Answering Recent Listener Questions

5.16.25: Audio automatically transcribed by Sonix

5.16.25: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Speaker1:
Well, welcome back to the federal retirement show. I'm your host, Val Majewski with American Benefits Exchange. And as always, I really appreciate you taking the time out of your busy schedule to view our content, to follow our show, because that's what this is for. It's for you, the federal employee that's out there looking for information so you can make the best decisions when it comes to your benefits and retirement situation. And today, um, I want to share with you some more listener questions. So some recently we've been getting questions. Come in. I've been talking to a lot of you about your specific concerns. And here are some of the questions that we've been getting. Now. It's not all of them right. But I think these are the ones that would be most pertinent to the masses, because a lot of the questions we have been getting asked are very specific to a specific person's situation, and it may not be relevant for everybody else, but these are some of the questions that have been frequently asked if you will or would be most common for everybody. So let's let's dive into today's questions. And we're going to answer these as best we can. If you do have additional concerns after that or follow ups, please reach out to us. Go to our website. Federal retirement Show.com. Fill out the form. One of our reps. If it's not me personally, we'll be reaching out to you to schedule a time to answer your questions, go over your full benefits and retirement situation.

Speaker1:
And oh, by the way, when you get done with that meeting, we can get you a free copy of my book. There's no excuse. We can put that in your hands or send it to your inbox digitally. So again, let's dive into today's content and tackle questions asked by viewers just like you. The first question is, what are the age based Social Security reductions and are these permanent? Now, without knowing exactly what they're talking about, I'm going to assume something. They're talking about. What are the reductions for taking Social Security early? So when you retire, you're going to have the ability when you hit 62 to turn on Social Security. You don't have to, but you can turn on Social Security right away at age 62. Your full Social Security retirement age, however, is anywhere between age 65 and 67, depending upon your birth year and every year prior to that full Social Security retirement age, you're going to see a reduction in those benefits of about 6.25%. Now, yes, this is permanent. It doesn't bump back up to the full amount or to the full level once you do hit your full retirement age. So this weighs into the decision that you have to make when taking Social Security.

Speaker1:
Do I want less money but I want it now, or do I want to wait and get more money later? It really depends on your situation. If you have further questions on that, again, reach out to us. We can talk about it one on one. Question number two comes in and it's similar to Social Security asking about reductions. But now when you do get those benefits, people are wondering are my Social Security benefits taxed? Now this is one of the misconceptions that we've gone over in the past where people think, hey, pension, Social Security, TSB, they're not taxed in retirement. I've gotten those things before. You might be thinking, well, you know, I'm not thinking that. But other federal employees have thought that. And that's one of the misconceptions that I've seen. And this question comes in kind of like that. Are my Social Security benefits taxed? Now I will say this, um, state taxes, let's start there because we'll get into the federal tax part of it. But state taxes depends on what state you live in. There are some states out there that do not have state income tax like my state of Texas, or if you live in Florida. But there are, um, some states also that will not tax, pension and Social Security benefits. So if you live in one of those states, then perhaps you won't pay a state tax.

Speaker1:
But now let's talk about federal tax when it comes to your Social Security. And this will depend on how much you're making when collecting Social Security. Right. And what your income is to determine how much of your Social Security will be subject to tax. Now, this isn't what the tax is, it's what percentage of your Social Security benefits will be subject to tax. So how do we determine that. And this this determination this calculation is a little different because this is your AGI, your adjusted gross income plus any tax free interest that you've earned plus half of your Social Security benefits. If that is under 32,000 for the year, then you will not pay any tax federally on your Social Security benefits. Oh, sorry. This is for those that are married filing jointly. I'm not going to go into all of the different categories, right, because there are single filers or married filing joint return filers. I'm just talking about this is married filing jointly. Um, if you're making under 32,000 for the year, then no federal tax on Social Security. If it's between 32,000 and 44,000, then up to 50% of your Social Security benefits will be subject to tax. Again, this is not a 50% tax, but up to 50% of the benefits will be subject to tax. If it's above 44,000 for the year, then up to 85% of your benefits would be subject to tax.

Speaker1:
So again, to wrap up the question, it state tax depends on what state you live. Uh, but federally it determines how much or it's determined by how much income you're making while collecting Social Security. Question number three comes in about your federal employee health benefits and Medicare. Now we've had an episode where we covered this. Where how do federal federal, uh, how do your federal employee health benefits coexist or work together with Medicare? Uh, once you turn 65, uh, it really depends on whether you're working or not. So I'm going to keep this as simple as possible. Uh, Medicare and federal employee health benefits. They do coordinate. They work together. Right. But which one's going to be the primary? Depends on whether or not you're working while you're working still employed by the federal government and working past age 65, your federal employee health benefits will be your primary insurance coverage. And once you turn 65, you automatically get part A of Medicare. That's something that you've been paying into while you've been working. Part B is something you need to elect, and you can elect it while you're working. You don't have to, but you can. Now, I will say you don't have to get part B at all, but this is that's an election. It's not something that is mandatory necessarily. Right? There are certain circumstances we can get into it.

Speaker1:
Um, whether you work for the post office or not, whether that could be a problem, right? Having to select part B, but in general, in general you'll get part A automatically. Part B is not something that you have to get. It is an election that you can get right. It's not mandatory. So while you're working, FB is primary. Medicare is your secondary. Once you retire separate from service, it flips. Medicare becomes your primary and your FB becomes your secondary. And they still work together. And hopefully the coordination of those benefits because you'll have, um, you know, hospital stays taken care of with part A of Medicare. If you do take part B, you'll have doctors and specialists. Um, FB could act as your Medicare supplement. Plus you have prescription drug coverage through your FB. So it should and could cover everything. And there should not be a need should. Again, it's not 100% but should not be a need for additional health insurance coverage. So that's how Medicare and FB Coexist once you're beyond age 65. Question four is about TSP. And people ask, how can I access my TSP money without being taxed and avoiding a 10% penalty? Well, this is an interesting question because there have been ways that people have asked me is how can I turn my TSP into tax free dollars? How can I access my TSP without being charged tax? How can I avoid the 10% penalty? What that is is for withdrawals from TSP prior to the age typically of 59.5.

Speaker1:
How can we avoid these things? Well, it's a it's a lot in this question, but let's start at the beginning. How can I access my TSP funds without getting taxed? Number one, if you take out a TSP loan while you're working, those funds are not taxed at that time. You do have to pay that loan back. But the question asked again, how do I access my TSP without being taxed alone while you're working? It's not taxed, but you do have to pay it back. Typically, though, how can you withdraw money from TSB without paying tax? You'd have to withdraw money from the Roth bucket. That's assuming that you are putting money into the Roth bucket with NTSB. That is the tax free bucket. You pay tax now. Deposit the money. It grows in that bucket on a tax free basis. If you do want to convert money to a Roth, you cannot do that currently with NTSB. You'd have to move it outside into your own Roth IRA. First of all, sorry. You have to move your the traditional portion, the taxable portion of your TSB into a outside traditional IRA. I then convert that whether it's over time or all at once into a Roth IRA. Then beyond that, that money could be accessed on a tax free basis.

Speaker1:
A little bit of a process, right. But doable. So how do you access money tax free alone? Not going to be taxed initially as long as you pay it all back before you retire. And then if you have a Roth bucket of your TSP taking money out of that Once you're eligible to do so, you won't be taxed on that. The second part of the question how do I avoid the 10% penalty? What that is, is a penalty is assessed by the IRS for withdrawals taking from an account such as a 401 or your TSP, or a traditional IRA or Roth IRA. Prior to the age of 59.5. Now there are ways that federal employees can avoid the 10% penalty in retirement. So if you retire from the government prior to age 59.5, you may be eligible to take money from your TSP without getting assessed the 10% penalty. Normally, this is for folks that are part of a special group, or if you retire and leave service with full benefits after the age of 55. Sometimes they call that the rule of 55 for this, but just typically you'd have to wait until age 59.5 to access TSB withdraw money to avoid any 10% penalty. Hopefully that answered a question for you. Again, if you need more information, reach out to us. We'd be happy to help.

Speaker1:
And our last question, question number five for today. This is going back to some basics when it comes to retirement planning and what to expect. But the question is what are RMDs and RMD stands for required minimum distributions required minimum distributions. And what are they. They're basically and this is just to sum it up, a way that the government says you have money in an account that has not yet been taxed. And we are going to require you to start taking money out of this so you can start paying some taxes on it. And this is for the traditional portion of your TSP. For any outside traditional IRAs you have, or other retirement accounts such as 400 A-3bs, things like that that have not yet been taxed. So the traditional bucket of your TSP, let's go back to this traditional bucket of your TSP. Money has gone in before tax. You get a tax deduction and it grows right. And when you withdraw money from it, from it. Every dollar that comes out, your money you put in plus interest is taxable. That's the traditional bucket. And if when you're retired, when you're separated, you owe RMDs. Once you hit a certain age, if you're working beyond that age, you do not owe RMDs until you're retired. But it used to be age 70.5. Then they upped it to 72 and 73, and now it can be up to age 75, depending upon your birth year is when you're supposed to or required to start taking these required minimum distributions.

Speaker1:
Again, active federal employee. If you work past your RMD age, you do not yet owe RMDs from your TSP. You would owe it from other accounts that you have that are not TSP. If you're still working for the government, but once you're separated retired, you do owe this, and there's a minimum percentage that they'd require you to take out every single year and start paying tax on that. If you do not take that out within the time frame, the penalty is 50% of the amount owed. So it's a big penalty. I would talk to your tax professional, your advisor, whoever's helping you with TSP or other outside accounts to ensure that you're taking the RMD and not getting penalized for it. So I really appreciate the questions that come in, the emails that we get, the visitors that are filling out the form on our website. I mean, that is what we're here for. We want to give information, number one, but we want to help you individually because you might get this information, say, where do I go? What do I do? Where do I start? What am I supposed to be looking into? We can do a full workup of your benefits and retirement situation.

Speaker1:
Estimate what your future pension is going to look like. Make any changes if necessary. Help you walk through ways to better set yourself up so you're optimized or maximized when it comes to your benefits and retirement. The whole goal and I just got done right before recording this episode, talking to a federal employee that's planning for retirement. The whole goal is to get you the individual. It's not. There's no one stop shop blanket advice that I can give everybody. Everybody's situation is unique, but give you the individual the best guidance possible so you can make the right decisions and set yourself and your family up for success in retirement. Because there's a lot of things in here. If you don't know it, you might be making the wrong choices along the way, which can cost you tens of thousands of dollars over the course of your working career. So chat with us, go to our website, Federal retirement Show.com. Fill out the form. Reach out to us. You can find our our emails, our contacts, all of that stuff. Um, also share this with your colleagues. Let them know that there's this information out there, right? We appreciate referrals to those that you're working with. We appreciate you subscribing and getting notified when new episodes come out. So thank you for that. Again. Really appreciate you taking the time out of your busy schedule. Looking forward to seeing you on a future episode.

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