In this episode, Val helps make sense of the complex series of TSP distribution options. Val shares valuable insights about TSP withdrawals as he helps federal employees maximize their retirement savings.

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5.31.24: Audio automatically transcribed by Sonix

5.31.24: 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. Thank you for taking the time out of your schedule to view our content, to visit our channel, to visit our podcast, to visit our radio show. Hopefully you found the information to be extremely valuable. That's why we put that out. So I highly encourage you to go back and view our previous content, our previous episodes, and if there is a topic or something that we have not yet talked about, please reach out to us, go to our website dot Federal Retirement Show.com fill out one of our forms. We'll be in touch in order to not only get you benefits and retirement information, but you can share with us what you'd like to know about the episodes that you'd like to see. And that's where this comes in. Today we're delivering a topic or talking about a topic that federal employees have been asking about. We've been asked to give talks on this topic. Uh, people that are nearing or entering retirement have been asking, what are their Thrift savings plan distribution options? What are the things that they can do as they near or enter retirement or once they're separated from service? So I want to bring to you today this topic that's been brought to our attention by some of the groups that we give group presentations to and whether you know it or not, at American Benefits Exchange, we talk to groups all over the country, all different agencies, groups large and small, in order to give guidance, education and training on federal employee benefits and retirement information.

Speaker1:
So a lot of the topics, a lot of the things that we're providing through the federal retirement show are from questions we get asked when we're talking to federal employees, just like you in these group settings. When we're giving these presentations, we get ask the hey, can you provide or present on this topic? Can you show us information on this topic? We have a lot of employees that are asking about X, Y, and Z. Can you share with us on that? And that's where today's topic comes from. So let's dive into today's material and talk about Thrift Savings Plan distribution options. Now, whether you know it or not, you have the ability to do something with your TSP as you near or into retirement. And what we're talking about is how can I utilize my TSP distribution options? Right. But it's how can I best utilize my TSP as a near or into retirement. And there's a number of things we're going to discuss. But this is more about as you near to retirement right. There are certainly things that you can do while you're working. Um, to access your TSP funds, you can take a certain type of withdrawal. Uh, that's called a hardship withdrawal. There's actually two types of withdrawals that you can take while you're working.

Speaker1:
One is called a hardship withdrawal. It's not something that I wish upon anybody. But if you're in a dire financial situation due to a number of reasons and you have to show documentation about that, you can access money while you're working. There's another way you can access money while you're working. Uh, through loans. Now, I am going to talk about I'll back up a second. I am going to talk about another withdrawal provision that you have while you're working, but I'm going to save that for a little bit. So there's two types of withdrawals a hardship withdrawal. And then this other one we're going to discuss. And there's also loans. So not something that you're doing as you're near to retirement generally or even separated. You can't do it. But while you're working you can take out loans. And there's two types of loans. There's a general purpose loan and there's something called a residential loan. We're not talking about those today. We're not going to talk about the hardship withdrawal. We're not going to talk about the loan provisions. We're saying, how are you going to distribute and utilize your TSP funds as you near or enter retirement? So what are the things that you can do? You're planning for your exit strategy. You're waiting for that clock to run out right? When it comes to your, your, uh, federal employment, you have the countdown is on, you have the end in sight, and you want to see what am I going to do with my TSP? I've saved this money.

Speaker1:
I've worked hard to put money away for my future. How am I going to utilize this? What are the best options or even single option for me? How should you distribute or utilize your TSP funds? And I want to go over the five main ones. Now there's actually four distribution options, right? There's actually one that is a lack of distribution as an option. And this is where uh, you can leave it in TSP. Now, I don't see a lot of federal employees that just straight leave it there. But you can you can leave your money in TSP. There's no requirement that you have to take it all out. At any point, you just. You can leave it there. What are the the things that you're going to be able to do with it? Well, you're not going to contribute to TSP anymore as you retire. Um, this is, uh, something that you can just utilize the the TSP gov website. You can access the funds by or manage the funds. Sorry. By moving things around and really being your own advisor, your own financial planner, your own investor, you just move the money around as you see fit. You can certainly leave it there and let it ride the market roller coaster, but you can leave the money in TSP. You can just let it sit there.

Speaker1:
Now. Again, not something I normally see federal employees do. This is your first option. This is really a lack of a distribution option. Uh, leave your money in TSP. When we get into actual distributions, something else you can do is take a lump sum withdrawal. Now, this is not something I normally see either. This is probably the worst thing in my opinion, that you can do with your TSP. Why? Because there's a big tax liability that you're going to have if you do this, if you just take the money out and I'm talking about taking it out and putting it into your checking and savings account. Big tax liability, not only, um, are you going to get that money, you're going to pay tax on it now, it can negatively affect all the money that you earned in the given year that you took this money out, most likely putting you in a higher or sometimes the highest tax bracket based on total income. So understand that the taxable portion of your TSP, which is going to include anything that you decided to put into the traditional side. And all the agency matching funds are going to be taxed as ordinary income. You might say, well, I've got money in my Roth side. Yes. And that money will come out tax free, but there will still be a taxable portion. So not something I normally say. People don't normally want to take all that money out and pay all the taxes on the taxable portion up front.

Speaker1:
They more most likely want to pay that over time, but you have the ability to take a lump sum withdrawal. Again, in my opinion, probably the worst thing that you can do with your TSP when it's all said and done. Number three, let's say you did want to take money out. Over time. You can set up installment payments. You can go to TSP and say, okay, um, I want to set up a monthly payment of $1,000. I want you to pay me all that every month until it runs out. Now there's a couple things in here. Yes, you can get a monthly amount. You can dictate how much that monthly amount is. You can modify that monthly amount as you go. But there's a problem. This is not a guaranteed lifetime payment. This is just an arbitrary number or a calculated number that you select. And that money will continue to come until your account runs out. Good news. Is your money still invested in Tsp's? A good news it could be good news or bad news. Meaning, if you earn positive interest. Yeah, those payments will last longer because you're earning money on the remaining balance. However, if you see a negative impact, if there's a decrease or you have a negative interest rate, you saw a loss in your TSP, then those account value or the account value is going to go down and those payments could stop sooner, right? They can run out sooner.

Speaker1:
So you set up installment payments. There's two types. There's where you pick the monthly payment and there's something called a life expectancy option. Now the life expectancy option is not still a or is not a lifetime or guaranteed lifetime payment. It's based on life expectancy. Now if you outlive that expectancy, your payments could stop and most likely will if you go beyond your general life expectancy and the same thing your money is still invested in, however it's invested. So if you earn interest, you're you're going to extend those payments. If you lose money, you're going to decrease those payments. Now for people that say, well, I don't want to take this chance on my money running out, I want to set up a lifetime income. You can do that in TSP. You can set up what's known as the life annuity. Now, in my opinion, this is the second worst thing you could do with your TSP. That's my opinion. I'm going to explain why. Because if you know what the life annuity is, um, you're going to see all the, the good, the bad, the ugly with this. Now why do I call it the life annuity? Because MetLife, an insurance company, same company that administers your Fegli program. They're the ones that administer handle the lifetime income payments from TSP. A TSP goes to MetLife and they'll buy for you.

Speaker1:
It's known as a spia single premium immediate annuity. What this is, is they take your balance of money, whatever it is that you decide you want to turn into a lifetime income stream and you make a trade, you cash in that balance, so to speak. And in return, MetLife, they will pay you an income for the rest of your life, guaranteed for the rest of your life. So you make a trade. Here's my money in return. Send me that check and they will. They will send you a check for the rest of your life. Good news is that's money you cannot outlive. It's not like those monthly installments where they can run out. This is a guaranteed lifetime payment. You will never outlive the money. Bad news you had to trade in or cash in your account balance. So in order to get this lifetime payment, you had to give up all ownership, control, liquidity, flexibility with that money while you're alive, right? So you don't have any more access to it, ownership or control. You've made a deal. You've decided, hey, I'm going to give up my balance in return. I'm going to get a check for the rest of my life. Maybe not the best way to do that. And that's why I think giving up ownership, access and control of your money may not be the best option for you if you want to generate lifetime income, there are other ways in which you can generate lifetime income without having to give up ownership or control.

Speaker1:
That's why I think this is the second worst thing that you can do. You may have a differing opinion. Love to talk to you about it. Reach out to us. We can have that discussion now up to this point, he said leave it in TSP. You can take the lump sum, which I don't agree with. I said it's the worst thing that you can do. You can set up monthly payments, but if you need TSP for income, those payments are not guaranteed for the rest of your life and the money can run out. It's still invested in TSP and can run out at some point. You can take the lifetime income, but in order to do that, you have to cash in your balance and trade in your money and no longer have any access or control of it. There's something else that you can do, which is our fifth option, which is rollover to an IRA. Now, this is an option that a lot of federal employees do take advantage of, either while they're still working or once they're separated. So what does this mean? This means instead of taking your money out and putting it into your checking or savings account, which is going to cause a tax liability, a rollover, a transfer to another qualified account, whether it's a qualified traditional IRA or Roth IRA, will not have any tax implications, will not have any withdrawal penalties, will not have any fees associated with it.

Speaker1:
It just goes from one account to the other, continuing to defer tax and now providing maybe better options for you compared to what it would be like leaving the money in TSP or using one of the income options with TSP. And there's so many different types of IRAs that you can choose from which one's right for you. And there's a lot of extra questions and factors that we'd have to go over to determine what's the best move for you. I mean, there's no one size fits all plan for anybody. So this option you can utilize either while you're working or once separated. Now, I said there's two withdrawal options while you're working. The first, the hardship withdrawal I mentioned earlier, the one that a lot of people utilize is called the age based in service withdrawal option. This is for those that are still working. For the government and or at least age 59.5 or older, you can take a portion or all of your TSP and move it into an IRA of your choice. You're allowed up to four of these withdrawals per calendar year. Each one just needs to be at least 30 days apart. So you have the ability to do this to set your TSP up in whatever way you want. That's certainly an option. Okay. The other type of withdrawals, once you're separated from service, you can take a full or partial withdrawal from your TSP and transfer of roll over those funds to an IRA as well.

Speaker1:
So just understand you can do it either while you're working, if you're at least 59.5, or at any point once you are separated from service. So what type of IRA you might be thinking? Well, well, I know you're kind of guiding us this way, but you know what? What's you're talking about this IRA thing. What what is, uh, the the best IRA for me? Well, a lot's going to depend on the answers to several questions that we're going to ask. And one of the questions that we talk about, if people are interested in getting their money out of TSP, rolling it over to their own traditional or Roth IRA revolves around risk tolerance. You know, there's there's two main questions that I'm going to ask better employees when it comes to, um, the transfer of rollover of their funds. If you're trying to determine the best plan for you, right, if you want all the information so you can see what plan is best for you, then there's a couple questions you want to answer. First, what is your overall risk tolerance. Now as you near or into retirement, a lot of federal employees want to become a little less risky and take less risk, not leave as many chips on the table. Pull some of those back.

Speaker1:
Perhaps that's you. Maybe you still want to take risk that that that can determine the type of plan or the the investment vehicle or whatever it is behind that IRA. Right. The IRA is just a qualification classification of the plan itself. The underlying vehicle will usually be determined based upon your risk tolerance. So how comfortable are you with losing money? That's normally what we ask when it comes to risk tolerance. Some people say, well, I like to take risk. Well, let me put it to you this way, you know, how comfortable are you with losing money and when you put it to somebody that way? Uh, I don't like losing money at all. Exactly. So perhaps you're pretty conservative. You may have thought you're willing to take some risk. So once you determine your overall risk tolerance, then you might be able to see where the best place to put your money is, what type of IRA you want to be looking at. The second thing is function you. What purpose do you want your TSP to serve? And there's a number of different things. So if you're saying, well, I do need TSP for income, um, I want to make sure that I can utilize it as another income stream along with my pension and Social Security. That's the function you want your TSP to serve. What if you said, well, you know, I'm in a good spot financially and I don't need my TSP for income.

Speaker1:
So what do I do then? Well, I just want to let it sit and grow. Okay. We go back to risk tolerance and how comfortable you are with losing money and decide what what could be a good move for you there. Now, am I saying that this is the best move for everybody? No certainly not. I would never make that blanket statement. Everybody's situation is different. Some people may want to leave it in TSP. Some people may want, you know, the the installment payments. Some people may still go with the MetLife annuity. This this is my opinion and what I've seen other federal employees do in my 12 plus years of working with federal employees. I want to make sure that you have all the information, because this is not something that TSP will advertise. They're not going to come out and say, oh, by the way, uh, I know we have options for distribution with TSP, which you can look elsewhere. They don't tell you that. So you want to know all of your options so you can make the best decision for you and your family. If all you knew is what TSP has to offer, you're limited. You need to know what's all out there so you can make the best decision. So just understand when it comes to choosing the right of this, of this selection number five or distribution number five option is best for you.

Speaker1:
You need to make sure you know number one what function you want your TSP to serve, what purpose it's there for, what do you how do you want to set it up and utilize it. And then right behind that is what is your overall risk tolerance. How comfortable are you with losing money? If we can determine at least those two answers, we can point you in the right direction, right? We can get you some information so you can make, again the best decision for you, your family. Make sure you're set up properly. Okay. So I appreciate you really taking the time to learn about your TSP distribution options. I went over that fairly quick. So if you have questions, if you have concerns, you want to go over your personal situation. You want to dive in and have a few more questions answered about your stuff and what your future retirement is going to look like, and making sure your TSP is set up right. For the right distribution option, reach out to us. Go again. Our website is Dot Federal Retirement Show.com. Fill out the form there. One of our experts across the country, if it's not me personally, will be reaching out to you to schedule a time to review your situation. Answer all of your questions. Thank you again for your. Time and taking time out of your busy schedule. We look forward to seeing you on a future episode.

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