) of up to $70,700 and still remain in the 15 percent tax bracket.If you look at your current situation without any TSP or IRA withdrawals and determine that your taxable income will be $40,000, you could withdrawal $30,700 and only pay 15 percent federal income tax on it. Even with a foggy crystal ball, I’d say that’s a pretty good deal! If you’re willing to take a bigger tax hit, you could make withdrawals up to the top of the 25 percent bracket (taxable income of $142,700 in 2012). With this approach, you won’t get all the money out of your retirement accounts in one fell swoop, but you could lessen the income tax burden associated with the strategy. Regardless of your approach, you’ll want to consult with your tax adviser and keep your ear to the ground relative to tax changes emanating from Washington.

You also mentioned an annuity. This may be a good approach if turning your lump sum into a stream of income makes sense in the context of your overall financial situation.Ideally, in retirement you should try to cover your fixed recurring expenses with guaranteed income (Social Security, government/military retirement or annuity payments). The nice thing about this approach is that the annuity payments from your TSP and IRA will be taxable as you receive them, thus spreading out the impact of income taxes.  Bottom line: If turning your retirement savings into an income stream fits into your overall financial game plan, it’s a reasonable option to address your concern. Good luck!


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