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Federal retirees with age differences: Steering clear of the 'Widow's Penalty', Medicare considerations, and additional factors

Strategies for optimizing your retirement and health care benefits when age differs between you and your spouse.

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Federal retirement planning for public servants with age disparities: Evading the 'Widow's...
Federal retirement planning for public servants with age disparities: Evading the 'Widow's Penalty,' Medicare strategies, and additional considerations

Aging Differences Among Spouses: Strategic Opportunities for Federal Employees and Their Retirement Planning

Federal retirees with age differences: Steering clear of the 'Widow's Penalty', Medicare considerations, and additional factors

Federal employees have unique opportunities to plan for their retirement, especially when there's an age difference of 10 years or more between spouses. Let's delve into the details of these strategic advantages, focusing on the Required Minimum Distributions (RMDs) from the Thrift Savings Plan (TSP) and the coordination of Federal Employees Health Benefits (FEHB) with Medicare.

Required Minimum Distributions (RMDs) from the TSP

The Thrift Savings Plan (TSP) is a 401(k)-style retirement savings plan for federal employees. Like other tax-advantaged retirement accounts, RMDs must be taken to avoid tax penalties once the employee reaches a certain age.

Since the SECURE Act 2.0, individuals born after December 31, 1950, will begin RMDs at 73 years (rising to 75 in 2033). The TSP will adjust to these legislative changes.

Special Rule for Spouses with a Large Age Gap

When the spouse of the beneficiary (the individual receiving the TSP benefits) is at least 10 years younger than the account holder, a more favourable "Joint Life and Last Survivor Expectancy Table" (joint life and last survivor expectation table) can be used for RMD calculations.

What does this mean? The annual distribution amount is smaller because the calculation is based on the longer joint life expectancy of the couple.

Procedure for Calculation

  1. Timing: RMDs begin in the year the account holder turns 73 (for those born after 1950).
  2. Calculation:Normal: RMDs are calculated using the standard tables when the spouse is not at least 10 years younger. Spouse 10+ years younger: The joint life expectancy of the couple is used, resulting in smaller annual RMDs.
  3. Beneficiary:Only when the spouse is the sole beneficiary for the entire year does the favourable calculation apply.
  4. After the Death: After the account holder's death, the surviving spouse must continue RMDs based on their own circumstances.

Example

Account Holder: 75 years old Spouse: 63 years old (12 years younger)

  • Joint Life Expectancy according to the table: e.g., 26.8 years
  • Impact: The annual RMD is smaller than if the standard table for a single individual (life expectancy e.g., 12.5 years) were used.
  • Example Calculation:Account balance at the end of the previous year ÷ joint life expectancy = RMD

Important Notes

  • Applies Only to Spouses: The rule applies exclusively to the spouse as the beneficiary, not to other beneficiaries (e.g., children).
  • Account Holder's Estate: If the account holder passes away, the surviving spouse is consulted at their current age for RMD calculations.
  • Documentation: The account holder must inform the TSP Beneficiary Participant Services that their spouse is the beneficiary.
  • Tax Consequences: RMDs are taxable and must be correctly calculated and distributed to avoid penalties (currently 25 %!).

Summary

Federal employees with a spouse who is at least 10 years younger can use the more favourable "Joint Life and Last Survivor Expectancy Table" for the calculation of their Required Minimum Distributions (RMDs) from the TSP. This rule results in a smaller annual distribution amount and, consequently, a reduced tax burden. The concrete calculation is based on the account balance at the end of the previous year and the life expectancy according to the IRS table.

Tips

  • Current IRS Tables: Always use the latest IRS expectation tables for the calculation (check annually, as they may change).
  • Advisement: Consulting a tax advisor or financial planner specialised in pension planning for federal employees is advisable to ensure all details are considered.

In addition to the RMD rule, it's essential to consider the coordination of FEHB benefits with Medicare for federal employees with younger or older spouses. If the older spouse chooses to sign up for Medicare Part B at age 65, Medicare becomes their primary insurer, while FEHB serves as a "backup" plan. For the younger spouse, FEHB remains their primary insurance. The 10-year age gap advantage can significantly reduce required withdrawals from retirement accounts, including the Thrift Savings Plan. The coordination of FEHB benefits with Medicare and the 10-year age gap rule represent potential thousands of dollars in savings and crucial protection for the financial security of a surviving spouse. Understanding how to protect a surviving spouse from unexpected tax burdens is crucial for federal employees with a significant age gap with their spouse. Some FEHB plans offer a reimbursement program that helps pay for Medicare Part B premiums, but this is typically only offered on the "basic" level of the plan.

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