This week on episode 99 of the Federal Retirement Show, Val tackles the world of Thrift Savings Plans (TSPs) and address some of the most common misconceptions that often lead to confusion and missed opportunities.
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7.12.24: Audio automatically transcribed by Sonix
7.12.24: 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'm your host, Val Majewski with American Benefits Exchange. As always, I really appreciate you taking the time to view our content here. What we have to say regarding your federal employee benefits and retirement information. This is our area of expertise. This is where we spend our time and making sense of all this stuff can be a little difficult, especially when you have your regular job to do. You're not always thinking about your benefits. You're not always thinking about retirement until it's time to leave. So we want to make sure we're giving you information that we believe you need to know so you can make the best decisions. And and as I typically do, you may have seen us review video content that's been out there on the internet, on YouTube or other things. And from time to time I'll go through and review different articles and other things that people have written and, and just see if there's information that is a deceiving or see if there's information that is incorrect, or see if there's some great information. Obviously, if there's a good video or article, I'd want to put it in your in your hands, put it in your lap, put it in your inbox so you can see this. And and today I want to review an article that I saw. And normally again I'm, I'm sharing with you my ideas and, and the things that we see our reps all across the country, what we see with federal employees just like yourself by going over their their situations, answering their questions, there's some unique things, some, you know, less than 1% scenarios, some very, very interesting stories that we hear.
Speaker1:
But from time to time, as I said, I review articles and I see things that are out there just because I'm always exploring, you know, what's new, what's out there, what do federal employees need to know? And I came across this one when it comes to TSP that I think could be very beneficial. And obviously I can't take credit for it. This was an article written up by a financial professional that is talking about the common TSP misconceptions and mistakes, and I think he hit the nail right on the head when it came to this. And you can find this article on Fed smith.com. I mean normally I'm sending you to our website Federal Retirement Show.com. But in this case fed smith.com. And the article was called avoid these common TSP misconceptions and mistakes. The author of the writer of this article is a gentleman named Brendan Rule, and I just want to share with you some of the points that he was making. He said there was 11 misconceptions that federal employees often have about TSP. And as I mentioned, I think he hit the nail right on the head. And I want to review these with you. You can certainly check that out, but I think you may have heard of some of these things.
Speaker1:
You may have come across some of these things. Heck, we have talked about some of these things. But when it comes to TSP and this is my opinion, TSP is your wild card when it comes to your retirement income because your pension and Social security are things that are set in stone that you really cannot affect. Gaining more years of service and trying to earn more money. You really can't affect your Social Security other than delaying it as long as you can, and trying to earn more money so that you can maximize the benefit that they're going to pay you back. But when it comes to TSP, this is the wild card, because a lot of times when people want to get as close to their pre-retirement income in retirement, tsp's going to carry the biggest amount of weight. And what do I mean by that? Well, let's say you work 30 years for the federal government. You're going to get approximately 30% of your high three in your pension. So that's 30%. Now, even if we're trying to get to the magical maybe 80% or 90% of our pre-retirement income in retirement, the next up is Social Security. And Social Security might only get to 2,025%. So let's say 25. So now I've got that 30% from my pension, 25% from Social Security. I'm at 55%. Even if I'm trying to get to 80, I'm still 25% short. If I want to get to 90, I'm 35% short.
Speaker1:
If I want to get to 100, I'm 45% short when it comes to my pre and post retirement income. So what's left to make that up? Tsp. So you want to make sure you understand everything there is to know about TSP, because you are the one that decides how much comes out of your paycheck each pay period. And you decide where that gets invested into the various fund options that they have. You know, the Gfcs and AI, plus all those lifecycle funds that are available for you. And we've even mentioned the mutual fund window that's out there that a few people take advantage of. But I'm saying there are investment choices, and you want to make sure you're making the right ones. Also, you want to know all the ins and outs when it comes to your TSP and how it works. So I'm going to review. Just go over some of the points that Brennan makes in this article that I think are helpful for you. And maybe there's some, again, misconceptions or things that you've heard before. And we can dispel some of those rumors. But the first one, your income is too high to contribute to a Roth TSP. Now what is Roth TSP? Roth TSP is a Roth 401 K. It's not a Roth IRA, so I've had this. I've had people come to me and say, I can't participate in my Roth TSP because I make too much money.
Speaker1:
And the misconception is that a Roth TSP acts the same or functions the same as a Roth IRA, which does have earnings limits. So there's only a certain amount of money that you could earn as an individual or as married filing jointly when it comes to taxes, before you're prohibited from participating in a Roth IRA for that given year. A Roth TSP does not have that rule to it because it has. It is operated by 401 K rules. So there are limitations only on how much you can contribute. The other thing is on that is people think, oh, it's IRA. I can only contribute up to the max per year, which is currently 7000. That's not true either. You can put up to the TSP max number two. Contributing to the max into Roth TSP will result in losing 5% government match. So I've had this before too, where federal employees have have asked and said, well, you know, should I really contribute to the TSP Roth because I won't get any matching money on that. So if I contribute to Roth TSP, they're not going to match because they only match me on my traditional contributions. That is incorrect. That is incorrect. The the concept. You may have just got the words mixed up. You can put how much or as much or as little as you want into either bucket, the traditional or the Roth bucket combined. There's a maximum that you can put in currently for 2024.
Speaker1:
If you're under the age of 50, it's $23,000. If you're 50 or older, you can put an additional 7500 in. But understand that you can put a combination or all of that 23,000 into the Roth portion of your TSP, the matching money. The government will match you no matter where you put your money up. The first 5% that you contribute into TSP. The problem is their contributions. The matching contributions go into the traditional bucket, so you can put all of your money into the Roth bucket. The government will still match you, but all of their contributions go into the traditional bucket. Number three if I max out my TSP early in early in the year to allocate more funds to other areas for the remainder of the year, says, I'll max out my TSP early in the year to allocate more funds to other areas for the remainder of the year. Be cautious of this. Why? Because you don't want to hit your maximum contribution limit too early in the year because you're going to miss out on funds. So the government only matches when you're putting into TSP. So the only time that the government is going to match you is when you are actively putting in the TSP, and they're going to stop it at 5%. Now, if you hit your maximum too early and you have to stop contributing to TSP, what does that mean? That means you have stopped getting matching funds as well.
Speaker1:
So it's important to try to evenly distribute if you're going to max out for the year, evenly distribute that payment per pay period so that you continue to get full matching funds for the entire year. Okay. Currently that Max, by the way, is $884 per pay period. Approximately that much. Right. And if you're maxing out with the catch up contributions, it's 1173 per pay period. If you're looking for a specific dollar amount, right. Not to try to pick a certain percentage of your pay 84 to get to the 23,000. 1173 per pay period to get to the 30,500, which is the max with catch up contributions number for the S fund is a small cap fund. Yeah, it is meant for or it is based on uh, a certain market index in there's just generally stands for small small to medium sized US companies that are not in the C fund which the S&P 500 but it is meant to mimic. The estimate is meant to mimic the Dow Jones US completion TSM index. And it is made up of, again, small to medium sized companies that are not in the S&P 500 or the C fund. So it is generally not just a small cap fund. That's just the kind of the the s people saying for small, but it is small to medium US companies that are not in the C fund for five. I will receive a 10% penalty for withdrawing before age 59.
Speaker1:
59.5. And I like what they talk here because there are exceptions to the 59.5 rule. Now, generally, if you're going to take a withdrawal from your TSP. Yeah. If you're prior to 59.5, uh, there will be a penalty for taking money out of your qualified account prior to age 59.5. But there are some exceptions for, uh, retirees. If you meet one of the criteria that they list here retirement in or after the year in which the account holder turns 55, you can access your TSP funds without penalty. Public safety employees who retire in or after the year they turn 50. Right. We're talking about those that are in special groups. Uh, firefighter law enforcement, air traffic controller. When you're part of those special groups, you can retire with full benefits at age 50. With at least 20 years of service. You're not yet 59.5, but you've hit a full retirement age. You can withdraw some money from TSP without that penalty. Those third phase retirement, there's an exception. And you know, obviously there's payments that are under certain court orders like it mentions divorce and child support, things of that nature. But there's in general, there typically is a penalty for taking money out 59.5 if you're below the age or under the age of 59.5 from your qualified account, like an IRA or TSP, things like that. Now within TSP, because we're talking TSP specific, there are those exceptions. Okay, I wouldn't necessarily think, hey, I can count on those all the time.
Speaker1:
But there are some exceptions. People that may not be penalized for taking money out prior to 59.5. The TSP annuity option the lifetime income option within TSP is owned by TSP. Now, you've heard us talk about this before. And this is a misconception that we've talked about on this show. But is it also in this article? Tsp does not manage the lifetime income. If you decide to take the lifetime income from your TSP account that is operated by MetLife, MetLife is who contracts with TSP to manage that. To utilize that, it's the same company that administers your Fegli plan. Metlife. Most people know them. You know Snoopy and the MetLife blimp. So understand that if you do choose the lifetime income option that is not managed and owned and operated by TSP, they will take your money and MetLife will be in charge of your lifetime payment. We're not a huge fan of that. You may have seen this on this show before in some of our previous episodes, because you give up all access, ownership and control. Plus it's a set in stone decision. If you decide to take a lifetime income from your TSB and keep it within TSB, right? Utilizing MetLife, you lose all access ownership and control of your of your funds while you're still alive. And it's an irrevocable choice. You can't stop that or change that decision once you've made it. I'm limited to one withdrawal every 30 days.
Speaker1:
This is number seven. I am limited to one withdrawal every 30 days. This is kind of true. Kind of not true. Now it is true if you're going to take an age based in service withdrawal or you're going to take a partial withdrawal in retirement, you have to wait at least 30 days before making your next withdrawal. But you can also set up installment payments and take a partial withdrawal at the same time. So there's there's a little way around it. It's kind of a play on words, but just in general, if you're just going to take a partial age based in service or partial withdrawal in retirement, you do have to wait 30 days in order to make the next one, uh, matching the L fund. This is number eight. Matching the L fund with my retirement date takes care of my investment strategy. Yeah, the L funds are guidelines, right? The L fund, life cycle fund. Each one of those is made up of each of the other five funds. So you may think, yeah, I've got an L fund, I've got the L income or the L 2035 or the L, L 20, 65, whatever it might be. Just understand every single L fund is made up of a little bit of the gfcs and I, you have a little bit of all of those. And if you want to know how much you have of each, if you do have an alpha, go to TSP.
Speaker1:
Gov you can look up the L fund. You can see the exact breakdown of your particular alpha and how that breakdown is going to change over time. But it is not a true set it and forget it. It's not a true management strategy when it comes to choosing funds or choosing your investments within TSP. Yeah, it does take some of the guesswork out of it, but it is not a true set it and forget it type of plan. So understand make an educated decision before getting into any of the funds by going to TSP. Gov checking out the breakdown and if a certain fund matches the breakdown of what you're looking to do, then maybe that could be a choice of yours. But that's completely up to you and I recommend doing your homework before just arbitrarily going. I'm going to retire in the year 2040, so guess what? I'm putting my money in the L 2040. Not that simple. Make sure you do your homework. Do your research in there. Number nine at retirement I can select the fund from which I withdraw my investments. Now I get this question a lot. People say, hey, I just want to take out my g fund money. I just want to take out the I fund money or whatever it might be. If I'm going to take a withdrawal as a federal employee or retiree, I just want to take out the money that is coming from X, Y, z type of fund, right? If it's the GFC or any of the L funds, I'm going to choose which money I can withdraw.
Speaker1:
It doesn't work that way. So if your breakdown in your account was something like, you know, 25% in four different funds, you can't just say, hey, I want it from the first one. I want 25% of my account. It's going to come out of this fund. No. If you take a withdrawal from your account, it's going to come out pro-rata from each of those. So you're still going to be left with the same breakdown when it's all said and done. So if you let's just say, for example, you had 400,000 in your TSP and you had four different funds that you equally had the money distributed in 25% each. If you took out 100,000, you couldn't just say, give me all the first fund, right? Let's just say it was the G fund. Give me 100,000 for the G fund. And now I've got only three funds left that are taking up 33, basically 33% of of the investment strategy. That's not how it's going to work. If you took out 100,000, you'd be left with 300,000, and you would still have a breakdown of 25% of the 300,000 in each of four funds. Hopefully you're tracking me there without showing you a chart, but that that works. So it's coming out pro rata. You cannot decide which fund now. You can't decide which bucket, meaning you can take money from the Roth or the traditional bucket, or a combination of both.
Speaker1:
But you can't determine where the money is coming from when it comes to fund strategy. Okay. Number ten misunderstanding of TSP loans. Now I like this in here. We've talked about the loan provision before within TSB. But I want to talk about this because this is interesting. While the interest paid on the TSP loan is returned to you, two main downsides are often disregarded. Firstly, the loan amount doesn't accrue growth based on your investment choices, so the loan amount doesn't accrue growth based on your investment choices. So again, any money that you're loaning that money it's a loan right. And withdraw the money. But that money does not continue to earn interest based on the investment choices. So it's kind of just hanging in limbo. Secondly, you face double taxation on interest paid. Now what does this mean when repaying interest into your TSP loan? You're using after tax funds, which are taxed again upon withdrawal at a later date. So whether the money's gone into Roth or whatever or into the traditional it, it is kind of a double taxation, right? You're paying that interest back to yourself with after tax dollars. And if that money was traditional money, say you had 100% traditional, well, that money is going to get taxed again when it comes out as a withdrawal. And if it were a Roth money, well, that money's already been taxed. So just understand if you face that.
Speaker2:
In.
Speaker1:
There. So just misunderstanding the TSP loan provision. Yes you can take out loans for two reasons general purpose loan or residential loan. You have different payback periods for each, but it's not maybe the best option in every case if you've got to to get money out. Number 11 my beneficiary will inherit TSP tax deferred. Now this depends on who inherits your TSP. So if it were your primary beneficiary is your spouse then they can inherit it. Tax deferred. Right. They can actually take over your TSB and keep it on a tax deferred basis. Um, if it were secondary right. If it's a inherited IRA, not a spouse, then they're going to have to take that money out or, or withdraw it all with a certain period of time based on the new inherited IRA rules. So it's just understanding who's going to get the money a spouse can take over your TSP. They can essentially operate it exactly how it was while you were alive. Keep it the same. Keep the tax deferment, the inherited side that would run into some complications because they're going to have to take out all that money within a certain period of time. Right now, it's ten years is Is the new rule that inherited IRA needs to be withdrawn completely within ten years, and that's a way that they're going to have to pay taxes.
Speaker1:
So I'm able to keep a tax deferred forever. They're going to have to withdraw that money and and pay the taxes on it. So just understand you know, why I like this article is just it's it's a different perspective. I love reading what other people said. Again this this was on Fed Smith. And it was an article by a gentleman named Brennan Rule. I want to give him credit for that. And just reviewing the different points there, the misconceptions and the things that you might hear out there when it comes to your TSB. Now, if there are some others, maybe there are some things that were not mentioned in that article that we didn't talk about here today that maybe we don't have any content on. I want you to reach out to us and give us your question. Right. Provide us with something that you've heard that you want to confirm. This is like a MythBusters section of the federal retirement show. If you've heard something that you want to see as true or false, you want to confirm whether it is true or false.
Speaker1:
You want to see if it's misinformation or if it is a misconception. Or maybe it is true. It may be might sound outrageous and off the wall, but you might find out and get confirmation that it is in fact true. Reach out to us. Go to Federal retirement Show.com fill out the form on there. One of our reps across the country will be reaching out to you again. If it is not me personally, and we want to make sure you're getting the information that you need, getting the answers that you're looking for. So as always, I really do appreciate you taking the time to view our content. I encourage you go back and view our previous episodes. This is episode number 99. So there are 98 other episodes that we've come out with with a ton of valuable information. At least I believe it's valuable for you, the federal employee, so you can make the best decisions as you go through your working career and near and enter retirement. My name is Val Majewski again with American Benefits Exchange. I really appreciate you joining me. Looking forward to seeing you on a future episode.
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