Delivered on: Wednesday, December 9, 2020
Leveraging Your TSP in 2021:
Key insights to get the most out of the Thrift Savings Plan in the new year:
- CONTRIBUTIONS: the IRS limits for 2021 and the TSP’s brand new way to make contribution elections
- MATCHING FUNDS: ensure you’re getting every dollar of matching funds available from your agency
- NEW FUNDS: explore the new Lifecycle funds to compare and contrast your fund choices
- TAX DIVERSIFICATION: utilize various parts of the TSP to strengthen your tax diversification for retirement
- TIMING YOUR CHANGES: when to submit your changes for next year so they are sure to start in PP#1 of 2021
Download Handouts: CLICK HERE
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Prefer to read instead? Below is a transcript from the video:
Welcome everyone to today’s webinar on Leveraging Your Thrift Savings Plan in 2021. Of course, I’m Chris Kowalik of ProFeds. Very happy to be with you today. My camera feature isn’t working, so I’m not able to be on screen with you guys today, but very happy to be here and to have thousands of you registered for today’s webinar.
So I know that this is a topic that you’re keenly interested in. So about today’s topic, we get a lot of questions about TSP and the changes that happen from year to year. Some of them are more pronounced than others, other times we don’t have a lot of changes. But there are some significant changes that are happening this year that we want to make sure that everyone is aware of. So our audience today, of course, we’ve got federal employees from all walks of life. Some who are just joining federal service, some who are on their way out, and certainly different pay levels and all of that good stuff. And so it’s important that we lay a little bit of foundation of the materials so that everyone can be on board with the main concepts that we want to cover today.
Now for Q&A, we’re not able to do live Q&A here, as far as letting you open up your mic and ask your question, you can imagine what a disaster that would be, but we do have our awesome support team standing by in the Q&A area. So if you have a question that is related to today’s topic, please feel free to hop over to the Q&A and type that in and our support team will do our very best to get back to you quickly. We’ve got lots of you on the call, and so we’ll do our very best. Okay.
Now, handouts. You should see a little red dot next to the Handout section. If you click on that, you’ll be able to download today’s slides. If you find that they’re helpful for you and like to keep them, then by all means, I’d encourage you to do so. Now this session is recorded. As far as how to get the replay, the fact that you’re listening to this right now tells us that you’re either live or you’re listening to the replay, but we will send it to everyone who was registered for today’s session and give you an opportunity to go back and listen to it. Now, stay until the very end. I’ve put together a couple of really important FAQ’s that we get all the time, that help put a bow on everything that we’re going to be talking about today. So stay all the way till the end.
Now, like I mentioned, my name is Chris Kowalik. I am the founder of ProFeds, and the developer of the Federal Retirement Impact Workshop. Many of you have already been to one of our workshops, and so we’re happy to have this kind of continuing opportunity to be able to help you.
For those of you who have not been to one of our workshops, and you’re nearing that point of retirement and, or you’re far from retirement, and just want to get a really good handle on it, I would certainly encourage you to check us out. Of course, like I mentioned, our support team is standing by for your questions. I’m really lucky to have them here with me today to be able to help make this a really smooth training opportunity for everybody. So our agenda today, we’ll talk about the contributions that you’re making into the Thrift Savings Plan, a little bit about the agency match and making sure that you’re getting every dime of that free money.
We’ll talk about some of the new funds created in the TSP and how they may or may not be appropriate for you. We’ll discuss tax diversification, that idea of having different buckets of money that you can pull from. We’ll discuss the timing of your changes for 2021 so that you can hit everything perfectly on pay period number one, and be ready for the new year. Now, like I mentioned, stay until the end for those good FAQ’s, but I’ve also added a really important slide, which are the biggest regrets. And our challenge to you to not be regretful at the end of your career when you’re stepping into retirement, When you look back and think about what you did in the Thrift Savings Plan.
So let me specifically talk about what this webinar will not cover. We are not going to discuss how to pull money out of the Thrift Savings Plan when you go to retire. We’re not going to be talking about loans, we’re not going to be talking about any of those types of items. We’re going to stay solely focused on the changes that are happening into 2021 and some tweaks that you may be interested in making, but you’re not quite sure how they work.
So if you’ve got questions outside of that, I’ll ask you kindly to hold them for another webinar, because we want to make sure that we get through all the questions on today’s topic, because we have so many people locked in. Now, let’s start with the contribution limits to the Thrift Savings Plan. Good news, bad news. The good news is the IRS sets this limit each year. I suppose another piece of good news is that they’re unchanged. Maybe that’s good news and bad news all wrapped into one.
If you’re already set to contribute the correct dollar amount for 2020, you don’t need to make a change for 2021 with maybe one exception. So let’s talk about the different limits as far as what the IRS allows an employee to contribute to an account like this. So for the TSP, for regular contributions, an employee is permitted to contribute up to $19,500 per year. If we were to do that over all 26 pay periods, that would come out to $750 per pay period. This option is available to all employees, regardless of how old they are. Now it might be easier the further you are in your career to be able to afford to put in $19,500, but it is available for everyone regardless of age.
The other type of contribution is what’s called a catch-up contribution. And this is a special provision that allows you to contribute above and beyond the $19,500. In fact, an extra $6,500 per year or $250 per pay period. In order to contribute to catch-up contributions, you have to be in the calendar year in which you turn 50 or older. So if you’re a 48 and below, we know you definitely don’t qualify for catch-up contributions.
If you’re 49 today, but turn 50 at the end of this month, end of December, of course you would be eligible for the catch-up contribution because you will turn 50 in this calendar year. And you would be able to contribute the entire $6,500, even if you turn 50 on the very last day of the year. So the numbers haven’t changed as far as what you’re allowed to contribute, but the method by which you make your contributions has changed for 2021. Now this is specifically for those who are age 50 or older and contributing to the catch-up contract.
So, up to this point, you have had to make separate elections for your regular contributions and the catch-up contributions. And those catch-up contributions had to be reelected each and every year, which caused a lot of people to miss out on the catch-up contributions because they forgot. They forgot to reelect them, and then they get to the end of the next year and they’re like, “Oh no, I didn’t do what I thought I did.”
But starting in 2021, employees get to set one single contribution amount. So either a dollar amount or a percentage. So in this case, if you are maxing out the Thrift Savings Plan, you could put in a total of a thousand dollars a pay period to get you to the $26,000 that we talked about before. So, this method is called the “spillover” method. And it’s the idea that instead of having two separate elections for regular and catch-up contributions, they’re now combining them.
And when you hit the $19,500 limit that the IRS sets, the remainder that goes into TSP will simply spill over, into catch up contributions, up until you hit that $26,000. And then of course it would be turned off at that point. So if you want to hit the ground running for 2021 and get this exactly right, right from the get-go, you want to make sure to update your contribution amounts during the very last pay period of 2020. This will allow the first pay period of 2021 to be set correctly.
So let’s talk about the next main topic, which is the Agency Match. This is something that hopefully all of our FERS employees are capturing, but by virtue of the work that we do and the number of cases that we see, I know that there are a lot of misconceptions about the way the match works.
And so I want to walk you through this so that I know that we’re all really clear. So, in order to get the full match in the Thrift Savings Plan, an employee must contribute at least 5% of their salary to the TSP each and every pay period. Each and every pay period. The breakdown of how the match works, is there’s an automatic contribution of 1% per pay period, and that happens no matter what you do. If you don’t contribute at all, your agency’s still going to give you 1% of your salary each pay period.
But in order to get the real match, which is 4%, you as the employee must to contribute at least 5% of your salary every single pay period. I stress that because you wouldn’t believe the number of cases that we come across, where people are maxing out or sporadically contributing to TSP, but not doing it every single pay period throughout the year, and they end up missing out, and not only hundreds, but sometimes thousands of dollars that otherwise would have come to them.
So let’s talk about missing out on some of the match and give you a little bit of an example here. So let’s examine a case study where we have an employee who’s 45 years old. And I’ve chosen 45 because it’s definitely not 50 where they’re contributing to the catch-up contributions. This is just regular contributions that we’re going to talk about in this example, to not confuse anybody here. So if we have an employee who’s 45 years old, let’s say they have a salary of $52,250. I use this as an example. Certainly if you make double that, triple that, whatever that number might be, you can do the math and figure out how this will work for you.
So, this employee, this pretend employee, decides that they want to contribute the full amount allowable this year into the TSP. So, the full $19,500. I mean, that’s a significant amount of money compared to their salary and I realize this might feel a little bit unrealistic, but I want to really drive a point home here for everybody. So this employee is putting in 37% of their salary into the TSP. The question is, will they get the full 5% match? And the answer is, it depends. And it depends on when they contribute the money. So if they put too much too early, they might very well miss out on some of the match.
So let’s take a look at scenario number one, right down the middle of the screen. So in this scenario, we have, again, an employee that makes $52,250, their pay period contribution, they’re going to put in exactly the amount that they’re supposed to each pay period at $750 a pay period to get them exactly to $19,500 on the very last pay period of the year. So we know that they would have received 1% automatically from their agency. So $522. And because they did this over all 26 pay periods, they also received the full match, which is the 4% from the agency, a little over $2,000. But let’s look at this other scenario.
Scenario number two, same income. And they want to put that same amount in the TSP, but they just want to do it earlier in the year. They want to kind of front-load the TSP and get the full $19,500 in through pay periods one through 22. And so they’re going to contribute $886 a pay period, and on that 22nd pay period, they would hit $19,500.
So from an IRS standpoint, they contributed their $19,500, just like they’re allowed to, and they did receive the full automatic 1% contribution from their agency. What they didn’t get was the full 4% match. They only received $1,768 instead of $2,090. The reason is that for pay periods, 23 through 26, they were not contributing to the TSP and thereby the agency had nothing to match. So very, very important that you spread those contributions over all 26 pay periods.
So this is your big takeaway. If you learn nothing else from this little section, please, spread your contributions out over all the pay periods of the year. If you happen to be up with the payroll processor for this year, that has 27 pay periods, you’re going to need to consult with them and make sure that you’re doing all of this on the right timeline to make sure that you get your contributions in.
All right. So let’s do talk about the new funds within the Thrift Savings Plan. The picture that you see on the left-hand side is a horizon. And I chose this picture specifically because, in the private sector, we have what we call horizon based portfolios. Meaning there’s a moment in time in the future that we want an account to look a certain way. To be perhaps more conservative. And as we get closer and closer to that time, or that horizon, the account automatically adjust. So the lifecycle funds are a mixture of each of the core funds within the TSP. The G, F, C, S and I funds.
The objective of the lifecycle fund is that they strike the right balance between the expected risk and return associated with each one of those funds. And so the balance of the funds will be different. You won’t have an equal amount of G, F, C, S and I in each of these lifecycle funds, but instead they shift and morph over time to look more like they need to look based on your timeline of needing the money.
So the question is, aren’t the lifecycle funds right for you? That’s a really hard question to answer, but I’ll tell you the people that we see who seem to be most drawn to the lifecycle funds. And those are people who when they look at their TSP, they have no idea how to invest. They don’t know how much they should have in each one of the funds, they’re not really sure how they perform, or at what point they should change those allocations or the distribution, and they can get very confused. And when confused people approach decisions, they tend to take no action.
And so lifecycle funds allow employees to at least get a pretty good idea of the balance between all of the five funds that they should have. I like to tell folks, if you’re used to taking a SWAG in the TSP, that’s a scientific wild ass guess, chances are the lifecycle funds might be right for you because it at least gives you a direction. It might not be a perfect allocation, but it’s giving some direction based on the timeline in which you’re going to need the money.
So, how have lifecycle funds changed over time? Well, they naturally change over time because that’s how they’re designed. But in 2020, a different kind of change happened within the TSP. So there used to only be five life cycle funds. We have the L Income, the L 2020, 2030, 2040, and 2050. That was It. And then in July of 2020, they retired the Lifecycle 2020 fund, because we had reached that horizon, and they added, of course, the next bunch to replace it, which was the 2060 Fund, but all of the five-year increments within there, within those timelines.
And so it allowed you to just get a little bit more dialed in, might not be perfect, but it allows you to get a little closer to that timeline of when you plan to first need the money out of the TSP. But these pie charts can be a little difficult to look at if you’re not really sure how these things change over time, and so there’s actually an interesting chart here that gives, I think, a better visual representation of the makeup of each of these funds.
You will notice on the far left-hand side, the L 2065, 2060, and 2055 are all exactly the same right now. They’ve changed yet. I have to believe they probably did this to round out the number of lifecycle funds that were out there. Perhaps that was part of the decision. But at the end of the day, the 2055 through the 2065 are all exactly the same as of right now. Now the orange piece of the pie is the G Fund. So you’ll notice that in the 2050 Fund, there’s a relatively small amount, 10% of the account that’s safe in the G Fund, but as time goes on and you get closer and closer and closer to the L income window, that naturally changes over time, that orange piece of the pie or the safe piece of the pie gets bigger and bigger and bigger until eventually it makes up 72% of that portfolio.
So I thought this was an interesting way of showcasing the pie charts, just in kind of a flat way so that it was easy for everybody to see how those really change.
So if you need to dial in your lifecycle funds, please be sure to do that. If you have never done the lifecycle funds before, and you don’t have a financial planner giving you that guidance, and you feel like you’re all over the map, this is probably a good thing for you to look at, to get some direction.
So let’s talk about tax diversity or tax diversification. The concept here is that you have different buckets of money that behave differently from a tax standpoint. Some are taxable, some are tax deferred, whatever that might look like. And the idea is that you get to pick and choose which bucket to take money from when you need it. And that way, when you’re in a high tax environment, you can choose to take tax free money, when you’re in a low tax environment, you can choose to take taxable money and go ahead and pay the tax. And if in an ideal world, each bucket works independently of one another.
So let’s talk about the two tax options within the Thrift Savings Plan. First, we’re going to talk about traditional TSP. And I stole this slide from our workshop because I think it’s a real eye-opener for folks that are not familiar with how these things work, And so I wanted to be able to share that with you guys today. So on the left-hand side of the screen, when the money goes into TSP, if it’s traditional money, you get to save tax “today” on the principal, because you don’t have to report that as taxable income to you this year. You get a tax deduction. Okay? So it’s not taxed when it goes in, as far as the principal.
But when the money comes out the other side, so now you’re in retirement presumably and you’re taking money out, the principal of course, is going to be fully taxable because you did not pay tax on it to begin with. The killer though, is that the growth is all taxable, too. So you’re saving tax today, but you’re compounding your tax problem later. And that becomes a big challenge for a lot of people.
So back in 2012, the Roth TSP was created. And it works very differently. So when the money goes in, again, we’ll start on the left-hand side of the screen, when the money goes into the Roth, you don’t get an immediate tax advantage. You go ahead and pay the tax today on the principal that you contribute to TSP. When that principal comes out the other side, it is tax-free. Because you already paid the tax on the money when it went in.
So we know the principal comes out tax-free. But here’s the part that most people don’t understand and why it’s such a big eye-opener in our workshops. And that is that the growth on all of that money in a Roth account is also tax-free. And so it’s kind of biting the bullet now going ahead and paying the tax, and then never again. You don’t pay tax on that money or the growth on that money later. So really an incredible opportunity. But there are, of course, some limitations in the Thrift Savings Plan. The TSP does not allow participants to differentiate how traditional money is invested versus Roth money in the TSP.
So you can’t say, “Well, I want my Roth money to be in the C Fund where it performs crazy, big rates of return over a long period of time, and then I want my traditional money to be in the G Fund where I’m not going to have a lot of growth, and so not a lot of taxable growth there.” The TSP does not allow you to do that. So you’re a little bit handcuffed here, when it comes to really putting the afterburners on for tax diversification. So again, you just can’t pick and choose where your Roth money goes and where your traditional money goes. It’s all proportional against the funds that you have selected.
So let’s talk about timing your changes for 2021. If you want to make adjustments to the TSP, the real key is you want to log into TSP.gov and make your changes within the last pay period of 2020. I know I mentioned this a few slides ago, but want to make sure that everybody’s really clear in order to have everything coming out the very first pay period of 2021 properly, you want to make sure to make that happen in the last pay period of 2020.
Now I would be remiss if I didn’t encourage everyone to, while you’re doing all of this, go ahead and update your beneficiary designations. It’s not terribly difficult. Just make sure that you have a valid beneficiary on file. And I will remind everybody, whoever is named on these documents, even a former spouse will get your money. So please make sure that these are updated. Really easy, go to TSP.gov, or you can do the printed version, which is TSP-3, and send it in.
So, now we’re onto the frequently asked questions piece of this, where we pulled a couple of really important questions that we get from our workshops. The first was, “I thought I made changes to the fund I was invested in, but it only seems to affect my new contributions. How can I fix this?” Well to fix it, we have to figure out what you did and what you intended to do. So there are two ways to change how you’re invested in the TSP.
The first is where your current money is. So that’s your current balance in the TSP. It’s probably spread amongst a couple of funds, maybe all in one fund, but for most people it’s spread between the G, F, C, S and I, and we have to figure out where that is. The second decision that you have to make is where you want all of your new money to go. So this person with this question may have said, “Hey, I thought I made this change, but it’s only affecting my new money.” We have to also go in and make a change to the current money, if that’s the intention of the change that you’re making in the TSP. So just remember to make both, if that’s what you intend to do.
Next question, “Is there an advantage to contribute a certain dollar amount instead of a percentage of my salary or vice versa?” The answer is, maybe. If you plan only to contribute to get that 5% match, then you should probably just select the 5% match. The percentage option, put in five and you’re done. But if you are trying to get exactly the $19,500 or the $26,000, you should really choose that dollar amount, so you can get dialed in and get exactly that dollar amount that you need.
And I know I’m going through these questions quickly. I want to be respectful of everyone’s time. There’s just so much to share today. Next question, “Can I make a contribution to the TSP out of my checking account?” The answer is no, no way. So if you want to get money in the TSP, you better do it through your paycheck and make certain that it’s done early enough in the year that you can get all that you want into the TSP.
Next question, “If I retire before the end of the year, can I still contribute the full amount to the TSP?” The good news is the answer’s yes. You’re permitted to contribute the full amount to TSP, which is the $19,500, or of course, if you are doing catch-up contributions, the full $26,000.
Next question, “I have an outstanding TSP loan. Does this count against how much I can contribute?” No way. No way, no how. So, all employees are permitted to contribute up to the IRS limits, the normal $19,500. So any loan repayment that you have is totally separate from your contributions of “new” money to the TSP.
Next question, “Is it true that my agency only matches contributions made to the traditional TSP?” Boy, this is something we hear all the time. It started out as something true, and then it morphed and changed the more people it went through. The TSP, when you contribute to the traditional or the Roth side, it does not matter which one, your agency’s contribution to your account will simply be deposited into the traditional side of your account.
So it does not matter if you put all of your money on the Roth side, you are not missing any match, it’s simply showing up on the traditional side of your account. And the reason being is that money that goes into the Roth side of an account has to have been after-tax money. And the government is unwilling to pay the tax for you, so they’re going to make you do it by putting in the traditional side of your account.
Next question, “I’ve been told that my spouse and I make too much money to contribute to the Roth TSP. Is that true?” Boy, the answer is no. Those income limits that you’re thinking about, only apply to private sector Roth IRAs. So, couples who have an adjusted gross income more than about $206,000, they’re disqualified from a Roth IRA, but that has no effect on the Roth TSP. So this is a huge win if you’re a higher earner between you and your spouse, or certainly if you’re a single and a higher earner, a great opportunity for you to be able to do this right in the TSP.
Last question, “Most of my money in TSP is labeled as ‘Traditional.’ Can I change that to make it Roth?” No! The TSP will not allow you to convert any traditional money to make it Roth money in the TSP. You’re only going to be able to do that in a private sector account.
All right. So let’s talk about the Regret versus Challenge, and trying to figure all of this out. So when it comes to regrets, we hear a lot about this from employees attending the workshop and really trying to dial in all their decisions for retirement, and they, of course, are looking back to the TSP and wishing they had done some things differently. So, the first regret is getting started too late. I want everyone on this webinar today to know that most people never feel really ready to contribute, especially a large amount of money into an investment product. And so if we wait until we’re ready, we’re going to find ourselves not having a lot of money when go to retire.
Next regret is not contributing more and doing it sooner. So find a way to up your game. If you’re not quite to the 5% match level, get there. Whatever you’ve got to do, get there, because that is free money that you’re getting from your agency. If you’re already at 5%, how could you get to 10? If you’re already at 10, how could you press it and really max out the TSP at the $19,500?
And when you’re approaching that age 50 window, how can you stretch your budget to be able to contribute that extra $6,500 in catch-up contributions? So find a way to up your game, and push yourself a little bit. Your later self will be very glad that you did. Next regret is missing out on agency match. 5% every single pay period. I want to foot stomp this a little bit. We’ve got to get employees understanding how important this agency match is. This is free money. Make sure that you’re getting this. Don’t leave this on the table.
Next regret is, “I was too aggressive or too conservative.” So try to keep your emotions out of your decisions. If you are a conservative, perhaps you were in some of the market-based funds like the C, S and I funds and the market took a tank, and you got really scared because of your conservative fiscal nature and you yank money out of the TSP, or you move it over to the G Fund, you end up creating a big mess for yourself. So please try to keep your emotions out of that and be properly set in TSP from the get-go that way you don’t experience those big losses that make you nervous.
Next regret is trying to time the market. I’m just going to say stop it. Just stop it. We are not smarter than the people who watch the markets every blessed day. The idea that we as lay men can go out and time the market perfectly so that we buy low and sell high, that is just not reality. And so I beg of you to stop it, just knock it off. Okay?
Next regret is not taking tax diversity seriously. If you’re not already really contributing to that Roth TSP, I want you to at least consider the strategy and seeing how it may affect you both short-term and really long-term down the road.
The last one is something that is near and dear to my heart, and this is not seeking professional advice. You want to tip the odds in your favor, guys. So do it now. Don’t wait until you’re stepping into retirement to ask for help. Because at that point you’re doing damage control. You need to be looking to get the advice of a financial professional who operates in the federal space so that they understand not only the TSP, but all of the other pieces of your benefits and can help you.
So what can you do to tip the odds in your favor? Being involved in these decisions, getting the help of a licensed financial professional that understands how these benefits work, will put you definitely on a great path to get the retirement that you want. So, of course, TSP is part of the picture that you have with respect to the government benefits. I would encourage you to get the rest of the story. We’ve shared this on our other webinars. If you have not already attended a workshop, or maybe you have, and you want to come back through, I would strongly encourage you to do so.
We have virtual and live options. There’s no cost to attend for federal employees and so we’re, of course, delighted to have you. And it will cover not only the TSP in much greater detail than we were able to cover today, but all of the other benefits that you have and the big decisions to make. So you can see all of those details at FedImpact.com/Attend.
Now, handouts for today, you of course can download them right now. We will email you a copy so that you’ll have that link as well, and then the link to the replay for all of our registered participants. All right, our next webinar will be on January 14th in the new year, and it is on: “Choosing the ‘Perfect Day’ to Retire.” Lots of myths out there on choosing the right day, and I want to bring everybody up to speed on the things they should be looking at so that they don’t end up having some short-sighted decisions that ruin your big day to retire.
So you can sign up for that webinar at FedImpact.com/Webinar. All right. I want to thank you all for being here with me today. Again, sorry, my visual didn’t work, my camera on the screen, but hopefully you all stay engaged and that our team answered a lot of your questions in the chat. We look forward to helping you as time goes on and seeing you for our next webinar or at a workshop soon. Thanks so much, and have a great day.
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