SCEs need to be especially concerned about the rules regarding taxation of withdrawals from the Roth TSP. Image: Robert P. Alvarez/Shutterstock.com
By: John Grobe, Federal Career ExpertsSpecial category employees (SCEs) have somewhat different rules regarding FERS retirement and the Thrift Savings Plan (TSP). We’ll look at the TSP differences here.
The most common special category employees are law enforcement officers (LEOs) and firefighters (FF). SCE positions are either physically demanding (LEO/FF) or highly stressful (air traffic controller, nuclear materials courier, etc.) and, therefore have age-based criteria dealing with retirement. Most SCEs have a mandatory retirement age of 57, though ATCs have an age of 56. This is not considered to be age discrimination, because age is viewed as a bona fide occupational qualification (BFOQ) for these positions under EEO law.
SCEs need to be especially concerned about the rules regarding taxation of withdrawals from the Roth TSP. Roth withdrawals are free from tax if withdrawals are qualified. For a Roth withdrawal to be qualified, two things must be true. 1) you must have had the Roth portion of your TSP for at least five years; and 2) you must be at least age 59 ½. SCEs will have been retired for at least 2 ½ years before they will be able to take qualified withdrawals from the Roth TSP.
The Thrift Plan considers all withdrawals to be proportional between the traditional and Roth portions unless the participant specifies otherwise. If the participant does not so specify and withdraws from the TSP before Roth withdrawals become qualified, they will owe tax on the portion of the withdrawal that represented earnings on Roth contributions. This consideration would also apply to regular employees who separate prior to reaching the age of 59 ½.
Due to recent changes, SCEs no longer have to worry about the early withdrawal penalty from the TSP. As long as the SCE has reached the year in which they turn 50, or has 25 or more years of qualifying SCE service, they are exempt from the penalty.
How do Individual Retirement Arrangement (IRA) rules apply to SCEs? In the same manner they apply to everyone else; SCEs receive no special consideration. The 10% early withdrawal penalty will apply to anything withdrawn from an IRA prior to reaching 59 ½ (not the year in which you reach that age, but the actual date). SCEs who are considering rolling their TSP over into an IRA upon separation should be aware of this and should not roll over monies that they plan on withdrawing prior to reaching 59 ½.
Did you know that a recent survey from Bankrate found that 68% of parents who have any children aged 18 or older have made at least one financial sacrifice to help their children. This includes slightly over 50% who dipped into their emergency fund and 16% who have put off achieving their financial goals.
Estimate Your Time to Retire:
Federal Law Enforcement and Firefighter Retirement Countdown Clock
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.
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