You may have just started kindergarten. The television show you’re watching is interrupted by a special news bulletin. The date: November 22, 1963.
Walter Cronkite makes the announcement: “President Kennedy died at 1 p.m., Central Standard Time,” the CBS broadcast journalist said, removing his glasses to look at the clock on a newsroom wall. “Two o’clock, Eastern Standard Time. Some 38 minutes ago.”
This and other events – scrawled across the pages of late 20th-century history – mark your upbringing in ways few others alive today can comprehend.
But now you’re six months shy of your 60th birthday. You are 59.5 to be exact. Why is that age so significant for a federal employee?
It signifies a turning point of sorts in your life—on a number of fronts. In particular, the IRS allows you to make withdrawals from your retirement account without incurring a penalty. It is also nearly a decade after you were granted the right to contribute more annually to your retirement funds.
In 30 months you’ll be eligible to claim Social Security benefits. You’re 66 months away from Medicare eligibility.
Building Your Retirement Savings
If you’re 59.5 and believe you’re ill equipped for federal retirement, there’s still hope. The IRS grants those at that age special allowances to help bolster their retirement savings. The agency also exempts taxpayers who have reached that age from paying the 10% early withdrawal penalty.
While you won’t have to pay a penalty, the IRS still requires you to file withdrawals from your retirement account as income on your tax return. The money will be taxed as ordinary income. Certain Roth IRA and Roth TSP withdrawals may not be taxable.
If your retirement savings are not quite up to par, the IRS provides a catch-up clause, which applies to federal employees age 50 or older. In 2019, if you are 50 or older, you may contribute up to $25,000 to your TSP and up to $7,000 for an IRA.
The TSP offers three different in-service withdrawals. Today we will focus on the age-based withdrawal.
The age-based withdrawal is a one-time only option that you may exercise once you reach age 59.5. An age-based in-service withdrawal is a useful type of withdrawal because it allows you to take your vested money out of the TSP and put it into another type of account. Federal employees may roll the distribution into an IRA and/or a Roth IRA to allow for more control of their money. If you roll the money over into like kind accounts, you will not owe tax or penalty on the rollover and you can still contribute to the TSP while receiving the FERS TSP match to the Traditional TSP.
The most common reasons federal employees consider rolling money out of the TSP are:
- You are unsure how to manage your TSP and want professional help
- You want to be more proactive with tax planning; you need more choices and more control over when and how to withdrawal funds in retirement
- You desire access to more investment options. For example, the TSP offers 6 different funds for your choosing. With an IRA, your investment choices are vast.
Reaching age 59.5 is like hitting the sweet spot in your federal retirement. All of a sudden you have more flexibility and control to further prepare your financial life for federal retirement.
Disclosure: The information contained in these blogs should not be used in any actual transaction without the advice and guidance of a tax or financial professional who is familiar with all the relevant facts. The information contained here is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals’ specific circumstances or needs and may require consideration of other matters. RBI is not a broker-dealer, investment advisory firm, insurance company, or agency and does not provide investment or insurance-related advice or recommendations. Brandon Christy, President of RBI, is also president of Christy Capital Management, Inc. (CCM), a registered investment advisor.