Back to Basics – Thrift Savings Plan

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

Speaker1:
Welcome back to the Federal Retirement Show. I am your host, Val Majewski with American Benefits Exchange. And as always, I really appreciate you taking the time out of your busy schedule to join us to view our content, because that is what it is here for. It's for you, the federal employee that is looking for information regarding benefits and retirement so you can make the best decisions along the course of your working career and as you prepare for retirement. And we've been in a series called back to the basics. And there, you know, it's never too late. It's never too early. It's it's never a bad idea to go back to the fundamentals. You know, if you think about in sports, you could always rely on your your fundamentals. You can rely on your muscle memory and all of those things. And, and we're hitting on some of the bigger topics. We talked about the retirement systems. We did it back to the basics on Fegley. Today we're going back to the basics on TSP, your Thrift Savings plan. And this is a big part of your retirement planning because in my opinion, this is your wild card. And I'll explain that as we go. But usually TSP in a lot of scenarios that we run across, carries the most amount of weight when it comes to somebody's retirement income. And as a Fers employee, I'm assuming most of you on here are fers. Then you're going to have a pension, Social Security and TSP as your third income stream.

Speaker1:
Some people look at it as a three legged stool for retirement income, or a three buckets that you're getting your retirement income from. And in most cases, TSP is left to pick up the most amount of weight when it comes to your retirement income. So let's dive into the basics today on the Thrift Savings Plan. First of all, what is a TSP? Just a basic overview of it. It is your version, the government version of a 401 K established by Congress and the Federal Employees Retirement System Act of 1986. It's one of your three retirement income sources for Fers employees. We just went over that old school system, CSRS civil service retirement system. Sorry, zero matching because those folks were hired prior to 1984 and TSB did not exist prior to 1984, so no matching for CSRS employees. Uh, fers you get up to 5% matching. Now, this is my opinion, but this is the best kind of money you can have. Why is that? It's free money. The government doesn't give you much for free. They want to give you some free money when it comes to your TSP. So how does this work? Well, whether you participate in TSP or not as a first employee, the government will automatically put 1% in on your behalf. So there have been some people I've come across and say I don't participate in TSP.

Speaker1:
I don't have a TSP that are Fers employees, and I'd have to stop them and say, yes, you do, because the government automatically puts 1% on your behalf. The government will then match dollar for dollar, the first 3% that you put into TSB, and then they'll match $0.50 on the dollar for the next 2%. So essentially you put in five. They'll match four, but they're already putting in the one on your behalf. So essentially you put in five, you get five. If you want to maximize the free money that the government gives you put in 5%, you'll get 5% for free. Now, I'm not saying this as just a blanket statement, but it is generally my recommendation, in my opinion, to take the most or take advantage of all the free money that you can get. So if you can put in 5%, generally that's a decent starting point for most folks because you're taking care of or taking advantage of all the free money that the government will give you. Contributions can be allocated into six different fund options. There are essentially six letters. Right. We'll go over those. And there's other investment options that have come out within the past couple of years. There is something called the mutual fund window, which we're not going to go into detail here on this episode about TSP, but there is something called the mutual fund window. It's an ability for you to take your TSP funds and invest them in something essentially outside of TSP in a variety of different mutual fund options.

Speaker1:
But just buyer beware. There comes with the same similar, if not more or less, depending on the mutual fund you're in. Risks. There are additional fees that can be in there, and there's a limit on how much you can put, how much of your account you can put towards this mutual fund window. But we're going to be talking about the traditional TSP investment options in this overview today. On this back to the basics episode, if you do have questions about other options, reach out to us. Go to our website federal retirement Show.com. Fill out the form. One of our experts across the country will be reaching out to you to discuss your benefits. Go over your situation with you and answer your questions. Okay, so six different fund options. There's essentially six different letters right. We should all be familiar with these if you're in TSP. If you're not great this is going to be an education for you. But we're going to start with the I say the least risky to the most risky. We're going to go with the most conservative to, you know, most not conservative. Starting with the G fund. Now G you can use a stands for government securities. I say it stands for the guaranteed fund. Why? Because this is the only fund that is guaranteed never to lose. I never have a losing month, a losing year.

Speaker1:
It's made up of US Treasury securities. It's especially made for the TSP. So I cannot invest in something like this. This is only for TSP users or TSP investors TSP participants, but the objective is to ensure preservation of capital and generate returns above those of short term US Treasury securities. If you look at it, you can go and we'll talk about TSP Gov. You can check out past performance of the G as well as other funds, but the G fund only fund that is guaranteed never to lose. There's the F fund. Now F is a bond index. It's low risk, generally low risk. The objective is to match the performance of the Bloomberg US Aggregate Bond index. I say low risk. Generally it has been low over the years, but we have seen, um, that the F fund can lose it. Lost over 12% recently. So just be aware that the F fund has been fairly conservative over the years, but it has shown recently that it can be a little more volatile depending on the situation and what's going on. So f fund, we're getting a little more into the risky things, but it is a bond index fund. The C fund. Now this is probably the most popular index. But the C fund is moderate to high risk. And the C fund's objective is to match the performance of the Standard and Poor's or S&P 500 index.

Speaker1:
This is made up of 500 large, medium sized US companies, the top 500 US companies. And what this is, this is meant to match or mimic the performance up. It is not exactly the S&P 500, but it follows suit. So generally speaking, if you see that the S&P 500 is up, if you see it in the newspaper, on the news, on the TV, on the radio, then you should think that your fund will also be up. S stands for small. This is small US companies, small to medium, US companies that are not in the S&P 500. It's meant to match the performance of the Dow Jones US completion TSM index or Total stock market index. Again, this is moderate to high risk, just like the C fund the last stock fund. So of the traditional five funds you have the GFS and I, the c s and the I are the stock funds. Um, this is also moderate to high risk. The I stands for international. That is its objective is to match the performance of the MSCI Eafe, which stands for Europe, Australasia and Far East Index. This is made up of stocks of companies that are international in these different countries. So if you're looking at the stock funds right you got to understand the performance and how these things work. So you know we'll take a look at that here in a second I'll tell you a good resource for you to go into.

Speaker1:
But those are the five traditional funds Gfk's and I the G being government securities, F being a bond index, the CS and I being the stock index options or the stock fund options varying risk. But the CS and the I generally moderate to high risk can be good rewards but can also just again buyer beware. It has had years where it's gone down significantly. Now, if you want to take some of the guesswork. You're like, how do I manage this? How do I determine which percentage or how much I want? To put into each fund. That's where the L funds come in. And L stands for life cycle funds. Now what is a life cycle fund? Each L fund and there's numerous ones. There's the L income, which is the most conservative L 2025 all the way up to 2065 or 2070. And these are target date funds. So it's essentially saying, hey, if your retirement date is the year 2050, then perhaps you should be in the L 2050. And each L fund is made up of it has a little bit in each of the Gfc's. And so you might think, and I've had people tell me, no, I don't have the G fund or I don't have the C fund. I am in the L fund or one of the L funds. And I would break it down and say, yes, I understand, but each L fund is made up of the other five funds.

Speaker1:
What's the weighting? What's the percentage? It depends on how far away that target year is. So the further away that year is, the more the waiting is going to be in the stock funds like the CS and the IE. Um, the closer you are to that date, the more they're going to start shifting the weighting over time towards the G fund, towards the more conservative side, and it will alter the percentage for you as you go. It is not a a managed fund. It's it's on a set predetermined algorithm. It doesn't read, you know, market volatility and other things and manage it for you. It's just on a preset algorithm where it's a little more risky the further you are away. And it takes away some of the risk as you get closer. Important to note. Important to note that in most L funds, there is a high weighting in the I fund and the I fund. Compared to this, the C and the S, there's a there's a good amount of I. Why would I mention that. Because of the three stock funds. And this is something that you can look up. You can go on TSP gov and check that out. But of the three stock funds the CS and I, the I is the worst performing over history. I'm not saying that that's how it's going to go going forward. Right past performance, never a guarantee of future return, but it just gives you an idea that over history, the I fund has been the worst performing stock index.

Speaker1:
In fact, it's performed about half as well as the C fund over time. So just important to note that each fund does have a high amount of AI involved in it. Okay, I mentioned tsp.gov. This is a great resource for you. Why? Because this is where you go to manage your account. I mentioned TSP is not managed, it is an administered account. I said earlier that it is your wild card. Why? Because you have to determine how much money comes out of each paycheck in order to put it into TSP. Once it comes out of your paycheck and you can determine how it gets broken up each dollar as it goes into TSP. I want 25% to go here, 25 here, 2520. I can break it up to determine how it gets split as it goes in there. Then you can also go into TSP gov and make interfund transfers. You can take big blocks of money and move it from one part to the other, or one fund to another. And you can you can maneuver your money within t.s.b. Gov. Remember, it is not a managed account. You don't have a representative at TSB that is calling you and giving you stock tips and telling you hey, this is hot right now and this is moving and this is doing well and this is not doing well, you have to see that for yourself.

Speaker1:
So logging into TSB gov the tracked performance and see how your account is doing. Just so you're aware you don't necessarily have to micromanage it or day trade it. I have seen some people that do uh, some crazy day trading with their TSB. I'm not saying you have to go to that extreme, but just be aware of what's going on and say, oh, well, I haven't really logged into my TSB in a couple of years. Be aware. This is, as I said, the wild card. This is going to carry the most amount of weight and I want to make sure or have you make sure that your risk tolerance is in line with what you want to do, that your money is working as best it can for you, because this is going to be a a big thing for you in retirement. So you want it to be there. You got to make sure you track it. Be aware of it. Go to TSP. Governor. Log in. See all the tools and things that they have available for you. Okay. Um, contributions. Contributions. How does this work with with TSP? What can you do? Well, I mentioned you can go into your pay system and and determine how much is going to come out of your paycheck. So once the money comes out, you just say if you want a certain percentage or a dollar amount to go into one of two different buckets, it can either go into the traditional bucket, which is the pre-tax bucket, meaning you don't pay tax on it today, you actually get a tax deduction today.

Speaker1:
But as that money sits in that account and grows and earns interest, when you withdraw the money down the road, every dollar will be taxable as ordinary income. The other side of that is the Roth bucket. Now you pay tax on the dollars. Today money goes in after tax. But now your earnings and everything that you. The interest that you gained on that account when you do withdraw the money will come out tax free. So when do you want to pay tax. Now or later that determines which bucket you want to put your money into. Annual maximum went up this year, so you can put a total of 23,500 into your TSP in a calendar year. For those that are 50 and older, your catch up contributions remain steady at $7,500 extra per year. So again, that's now up to 31,000 total that you can put in if you're 50 and older. And for those that are 60 to 63 year old, they came out with this thing that I'm the super catch up. And this is for those, again that are 60 to 63 years old, your catch up is not 7500. It's actually 11,000 to 50 that you can put in to your your TSP in addition to the 23,500.

Speaker1:
Important to note that agency matching funds, no matter how much you put into TSP and where you put it, all, go into the traditional account. I have had some misconceptions or confusion over the years that people thought, I'm putting all of my money into the Roth, so I don't get any matching. That's incorrect. It doesn't matter where you put your money, the first 5% will get matched and that matching money will go into the traditional bucket. So just understand, you can put in all of your money into the Roth. You can put in a combination of both the Roth and Traditional or all the traditional. You'll get matched up to the first 5% of your contributions, no matter where they are. And those contour matching monies do go into the traditional account RMD. It's important to note, too, that this is while you're working. If you're still employed by the federal government, you are not required to take an RMD from TSP. But once you're retired separated from service, you will be subject to RMDs. Now, rules have changed in the coming years. So when do you need to take RMDs? Uh, if you were born June 30th, 1949 or earlier, your RMD is the old RMD, which is 70.5 years old. Those July 1st, 1949 through 1950, age 72. If you were born, uh, 1951 through the end of 1959 at 73. And if you're born after that, it is going up to 75.

Speaker1:
Just understand that this means you're going to have to start taking withdrawals from your TSB account based on the government and what they're telling you you need to do. Right. You can just specify, hey, I want to take out my RMD for the given year. It has to be done by December. In general, December 31st of the year in which an RMD needs to be taken. Okay. There's some different rules for your first RMD withdrawal, but just generally that RMD withdrawal needs to be done by December 31st for that RMD to count for that year. Okay. Um distributions. So we can ask a lot. Okay. Tsb it's going to be a savings account for me retirement savings. And you know Val you're saying that I'm going to be utilizing it in retirement. It's going to carry the most amount of weight. And it's going to be one of my three income sources. How exactly do I take money from TSB? Now understand you don't have to take money from TSB unless you're subject to, you know, RMD age, you can let the money sit there. You don't have to do anything. I'm just telling you what I typically see. But there are two ways that you can get money from your TSB, okay? One is a loan and one is a withdrawal. Now loans happen when you're in service. And we're going to talk first about in-service loans and in-service withdrawals.

Speaker1:
And then we'll talk about separated from service withdrawals. Because you obviously you can't take a loan once you're separated. But in service there are two types of loans, two types of loans. There's a general purpose loan. And what does that mean. That means that you can take money or borrow money. And this is just your borrowing from your contributions that you've put in, plus any interest you've earned on your contributions. General purpose means you can take money out for any reason and borrow it from TSB. It's not a withdrawal, it's borrowing money from TSB and you will have to pay it back. General purpose loan has to be paid back within five years. Normally that's going to be done during a regular payroll deduction. If somebody you'll set up a repayment that'll come right out of your paycheck. A residential loan. Now this is for the construction or purchase of a primary residence. And you have up to 15 years to pay this back. So general purpose loan has to be paid back within five years, residential loan within 15 years. And again, it is construction or purchase of a primary residence. It's not for the rental home or the Airbnb or the beach house. This is for your primary residence, and there's a lot more documentation that you need to show to get approved for this. Now, while you're in service, you can take withdrawals too. This is not borrowing money.

Speaker1:
This is just withdrawing money from the account. You don't have to pay it back. There's the first one is called a hardship withdrawal. And I hope nobody has to go through this. That's watching this podcast episode. But if you're in a dire situation, right, you're in a negative cash flow situation. You have legal expenses, casualty losses or things like that. You have to show documentation of this. You can take a hardship withdrawal if prior to age 59.5. And this means you're in a situation financially where you it's requiring you to take money out from your TSP. I hope nobody has to go through that, but it is an option for you. The most common in-service withdrawal option is called the age based In-Service withdrawal, and this is for folks that are 59.5 or older. You're allowed up to four age based in-service withdrawal options per calendar year used to be one in your lifetime. Now they allow up to four per calendar year. And this allows you to do a number of things with it. We'll talk about distributions here in a second. So those are ways that you can take money while you're working or get money from your TSP while you're working. Loans and withdrawals. Let's talk about separated from service right. Retired withdrawals or just separated in general. Now the first one is a lack of withdrawal option. And we're talking again about how can I access my TSP money? How can I utilize my TSP money? Well, first of all, you don't have to.

Speaker1:
As I said, you can leave it in TSP. And worst case scenario, down the road you'll be subject to RMDs with the money that has not been taxed yet, but leave it in TSP. You can't contribute to it anymore once you're separated and you just have to ride it out, right? You can manage your money on TSP, governor. Change the fund options, move the money around, invest it yourself. But you can leave the money in TSP. Not something I typically see, but it is an option that you have. Number two, and this is, in my opinion, the worst thing you can do from your TSP is you can take it all out and put it into your checking or savings account. Now, why is this a bad thing? Because you're going to be subject to taxes on the entire taxable amount of that account, and it can be significant. It can even bump you into a higher or much higher tax bracket, which means not only will you pay too much tax on this withdrawal, but on all the money that you earned for that given year. Not something I generally see and in my opinion, probably the worst thing you can do with your TSP money when you separate and retire. You can set up installment payments. Now, this is a way that you can do one of two types of installment payments.

Speaker1:
There's a fixed dollar amount. You can say, hey, pay me $1,000 a month until it runs out. The problem is, it's not a guaranteed income for life. If you need the income. And it can run out. Your money is still invested in TSP in installment payments. So meaning if the return is positive, then great. Those payments will last longer. If it's negative, well it can it will reduce your balance and those payments will be shortened. So there's two types. There's fixed dollar and there's life expectancy installment payments. The life expectancy is based on your projected life expectancy. So it's not guaranteed to be an income for life. Although they try to do that it's not guaranteed to be an income for life. So these are ways in which you can just designate, hey, I want to get a certain amount of money from my TSP each month. Not not something I typically see, but it is an option for you if you want some income in retirement. The other one is called the MetLife annuity. Now, if you do want a guaranteed lifetime income from your TSP, the only way that you can do that is called the MetLife annuity, or it's referred to as the MetLife annuity. Now why? Because they go to TSP does goes to an insurance carrier MetLife. Most people are familiar with them. Snoopy and the blimp. And they buy for you what's known as a spia a single premium immediate annuity.

Speaker1:
And in that case, you trade in or cash in your balance. You get rid of your TSP balance, trade it in, and in return we're trading it in. You will get a check for the rest of your life. Good news is that check will continue to come for the rest of your life. Bad news is you no longer have any access, ownership, or control of the money that you traded in to get that income. It's gone. You don't. But you will get that check for the rest of your life. And in death, there could be, you know, some big negatives as well. We'll talk about that on an individual basis. But this is the only way with NTSB that you can get a guaranteed income for life. I'm not a huge fan of this option because I think there's a better way to do it. But, um, yeah, this is the only option that they advertise when it comes to getting a lifetime income from your TSB. In my opinion, this is the second worst thing you could do with your TSB, besides just taking it all out and put it into your checking and savings account. You have questions on that. Again, reach out to us. We can we can go over that on a personal one on one scenario. The last thing, and this is something I see a lot of federal employees do, or they desire to do when they get to the point of being eligible to do something with their TSB, um, is roll it out into their own IRA.

Speaker1:
And the reason why is they say, hey, I want to get it out of control of the government's hands. I want to put it into my own account. I want to put it into my own IRA. And what type of IRA can you utilize? There are so many different ones out there that you can utilize, but rolling over to an IRA keeps you in control of your money. You make it more suited towards what you want to accomplish in retirement, and you have more options than just the ones that are available within TSB. So understand I see a lot of federal employees do this. It doesn't mean that it's perfectly right for you, but it's worth the conversation because now you can take control and get your money out of TSB. Put it into something a little more suitable for you, your family, for what you want to accomplish when you retire. And this is a way that you can again, remain in control of your money. Get it out of the the control of TSB and utilize it the way you want to. When you do retire. So excuse me when it comes to your distribution options both in service and out of service, just which one's right for you? What direction should you go in? That's where I say go to our website federal retirement show.com.

Speaker1:
Fill out the form. We'll be in touch. You can say, hey, I want more information on TSB and we'll be able to walk you through not only just TSB, but your entire benefit situation, so you can make sure you're in the right place, making the right decisions. So I hope I know for sake of time and we can go deeper and deeper and deeper. Tsb is my favorite thing to speak about. I love talking about it, but I appreciate you joining us for the fundamentals of TSP. Going back to the basics when it comes to your Thrift savings plan, hopefully you found this information enjoyable and it was beneficial for you. If you do need more information, as I said, go to our website, fill out the form, we'll be in touch and do a full workup not just of TSP but your whole situation. So as always, I really do appreciate you joining us and viewing our content. If you like what you see, tell somebody about it. Don't keep us a secret. Share the link. Go to your your your team and say you got to check this stuff out. You got to see this information, you know, subscribe to get updates of when new content comes out. Because we do this on a very regular basis. So I appreciate your dedication to improving your situation, to learning more about your benefits and retirement as a federal employee. And I look forward to seeing you on a future episode.

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