The "New" TSP Tax Loophole

The problem of course is that there were people here on the shore, watching all them discoverers jump ship. The locals had been here around 14,000 years. Some discovery. Think about it: Columbus was an Italian, working for the Spanish, sent to discover India.

Like Columbus, folks in the news business often "discover" what's been around for a long time. We, like politicians, are always discovering things. What that means is that they didn't exist until we broadcast or publish them.

Case in point: the "loophole" in federal tax law that lets you fiddle with your Thrift Savings Plan.

Many Washington area listeners were thrilled by a radio report (not on this station) of a little-known tax loophole that lets them get at their retirement savings nest egg before age 59 1/2 without paying that pesky early-withdrawal penalty.

We got a bunch of calls on it, even though it aired (as we say in the radio biz) on another station.

So we asked a TSP expert about it. This is what he said:

I heard that blurb on the radio and it ticked me off. There is nothing new about it and it's not a loophole. In fact, you don't even have to roll it to an IRA - it's one of the TSP monthly payment withdrawal options. You simply request "compute my payments" on the withdrawl form and we send you monthly payments that are substantially equal-based on your life expectancy using the IRS tables.

Regardless of your age, there is no early withdrawal penalty because you have effectively elected to receive your retirement savings as a stream of (small monthly) payments over your estimated lifetime - in some ways like an annuity (which you can also purchase at any age without being subjected to the early withdrawl penalty).

The early withdrawl penalty is designed to keep people from unnecessarily using up their tax-deferred retirement savings before they are really retired. In some circumstances, however, a stream of legitimate retirement benefits can begin before age 55.

I've regularly recommended this type of arrangement to police and firefighters who call to complain that they need to draw on their retirement savings but their early retirement ages subject them to the early withdrawl penalty.

Look at what random listeners were advised to do in the radio report: "quit your job. Even if you are only 35 years old, you can get your retirement savings without an early withdrawl penalty just by sending it to our IRA and having us pay it to you (subject to regular tax, of course) in a small amount each month."

Boy, there's a deal.

What are you going to do when you really retire? Moreover, the report incorrectly sent listeners to the IRS to get their distribution. Wrong. You ask your plan for the distribution, and when you do so you had better get it under the precise rules of the IRS or you will be hit with the penalty as well as regular tax.

These kind of shrill announcements get people all fired up to do something to avoid the hated taxman, even though it only makes sense for certain people in certain limited circumstances.

If you add the characterization that it's a "loophole" (which might be closed at anytime), you attract those people who want to look smart (or lucky) by telling their friends that you got theirs before the loophole was found. Trouble is, it's not lost and never was.

So, don't quit your daytime job until you check the facts. Twice.

To reach me: mcausey@federalnewsradio.com