TSP

It’s not too late to set money aside for retirement for the year 2020!  If you have not yet made a 2020 contribution to an Individual Retirement Arrangement, you have until April 15, 2021 to do so.

For 2020 you are allowed to contribute $6,000 to an IRA.  Like the TSP, an IRA allows catch-up contributions and you may contribute an additional $1,000 beginning in the year you attain age 50.

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There are two types of traditional IRA that are available.  To participate in a traditional IRA, you must have earned income.

The traditional deductible IRA has been around since 1974.

This IRA has the following features:

-Contributions are deductible from your federal income tax.

-The money in the IRA grows tax-deferred.

-When the money is withdrawn, all of it is taxed as ordinary income.

-There is a 10% early withdrawal penalty for money taken out before 59 ½, although the penalty can be avoided by following a life-expectancy based withdrawal strategy for the longer of five years or until you reach the age of 59 ½.

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-The same 50% penalty for failing to take a required minimum distribution after reaching 72 that applies to the TSP, applies to a traditional deductible IRA.

However, there are income limits on deducting your contributions to a traditional deductible IRA if you belong to a retirement plan at work.  Of course, as federal employees, we all belong to a retirement plan through work.  Here are the 2020 income limits.

Single filing status
Full deduction allowed if income is below $65,000
Partial deduction allowed if income is between $65,000 and $75,000
No deduction allowed if income is over $75,000

Joint filing status if spouse also belongs to a retirement plan at work
Full deduction allowed if income is below $104,000
Partial deduction allowed if income is between $104,000 and $124,000
No deduction allowed if income is over $124,000

Joint filing status if spouse does not belong to a retirement plan at work
Full deduction allowed if income is below $196,000
Partial deduction allowed if income is between $196,000 and $206,000
No deduction allowed if income is over $206,000

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Traditional non-deductible IRAs were introduced in 1987 for those who were covered by a retirement plan and whose income was high enough that they couldn’t deduct their IRA contributions.  There are no income restrictions on contributing to a traditional non-deductible IRA.

Other features are:

-Contributions are not deductible from federal income tax.

-The money in the IRA grows tax deferred.

-When the money is withdrawn, the portion of each withdrawal that is attributable to earnings is taxed as ordinary income.

There is a 10% early withdrawal penalty for earnings taken out before 59 ½, although the penalty can be avoided by following a life-expectancy based withdrawal strategy for the longer of five years or until you reach the age of 59 ½.

-The same 50% penalty for failing to take a required minimum distribution after reaching 72 that applies to the TSP, applies to a traditional non-deductible IRA.

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The Roth IRA was introduced in 1997.  It has several differences from traditional IRAs that may be to your advantage if you meet the Roth’s income restrictions.  To contribute to a Roth IRA, you must have earned income.

Other features are:

Contributions are from already taxed dollars.

-Earnings are tax free if you make qualified withdrawals.  In order for a withdrawal to be considered qualified:

-The account must have been open for at least five years; and

-You must be at least age 59 ½.

-There is a 10% early withdrawal penalty for any earnings taken out before 59 ½.  And you are always viewed as taking your contributions out first.

*Minimum distributions are not required.

There are, however, income restrictions on contributing to a Roth IRA.

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Single filing status
Full contribution allowed if income is below $124,000
Partial contribution allowed if income is between $124,000 and $139,000
No contribution allowed if income is over $139,000

Joint filing status
Full contribution allowed if income is below $196,000
Partial contribution allowed if income is between $196,000 and $206,000
No contribution allowed if income is over $206,000

One of these IRAs fits the bill for you.  Take advantage of the time you have to set more money aside for 2020, then start contributing to an IRA for 2021.

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