Retirement Reality Check: Misinformation, Roth Conversions, and Your Questions Answered

10.17.25: Audio automatically transcribed by Sonix

10.17.25: 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'm your host, Val Majewski with American Benefits Exchange. As always, I really appreciate you taking the time out of your busy schedule to join us to view our content as it is for you, the federal employee that's looking for accurate information when it comes to your benefits and retirement information. Now, a couple of things. If you like what we're doing, you like the information that we're providing to you. I want you to subscribe wherever it is that you're watching this or listening to this, and get notified when we come out with a new episode. We've got now 150. Today is 150 if episode that we've recorded of the federal retirement show. So thank you because we can't do this without your support. If you don't like what we're doing and, you know, it doesn't make sense for us to do it, but, uh, the feedback that we've been getting has been phenomenal. Uh, the people that I'm talking to all across the world that are listening to the federal retirement show and looking for this information. It is incredible to see. The other thing is share this with a colleague. Right. Who do you work with? You work with other federal employees, so the person next to you may not know about the federal retirement show. Tell them about it. Say, hey, if you're looking for information. If you're looking to get your question answered, uh, view all the episodes that are out there or reach out to us, go to our website, Federal Retirement Show.com.

Speaker1:
Fill out the form and you can get your questions answered personally by one of our experts or me. Uh, whoever's reaching out to you to to set up an appointment and talk more about your specific situation. So, uh, that being said, today is episode 150. We've made it this far. This is awesome. And I've got a few different topics that I want to talk to you about. The first thing is going to revolve around misinformation and where you're getting it from. I just had a conversation with a federal employee who was planning on retiring soon, and trying to get as much information as he can from his retirement Specialist and get some questions answered so he can prepare properly. And the information that was provided to him was a little shocking to me. Why? Because it was incorrect. It was misinformation. So you have to do your due diligence when you're talking to a what you perceive to be a retirement specialist within the government. This was within the government, within OPM or the retirement counselor that he was working with, with his agency. Uh, the information he was given was not accurate. And we had to go over some things and we had to answer some questions and, and provide the correct information and make sure that the information, the answers that he was given by his retirement person, uh, were crossed off. That way. He doesn't get confused because this is difficult for you guys.

Speaker1:
As federal employees, you are not given a full instruction manual when you first get hired about how to properly plan and what all of your options are, and what all these things mean, and how to best maximize and take advantage of what the government gives you then, especially when it comes time to retire. There is no straight instruction manual also to show you the best way to do that. What are the time frames? What are the timelines? What are the deadlines? What are the suggestions? What are your choices? What do all these choices mean? What are the consequences and the costs and all these things that are involved. And that's where we come in. You know, my subject matter being federal benefits and retirement. And I consider myself an expert in that. But that comes with experience. And seeing all these situations and talking to folks like you, I wish that the government did a better job of handling this for you, but it gives me and our company a job to do, and I think we do it pretty well. So if you do have questions, you do have concerns. You want to make sure that you're getting the right information. And even if it's coming from your agency or from OPM or something, that you're talking to a person that you think is an expert, just double check it. Triple check it. I encourage you to get a second opinion, right.

Speaker1:
If you if you don't like maybe what a doctor gives you, you're going to go get a second opinion or you want to confirm what somebody says, get a second opinion and just verify and validate. Because this veteran employee was hearing something and this was specific to how Phegley works in retirement, and it was incorrect. And fortunately, we were able to talk and clear it up and, and make dollars and cents of it all. But what if this person went into retirement and made a choice based on inaccurate information, only to find out that they could have made a better choice? I don't want that to happen, because a lot of these choices are set in stone, or you can't go back and change it once you've retired. So understand here, misinformation can come from anywhere. It can come from it can come from me. So I would encourage you double check me, verify me. I'm not going to ever say that I know everything and I'm 100% accurate all the time. I have made some corrections on this show because I've misspoke. I've said something that it turned out to be inaccurate. I want to make sure that you're getting the right information. So if it's coming from somebody like me who claims to be a federal benefits expert, double check that if it comes from somebody in your department, double checking if it comes from a colleague, definitely double check it. If it's water cooler, talk double check it, triple check it.

Speaker1:
Make sure that you are, uh, choosing the right things, getting the right information so you can again set yourself up the best as you're going through your working career and as you enter retirement, because some of these choices are irrevocable and you can't change them. The second thing I want to talk to you about today has to do with Roth conversions. And we've had episodes where we've talked about converting your funds from TSP that are in traditional to Roth or any other type of traditional IRAs that you have outside the government, and the benefits of that. And I'm bringing this up because TSP will, in the future, allow you the opportunity to convert some of your traditional money or all of your traditional money, for that matter, to the Roth side and the the benefits of that and why we would do it, I think are are obvious. But what is if you're not familiar with a Roth IRA, what that means this is a tax free version of retirement saving. How do you do that? You put in money into a Roth IRA or your Roth TSB after tax. So you pay the taxes up front and the money accumulates in this account, earns interest based on whatever investment choices that you have. And when you take the money out down the road, the moneys will come out tax free. Now, what if you didn't make that choice right away and you put money into the traditional bucket, or have a traditional IRA out there? The traditional side money's put into that account on a pre-tax basis, meaning you get a tax deduction for any of those contributions that you've made to that account.

Speaker1:
And in the end, the money will grow tax deferred and and grow and grow and grow based on the strategies that you picked. And in the end, you will pay tax on every dollar that you withdraw from, that the money that you put in, plus the interest that you've earned. So on the wrong side, just in general, when do you want to pay taxes? Now or later? I'm a big fan of tax free dollars in retirement. I'd rather pay tax on my contribution and let it grow and grow and grow. But if you've made a choice and you said, yeah, you know what? I do want to do the Roth side, but I've, I've been contributing to the the traditional portion of TSP for my entire career, and I've got a good amount in there. How can I how can I do it? And what are the benefits of moving money into a Roth side? Well, there are there are ways. The way to do it now is you have to do it outside of TSP. You'd have to move whatever portion into a traditional IRA, and then you can convert from the traditional to the Roth. And going forward, once you do that conversion, all the interest that you earn in the Roth IRA or the Roth portion will grow tax free.

Speaker1:
And any income or money that you take out from that account down the road will come out tax free. The problem with a Roth conversion, if there is one, is that you do have to pay tax on the money that you convert. So whether you do it in the future when it becomes available in TSP or you do it outside of TSP, even though I'm a big fan of it and I like and prefer tax free dollars in retirement, you've got to understand the consequences of doing a conversion. And what that is, is you have to pay the tax on whatever you convert. So let's say here's an example. You have $100,000 that you move out of TSP into a traditional IRA, and you want to convert that now to a Roth. And we can snap our fingers and just go, abracadabra, boom! Magic trick. We turned money from traditional taxable dollars into a Roth. Now tax free dollars. Awesome. But what's the problem? You're going to have to pay the tax on the $100,000, and depending on your tax bracket, that can be a significant amount of money that you'd have to come out of pocket in order to pay. So if I went traditional money 100,000 snap my fingers is now Roth money 100,000. At the end of the year, they're going to send me a 1099, and I'm going to owe tax on that $100,000 conversion.

Speaker1:
It could increase your tax bracket because it counts as earned income for the year in which you converted it. So just understand, you might want to talk to your CPA or tax professional to see how much you can convert before getting into a higher tax bracket. You want to see what the tax implication could be for the conversion. That being said, I am a big believer and a fan of having more tax free dollars in retirement now. Why? Why are conversions important? Why do people do them? Because it's a way to prepay Uncle Sam, and if you have a longer time frame before you're going to access this money, then now it gives you an opportunity. Once you convert all the interest that you earn from that point on, you no longer owe any taxes on. Right? So if I paid, let's look at two scenarios. If I had $100,000 today and it's in traditional and ten years from now, it grew to $200,000. Now I owe tax on $200,000 when I start taking money out if I wanted to withdraw. Let's just look at an example like that. If I'm going to withdraw all the money, what's my taxable portion of that? So I've got 100,000. Ten years from now it grows to 200,000. Well, if I kept it in the traditional yes, I got a tax deduction on all those contributions. I haven't paid tax on it yet, but when I withdraw all that money, I'm going to owe tax on the full amount, the full 200.

Speaker1:
If I convert today, 100,000, I might pay tax. If I'm in a 20% tax bracket on $20,000. So so I mean, 20% of that or I'll have a tax bill for 20,000. So now that 100 could sit for ten years and it grows to 200,000, guess what? I don't owe any more tax on any of the interest that I've earned or the gains that I had. It's that prepaid Uncle Sam. I got him out of my back pocket for retirement purposes. And going forward, all that money, plus the interest that I've earned, is tax free. That's the benefit of the Roth. Now, there's some other rules and some other things to consider. So if you have more questions about that, please reach out to us, like to walk you through the benefits and disadvantages of Roth conversions or Roth money. But as I said, overall I'm a big fan of it and it could be beneficial for you. So talk to an expert if it's not us and just ask about is Roth conversion beneficial for you? Should you consider that for your future retirement? Because here's here's another reason why I really, really like it. Not only is it tax free and you prepay Uncle Sam, but it doesn't matter then which way taxes go in the future. You're locked in, at least for this amount. Now, we can't avoid all taxes in retirement. You're going to be taxed on your your pension and Social Security.

Speaker1:
But when it comes to your TSP money or your other retirement incomes, we can mitigate the taxes and prepay those taxes. Get Uncle Sam, like I said, out of your pocket. And if taxes go up a double what they are now or they go up significantly, you're not going to have to worry about this amount being taxed too much because you prepaid the taxes. You've got it all taken care of. So that's another reason why I'm a fan of of Roth conversions and converting money. The tax free dollars. Okay, now the last thing, the last part of today, and I want to answer one of your questions that have come in. And we get questions like this a lot. You've heard us talk about getting out of debt, and you've heard us talk about different ways to do so. And we want federal employees, really anybody but federal employees specifically, as you enter retirement, to be as close to debt free as possible, as close to now, you may not be entirely debt free. If you are great, awesome. You're doing a great job planning. Somebody gave you the right advice down the road in the past so you can prepare for that. But when it comes to getting out of debt, we get questions like this one. Where is it wise for me to take a TSP withdrawal or loan to pay off debt that I had? Now, let's just say a high interest debt, because this person was talking specifically about credit cards.

Speaker1:
And should I take out a TSP loan in order to pay off my credit card debt. If you have no other options, this might be might be a solution. But they also asked, should I take a withdrawal or should I take a loan? Now let's say those were the only two options. Let's say those are the only two options. The problem with, um, taking out a withdrawal is going to be on your age. If you're under the age of 59.5, uh, not only will you be charged tax on the money that's taken out if it's coming from the traditional bucket, uh, but you're going to have an IRS penalty for taking money out prior to 59.5. So a withdrawal to pay off debt in this case, let's say high interest credit card debt, probably not your best option. So what's left taking out a loan now how does a TSP loan work? You have two options. You have a general purpose loan or a residential loan. Now in this case you take out the general purpose loan and you can take out any amount of your contributions, um, for any reason. And you do have to pay it back with interest, and it's got to be paid back within a five year period. So If you do have high interest credit card debt, let's say high interest is between 20 and 30%. I've seen a lot that are 24.99 29.99 because again, we're helping out federal employees plan to be debt free.

Speaker1:
So we've got some debt elimination strategies that we utilize. But if there's no other options and there's no other way to do this besides looking at TSP to get you out of this cycle because the interest is crushing you, then this could be an option. I'm not I'm not going to say I recommend it. Blanket statement across the board, but it could be an option. I'll tell you why for two reasons. Number one, the interest on a TSP loan is generally low, right? It's based upon the rate of the G fund, which is generally going to be a lot lower than the interest that you're paying on your credit cards. So that could be an option. And that would be why. Right. A lower interest rate you're condensing or consolidating. It's like you're doing your own debt consolidation, debt elimination. You are still going to pay some interest back when you're paying the loan off. But those are going to come directly out of your paycheck. It's going to be paid by payroll deduction, the loan balance, and you're going to be charged a little bit of interest compared to the high interest that you had in your credit cards. Okay. Number two, the number two reason is that could be beneficial if you're going to commit to not rebuilding up your credit card debt. Right now you're not like, oh, look at I've got all this credit and I'm just going to go spend, spend, spend again and get back into the same situation and have a vicious cycle occur.

Speaker1:
So if you're going to change your spending habits and this is going to kind of be like the the straw that broke the camel's back and you're saying, hey, I'm, I'm done with this, I want to pay this off. And I'm going to, you know, change the way I look at money and spend money. Then again, that could be a reason why I would look at that. Otherwise, look at traditional methods or organic methods. It's it's kind of like weight loss in that. Right? I don't want I don't need the quick fix. I need to to change my habits more than I just need the quick fix. So TSP could be a quick fix for you. It could be a lower interest way to consolidate and eliminate debt, like high interest credit cards. As long as you commit to paying it back and commit to changing the spending habits so you're not going to be back in the same situation, you know, a year or two, and you're doing this all over again and looking at TSP like a lifeline. Okay, this is your retirement. So I don't want you to end up, you know, spending or borrowing. Um, your TSP to pay for today. You need to use it to prepare for tomorrow. So if you do have further questions on that, or you have other debts, or you want to design a way to get completely out of debt, not just credit card, but we're talking car payments, student loans and a mortgage, that's a way in which we help federal employees.

Speaker1:
We have previous episodes on that. Go back and check out our previous content on on how exactly we do that and if it's beneficial for you. Love to talk to you more. Again, go to our website, A Federal Retirement Show.com you can fill out the form. One of our experts, if it's not me personally, would reach out. You can even get a copy of the book that I wrote on federal benefits called There's No Excuse. Be happy to put that in your hands. So you've got a reference, a resource material that you could refer back to. But thank you for taking the time out of your busy schedule to join us. I really appreciate your viewership. Share us with your colleagues. That's how we get the word out. Um, it's just it's my viewers like you sharing, uh, you know, with your colleagues, with the people that you're working side by side with. We don't we don't want to just rely on people randomly coming to to see us based on Google searches or things like that. Share us, be proactive. Tell other federal employees that they need to view the federal retirement show. I'm your host again, Val Majewski. You've been watching the federal retirement show. We look forward to seeing you on a future episode.

Speaker2:
His retirement just around the corner. It might be time to start imagining the foundation of your retirement budget. I'm Jim Tabaka here for the Retirement Radio network powered by Emeril Live. Most people spend decades saving for retirement. The far fewer spend time planning how they'll spend in retirement, according to a recent study by CNBC. 64% of Americans are more worried about running out of money in retirement than they are of actually dying, Andrew Biggs, senior fellow at the American Enterprise Institute, tells CNBC that growing fears about retirement finances are pushing more Americans to keep working later in life.

Speaker3:
We have more options for extended work lives today than we've ever had before, and Americans are taking advantage of them.

Speaker2:
Without a clear retirement budget, it's easy to go off track either by spending too much too soon, or holding back out of fear and missing out on the freedom you've earned. At a recent Ted talk, award winning financial planner Amir Rocha-lima revealed how true freedom and retirement budgeting go hand in hand.

Speaker4:
Yes, you need to know your numbers, but knowing how much you need to ensure your dream retirement becomes a reality is completely intertwined with knowing what your dream retirement looks like in the first place.

Speaker2:
To help keep your retirement years both secure and fulfilling. Here are four tips for navigating your budget. First, get clear on your monthly must haves. We're talking about essentials. Housing. Healthcare. Groceries. Transportation. Next, think about what makes retirement meaningful for you. Travel. Picking up a new hobby. Helping the grandkids with college. This is your time. But even purpose has a price tag. Then take a close look at your income sources. Social security. Pensions. Investment. Withdrawals. Each comes with its own set of rules and tax impacts. And finally, check in with your budget every year. Life changes. The markets they shift. Your priorities might too. A little regular review can go a long way in keeping you confident and in control. Retirement budgeting isn't a set it and forget it moment. No, it's a new chapter, and like any good story, it needs a solid outline for the Retirement Radio network powered by a mirror life. I'm Jim.

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