Delivered on: Thursday, December 16, 2021
Looking Ahead to TSP in 2022
Getting the most out of the TSP in the coming year
- LIMITS: new contribution amounts allowable by the IRS
- MATCH: ensure you’re getting all of the free money provided by your agency
- FUNDS: review various fund choices for how to invest your money
- TAXES: explore tax diversification options in preparation for retirement
- VACCINE MANDATE: how TSP works for terminated employees (and penalties that may apply)
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Prefer to read instead? Below is a transcript from the video:
Welcome, everybody. Happy to have you here with us for our webinar today on looking ahead to TSP in 2022. We did a session similar to this last year. And so, we knew that this was the perfect topic to round out 2021 and make sure everybody’s up to speed on how the TSP is going to work. About today’s topic, everybody’s going to want to know what they’re doing in the Thrift Savings Plan and make sure that they’re on track. So, in our audience today, again, we’ve got thousands of you registered. We’re always so pleased to see great attendance here. So, I’m going to focus on delivering today’s material, and our support team will be standing by in the Q&A area to answer any of your questions.
All that I ask is that the questions that you ask today are related to the topic at hand. Because we have so many of you on the call, we want to make sure to get all the TSP questions, specific on the changes coming for 2022, taking care of in the Q&A area versus this being a platform where tons of benefits questions are asked, and we’re not able to get to everybody asking questions about this specific material. So, if you can help me out, I will greatly appreciate that.
Handouts are available for download. You can either do that right in the webinar panel by the Q&A area, or if you go down to the very bottom of the page, you’ll see kind of a block. We have the link to the handouts there as well. Now, like we do every webinar, this session will be recorded. We will send out the instructions for the replay once we wrap up. I want you to stay until the very end, because we’ve got a couple of important FAQs and some regrets that we want to bring to your attention. And so, we’re excited to be able to do that today!
I’m your ProFeds presenter, Chris Kowalik, the founder of ProFeds. We love doing these webinars. They’re, of course, in addition to our regular retirement workshops, our full day in-person sessions that we deliver. We’re very happy to be back in-person and not in a virtual world anymore, which is great. We also do the FedImpact Podcast. So that’s fun as well. Like I mentioned, our support team’s standing by for your questions. So, looking ahead to the TSP in 2022. So, getting the very most out of the TSP in the coming year. Like with most things, when it comes to money, if you don’t know the rules, you’re likely going to miss out on something. And so, we want to make sure that everybody’s up to speed.
For our agenda for today’s webinar, we’ll discuss the contribution limits, how to make sure you’re getting your full agency match and some easy hiccups, even if you’re maxing out TSP. Would you believe that it’s possible to not get your whole match? We’re going to cover that today. We’ll also talk about the available funds that you can choose to invest in within the TSP. Some tax diversifications, when we’re thinking about traditional versus Roth, or some combination between the two of them, what that will look like.
We also want to make sure that we’re helping you to time your changes for the very first pay period of 2022, so that we get that done right. One interesting question that’s come up this year is, if I am terminated because of the vaccine mandate, or I just leave because of the vaccine mandate, what does that do to my TSP? And so, we’re going to talk through what that looks like for some employees. Like I mentioned, stay till the very end because we’ve got some frequently asked questions. In fact, we’ve got eight of those and seven of our biggest regrets that we hear federal employees tell us when they’re at the end of their career of what they wish they would’ve done differently. We’re going to issue some challenges to you to try to overcome those.
For specifically what this webinar will not cover: We’re not going to cover how you should be invested in the Thrift Savings Plan. That is not my place. This is not the forum to do so. So, we’re not here to give advice on what you should or should not be doing in the Thrift Savings Plan, we simply want to make sure that you understand what the rules are and what the parameters are that you can operate in. But as far as picking which funds and whether you’re in the traditional or Roth, that’s not our call to make.
Let’s talk about contribution limits to the Thrift Savings Plan for 2022. The IRS is the one who sets the limits each year on how much can be contributed to employer sponsored plans, typically 401(k)s, but this applies to the Thrift Savings Plan as well. These limits have changed for 2022. The regular contribution limit is $20,500 for the year, which averages out to about $789 a pay period. All employees, regardless of how old you are, are allowed to contribute this amount. Now, this might be a stretch for a lot of you, especially if you are early in your career, just getting started and trying to ramp up to this. Many of you have been operating at this contribution level for many years. Again, we’ve got a great mixture of people on this call today.
There’s a special type of contribution called a catch-up contribution that the IRS has deemed that you are allowed to contribute an extra $6,500 per year. This number did not change from last year, it is still $6,500. But this is only open to employees who will be turning 50 or older in 2022. So, it doesn’t matter if your 50th birthday is on the very last day of 2022, you’re still allowed to contribute that entire $6,500. This is a great little feature to just shove a little bit of extra money right there at the end.
But I do want to make a special note and it is in the footnote at the bottom of the slide. The limits that we’re showing here on the screen, the only thing that includes is your personal contributions to the account. It does not include any of your agency’s match or growth on the account. So that’s not a contribution, that’s just a fluctuation in the account itself. This is money leaving your paycheck, going directly to TSP. It’s irrespective of loans that you might also be repaying to the TSP. These are new contributions.
If you plan to change your contribution amount and you want it to happen for the very first pay period of 2022, you have to make sure that you’ve made a change effective in the last pay period of 2021. I’m going to back up here, if you’re trying to nail these limits of $789 a pay period and $250 a period so that you hit exactly the right dollar amount on the last pay period of next year, then you want to make certain that change happens the last pay period of this year. So, for most of you, December 19th is the effective date. That is the start of your last pay period of the year. So, log into whatever system your agency allows you to log into. There’s lots of systems out there. I won’t even pretend to name all of them, but definitely want to make sure that you’re making that change at the right time.
Next up, let’s talk about the agency match. This isn’t really a change from last year, but always worth mentioning when we’re talking about making any kind of adjustments in the TSP is to make sure that you’re getting all of the free money. In order to get the full match, you must contribute at least 5% of your salary every single pay period to the TSP, every pay period. So, the breakdown here is that there’s an automatic contribution from your agency that’s 1% of your salary. And it doesn’t matter what you do in TSP. You could contribute nothing. You could contribute the maximum amount or anywhere in between, the agency’s automatically going to give you 1% of your salary into your TSP account. The true match is at the 4% level. In order to get that, you must contribute 5% of your salary. So, all in all, we call the whole 5% the “match,” but in reality, only 4% of it is a true match. But please make sure every single pay period you are contributing at least 5% to the TSP.
Let’s talk about missing out on some of the match and do a little bit of a case study so that everybody can see how this comes to life. Let’s say we have an employee who’s 45 years old. They’re only allowed to contribute the $20,500 because they’re not age 50 yet. They’ve got a salary of $100,000 a year. And let’s say they plan to contribute that full amount, the $20,500 to the TSP. That ends up being 20.5% of their salary. So, any rational person looking at this would say, well, of course, they get the full match. They’re contributing way over 5% of their salary. But if there’s one thing I’ve learned about government benefits is they love to overcomplicate things. And so, the question becomes, will they get the full match? It depends, because if they don’t spread out their contributions over all 26 pay periods, for any of the pay periods in which they are not contributing because they’ve already maxed out, they won’t be matched.
Let’s see this in real life. Let’s talk about scenario number one first. Again, the employee has a $100,000 salary. They plan to contribute about $789 a pay period, that gets them right on the nose of $20,500 for their contribution. They’re going to do that over all 26 pay periods. They’re going to get their $1,000 automatic 1% contribution. They’re also going to get the full match, the $4,000 in this case. But let’s say that in scenario number two, that same person decided that they would rather contribute more to the TSP earlier in the year so that they had a few pay periods at the end where nothing was being taken from their check and they’d have a little bit of extra cash around the holidays. We hear this all the time.
Let’s say that instead of the $789 a pay period, they decide to put in $1,000 a pay period, they’re still going to get their $20,500. So, for IRS purposes, you’re good to go, but the TSP is going to reject any contribution that they make after pay period 21. They would have made too much of a contribution too early. And so, the TSP isn’t going to allow more money to come in that’s not allowed by the IRS. So, what happens? Well, remember, regardless of what this employee contributes, the agency’s automatically going to contribute the 1% level. So, they still get their $1,000, but that 4% match got messed up. It’s no longer $4,000 for the year, it’s now $3,230 for the year.
And the reason is, is because for pay period 22 through 26, there were no matching dollars contributed by the agency. The employee was already maxed out. They couldn’t contribute for pay periods 22 through 26 and so the agency had nothing to match. So, in this case, they lost out on $770 for no good reason. Spread out your contributions over all 26 pay periods. Whatever you do, make sure that that happens. This is free money that you are losing if you don’t spread out those contributions. Many of you know this and I see that you’re practicing good contribution habits when we’re helping feds with the reports that we prepare following our workshops. So, I’m so glad that so many of you are all over this. But we see enough of you that aren’t spreading out your contributions that I felt it was very, very important to share that today.
Next, let’s talk about the TSP funds. Now, we’re anticipating some changes with the TSP in the summertime. This session is not talking about the summertime changes. We’re waiting until we get final word on what that’s actually going to look like, how it’s going to be administered, what the timeline is, all of that. I promise we’ll come back and do another session to cover those new options, whatever they may be in their final form. But for now, let’s talk about the different funds that are available. So, we’ve got, of course, the five regular funds. We’ve got the G Fund, which is the mix of government securities. We like to tell people there are two guarantees in the G Fund. You’re guaranteed not to lose any of your contributions or your earnings. You’re also guaranteed not to make a lot of money.
That’s just the way the G Fund operates. It’s the nice secure little fund. And it’s not to say that fed shouldn’t be in the G Fund. What we want to be cautious of is that we’re not too conservative much earlier in our career that we don’t get some of those gains. We’re going to talk a little bit more about risk tolerance here in just a bit. As far as the index, there’s no index for the G, it’s simply an interest rate. That interest rate changes each quarter. That is something that just continues. It’s not based on any kind of stock market index or anything like that.
The F Fund is a mix of government and corporate bonds, and it’s indexed against the Barclays Capital U.S. Aggregate Bond Fund. So, whatever that bond fund does, however it performs is the same way by and large that the F Fund will perform. So, if you had your money invested in the F Fund and directly in Barclays Capital U.S. Aggregate Bond Fund, they would perform the same. The C, S and I funds are indexed against the stock market. The C Fund consists of large US companies, and it’s indexed against the S&P 500. So those are the 500 largest publicly traded companies in the US stock market.
The S Fund consists of small and medium size US companies. Many of these that we think are very large companies still look small in the grand scheme of things when they’re compared to all these other companies, but the S fund is indexed against the Dow Jones total stock market completion index for the United States. What this means is if we take the entire US stock market and we subtract out the S&P 500, the S Fund is everything that’s left. So, you’re getting a little piece of the whole US stock market by being in the S and the C funds. The I Fund invests in mostly large foreign companies, and it’s indexed against Morgan Stanley Capital’s International EAFE index, or Europe, Australasia, and the Far East. So however, that fund is performing is the same way the I Fund performs.
There’s nothing super unique about these five funds with respect to the TSP. Certainly the F, C, S and I Funds that have direct indexes out in the market or out in the US economy, if you had money invested in the TSP and in that specific index, they would operate the same way. A lot of employees aren’t really sure which fund or which combination of funds they should be invested in. And the TSP knew this. They knew that this can be kind of an overwhelming decision, and they wanted to give a little bit of guidance.
Guidance isn’t perfect guidance here, but let’s talk about the lifecycle funds. The lifecycle funds, there are 10 of them now. This was a change that happened last year, where we added five funds to the lifecycle funds. These lifecycle funds are designed to be more aggressive, the further out you are from needing your money. So, if we take a look at the far left-hand bar, where it’s labeled 2065, you’ll see that the vast majority of that lifecycle fund is in C, S and I. We’ve got a legend up here in the right-hand corner. So, we know that this is really volatile. In fact, it looks the same, at least what we can see here on the chart as the 2060 and the 2055. There are minor differences, but they’re very small between the G and the F Fund in each one of these indexes.
If we go to the 2050 fund, you’ll start to see, now we have a bigger chunk. That’s the G Fund, which is the orange section, and that red section in there that is the F Fund. So, we’re starting to get more conservative, granted a small amount of that portfolio’s conservative. But if you keep your eye on the orange part of the lifecycle funds, as you move to the right-hand side of the screen, you’ll see that it gets more and more and more conservative until you hit the lifecycle income fund. That is 71% safe in the G Fund but make no bones about it. If the stock market takes a tumble, people in the lifecycle income fund will lose money.
That’s just the way the math shakes out. It happened in 2008. The lifecycle income fund is not 100% safe. The only way to do that is to go 100% G Fund, and you have no market upswing when it happens. So, I’m not suggesting everyone go to the G Fund, but I do want everyone to recognize that there is still an opportunity for gains and losses in every one of the lifecycle funds. The difference is how much is at risk.
The lifecycle funds were designed for you to put 100% of your TSP money into one single lifecycle fund. It wasn’t to spread them out of across all 10. And it also wasn’t to pick a lifecycle fund and then have some regular funds on the side. So, for instance, let’s say you plan to start needing money out of the Thrift Savings Plan in 2030. So, you select the 2030 fund. The idea here is that the TSP has already found the right mixture for you to be invested in. If you also on the side have 50 grand in the G Fund or 50 grand in the C Fund, or any of these others, you have now altered that mixture that the TSP was trying to strike for you. So, it wasn’t the intention of the lifecycle fund to be one of many things you’re doing in TSP, but the one thing you are doing in TSP as far as where you are invested.
A couple of things we want to point out here, the first is what you can do with your existing money that’s in TSP. These are prior contributions that you have already made into your account. For as far as changes you can make for 2022, let’s take a look. For your existing money, you can choose to be invested in any of the regular funds, that’s the G, F, C, S & I, or the lifecycle funds in any combination that you wish. Now, like I mentioned, the lifecycle funds weren’t designed to be part of this combination really, they were designed for you to put all of your money in one of them, but you still can invest in any of the lifecycle funds or the G, F, C, S & I, however you wish. For your existing money in the TSP, you’re allowed to change up to two times per month. You can change how that existing money is an invested. So, this is called an interfund transfer.
Once you’ve exhausted your first two transfers for the month, you’re only permitted to change to the G Fund. For the remainder of that month, the only direction you can go is to safety. Now, as a long-term investor, I don’t like to see people run to safety in short-term problems. So that’s maybe a webinar for another day, but you’re afforded two opportunities to move your existing money in the TSP to rebalance, however you wish. But once you’ve exhausted those two, the only thing you can do from that point is to go to safety, to the G Fund. For your new money in the TSP, these are future contributions that you’re going to be making, you can choose to be invested in any of the regular funds G, F, C, S & I, and any of the lifecycle funds and any combination that you wish.
Just like with your existing money, and throughout the year, you can change the amount of those new contributions. So, the that would be the dollar amount, or maybe a percentage of your salary that you’re choosing to contribute right from your paycheck. You can also change the funds that your new money will be invested in. Again, either regular funds or lifecycle funds. You can do this an unlimited number of times throughout the year, but just keep in mind that when you make a change, it takes a little while for that change to take effect in your paycheck.
So, this is not something we encourage employees to change really more than once a year unless, of course, you found yourself with maybe a promotion or a step increase that gives you some more money and you’re going to up your contribution. But this is not something to fiddle with every pay period or anything crazy like that. Just keep in mind that the rules are different between what you can do with your existing money. I’ll kind of step back on the slide here, your existing money. You can move it around twice a month. For your new money, you have much more flexibility on where the new contributions are going, how much you’re contributing, and all of that good stuff. So that’s it on the fund choices in the TSP.
The next logical question is about those darn taxes. In the investment world, we have this idea of tax diversification. And it’s to give some diversity to the way that different buckets of money are being taxed. Let’s take a look. It’s this concept of tax buckets. There are some tax buckets that are taxed now, there are some tax buckets that are taxed later. I won’t talk about the tax buckets that are never taxed. That’s a different conversation than the one we’re going to have today. But when we’re thinking about taking money from the TSP, we like the idea that you can choose when to take money from each bucket, a bucket you have to pay tax on and a bucket you don’t have to pay tax on.
In a perfect world of tax diversification, each of these buckets should work independently of one another. They’re invested differently. They have a different strategy, so that you can pick and choose which one is most advantageous for you. We’re going to circle back around to this tax diversification piece here in just a moment, but let’s take a look at the different tax advantaged options in the Thrift Savings Plan. The first is the traditional TSP. On the left-hand side, we’re going to talk about the money when it goes in. In the traditional TSP, when you contribute to that, you save tax today on that principle because you don’t have to pay tax on that portion of your income that you contributed to the traditional TSP. So, when that goes into the principal bucket, the blue section in the image, we know it’s not taxed there, but when you go to take out that principle, it is taxed later. It’s fully taxable on the way out.
What I want to really focus on is the green box. That is the growth. This is where we see a lot of jaws drop when we’re teaching our live workshops, because a lot of people don’t realize that with the traditional TSP, all of that growth is fully taxable, too. So again, let’s say you have a principle of $100,000 that goes into the TSP over many years, that doubles to now $200,000. When all of that $200,000 comes out of the TSP, either all at once or over a long period of time, all $200,000 is fully taxable. So, we need to understand that with traditional money, whether it’s the traditional TSP or a traditional IRA out in the private sector, we’re simply deferring the tax bill until later, but it’s hopefully on a much larger amount because we want this account to grow over a long period of time.
Now let’s talk about the Roth TSP. In this case, it works exactly the opposite of the traditional TSP. When the money goes in, you go ahead and pay the tax on it this year. When that principle comes back out, that’s the amount you contributed, when that money comes back out of the account later, it is tax-free. Here’s the beauty of the Roth. And that is all of the growth on a Roth account is also tax-free. So again, you put in a total of $100,000 in the Roth, you paid your tax on $100,000, and you called it a day.
Over time, this thing’s grown to $200,000. When all of that money comes out, it is all tax-free. Now, which one’s better? It depends. That’s the answer to most of our questions in our workshops, but there definitely is enough of an eye-opening experience here for most employees that they’re curious what this really looks like, and if they should contribute to the Roth and whether it’s right for them. There are some additional requirements on the Roth that we can’t go into today, but I wanted you to understand at least the tax advantage options available.
I do want to talk about some limitations in the Thrift Savings Plan. The TSP made a lot of changes in the Modernization Act a couple of years ago, but there’s something very important that they didn’t change. And that is, that the TSP does not allow you to differentiate how the traditional or the Roth monies are invested.
For instance, you couldn’t take your Roth contributions and put them in the C Fund and your traditional contributions into the G Fund. They don’t allow that division between the two different sides of your account. Your traditional and your Roth money is invested however you have your entire account invested as far as which funds you’re contributing to and which funds you’re currently invested in. So, it’s very, very important that we understand from a tax diversification standpoint, we’ve not done ourselves a huge favor by leaving money in the Thrift Savings Plan when we go to take it out because we can’t pick and choose which bucket to take it from, as far as how the funds are performing. Each will have a different tax advantage based on how they’re performing at that given moment when we need the money.
We’re actually going to do a webinar a little bit more specifically on that particular piece. But for today, I wanted to make sure, at least we got that piece covered. As far as timing your changes for 2022, I kind of let the cat out of the bag a little bit earlier today. We want to make sure that when you’re thinking about making those changes for next year, you can log in to tsp.gov or some of you have a different portal that your agencies allow you access to make it easier to change your TSP contribution. Just please make sure that you’ve made those changes effective in the last pay period of 2021, so that they will go into effect for the very first pay period of 2022.
Let’s now talk about the vaccine mandate. This is something that is timely here. We want to make sure that we’re very clear on what’s going to happen. I did a webinar specifically on the vaccine mandate and how it works with pensions, so I’m not going to cover that today, but I do want to talk about specifically the effect on the Thrift Savings Plan. If you voluntarily leave or are terminated from federal service, due to the vaccine mandate or a slew of other reasons, if you leave prior to the calendar year in which you turn 55, you are going to be penalized for all funds that you withdraw from the TSP all the way through age 59 and a half.
So, let’s say you’re 50 when you decide to go ahead and leave, perhaps you just had enough, you didn’t want to get the vaccine, whatever it might be. If you do that, you still have access to your TSP, you’re just going to be penalized from 50 all the way to 59 and a half for any money that you take directly from the TSP. I want to clarify that this does not affect money you transfer to another type of account, like an IRA. That does not trigger any kind of penalty. But when you’re taking the money directly from TSP to spend, presumably, you are going to be penalized all the way to 59 and a half.
However, if you are in the calendar year in which you turn 55 or older, you will have penalty free access to the TSP all the way to 59 and a half. So, the penalty that we’re talking about here is an early withdrawal penalty. The IRS doesn’t want you to access retirement accounts like the TSP prior to 59 and a half, but they’ve made some special rules for 401(k) styled plans like the TSP, that if you leave either separate or retire in the year in which you turn 55 or older, you’re not subject to that penalty.
This is a big one, especially for the younger folks that are simply not in that retirement window yet. If they go ahead and leave federal service, again, because of the vaccine mandate or any other reason, then there could be a negative consequence to the TSP. I’m going to throw in a little bonus here. It’s a pet peeve of mine. Please make sure that you have your beneficiaries updated on the TSP and every other beneficiary that you have out there as well. We’ll just talk about the TSP form here. It is the TSP-3. You can do this by either logging in to tsp.gov and filling it in, it will give you a printed TSP, or you could just fill out the form itself. Just know that you must have a wet signature on this document and submit it.
Even if you’ve got your CAC Card and you’re doing a TSP designation of beneficiary in fine print, it’s going to say, “Okay, now you have to print this and sign it and send it in.” So please don’t think you’re done, even if you’ve got your CAC Card in the TSP. So that’s it on the main material. What I’m going to talk about now are the frequently asked questions. I didn’t change a lot of these from last year because they are legitimately so frequent that we get them, that I think they were important to still highlight. And so, if you were with us last year, this might be a little bit of review, but I hope that if you had these questions last year, that you are on the straight and narrow now, and that this is just a nice recap for you.
Question number one: I thought I made changes to the funds I was invested in, but it only seems to affect my new contributions, like what gives? Well, there are two ways to change how you’re invested in TSP. Remember that first is where your existing money is. And the second is where your new money goes. So if your intention is to take all of your money from the G Fund and spread it out between the C, S & I funds, for an example, then you want to make sure to make that change on the existing money and then go in and change where the new money is going to also go to the C, S & I, in whatever percentages that you wanted. I’m not suggesting this. I’m just giving an example here. So, if you change one, but not the other, you might be a little bit out of balance in what you are trying to do.
Next question. Is there an advantage to contributing to a certain dollar amount instead of a percentage of my salary? The answer to this is maybe. If your intention is to do something like I want to make sure to at least get my 5% match, then go ahead and choose the percentage option. Don’t try to figure out 5% of your salary divided by 26 and round and all that. Just put the 5% in there. But when you’re inching up against the maximum, you’re allowed to contribute into the TSP either the $20,500 or the $27,000, if you’re at least 50, it seems smart to just select the dollar option. And that’ll let you get a little bit more particular on how much is going into the account. Again, especially if you’re trying to get that maximum number and really max out TSP.
Next question. Can I make a contribution to the TSP out of my checking account? This is an easy answer. It is no. You can only contribute to TSP through your paycheck. So, make certain that you make that election nice and early in the year. What we don’t want to see happen is someone to say, “Well, I’m not going to contribute to the TSP. I’ve actually got some money that later in the year, I’ll just stroke a check and it all be fine.” That is not at all how the TSP works. And so, we want to make sure that you get in right from pay period number one, at least your 5%. Don’t forget that, but know that you are not allowed to have outside money be deposited into the TSP as a contribution.
Next question. If I retire before the end of the year, can I still contribute the full amount to TSP? Ooh, the answer to this one is yes, you can contribute the full amount, either the $20,500 if you’re under 50, or the $27,000 a year if you’re at least 50 into the TSP. It does not matter when you retire in the year. The only requirement is that you had to have made at least that money that year, at that point.
So, let’s say you were planning to go out January 31st, for whatever reason, if you didn’t make $20,500 in January, you can’t put that much money in the TSP. It would stand to reason that because the money can only come from your government check that if you didn’t make that much money, you couldn’t defer that much money over into the TSP. So, a lot of people think, well, if I just wait until the beginning of the year, I can go ahead and make a full contribution. And that’s not really the case. You might have to work couple of months to be able to get to that $20,500.
Next question. I have an outstanding TSP loan. Does this count against how much I can contribute? The answer is no. You can contribute up to the IRS limits every year, irrespective of any loan repayments that you have. That’s completely separate from your contributions of “new money” into the TSP. So don’t cut yourself short. Now, not to say that the TSP loan might keep you from being able to afford to put as much money in as you’re wanting to, that’s a separate deal. But in this case, the TSP, or really the IRS, allows you to contribute the full amount into the TSP, if you wish.
Next question. Is it true that my agency only matches contributions made to the traditional TSP? This is a very common thing that happens with government benefits. So, I’m going to have a little side chat here. Most of the time, the bad information that we hear circulating out there started from something that was true. So, in this case, the something that’s true is that when the agency matches your TSP, they will always deposit their match in the traditional side of your account. And somehow that morphed into, oh, you’ve got to put money into the traditional TSP, if you want the match. But that’s not true at all. You can put all of your money to the Roth side of TSP, if you wish, but the TSP … I’m sorry, your agency’s contribution to the TSP … will always be deposited on the traditional side of your account.
A lot of people ask, well, why is that? Why do they make it that complicated? And it’s not really complicated at all as far as the government’s concerned, because on the traditional money you’re going to have to pay tax on later. The Roth money, in order for money to go in the Roth side of your account, taxes have already been paid on that amount. And so, the government is unwilling to pay the tax on your behalf to put it in the Roth side of your TSP. So, you can decide whatever you want to do with your account, as far as Roth or traditional, just know when the agency matches your salary, it is going to go in the traditional side of your account.
Next up, I’ve been told that my spouse and I make too much money to contribute to the Roth TSP. Is that true? No. Those income limits only apply to private sector, Roth IRAs, not the Roth TSP. Now not everyone is allowed to contribute to a Roth. So, if you make too much money, let’s say that you’re married and you’ve got a modified adjusted gross income of more $214,000, you are not allowed to contribute to a Roth IRA. That’s a private sector account. But this has no effect whatsoever on TSP. In fact, it’s what makes the Roth TSP so desirable for people who are on the higher earning spectrum, because they don’t have this opportunity for tax free growth in the private sector anymore, because that Roth IRA option is off the table for them. So, this is a great feature, especially for our higher earners who otherwise couldn’t qualify for these cool accounts.
Last question here. Most of my money in the TSP is labeled as traditional. Can I change that to make it Roth? I just listened to this webinar and this lady was talking about these Roth TSPs and all the tax-free growth. That’s cool. I want to make all my money that way. No, the TSP does not allow you to do what we call convert traditional money that’s already in the account to make it Roth money in the TSP. If you want to do this, you have to go to a private sector account, like an IRA, so that you could do this thing called a Roth conversion strategy. So, you already have traditional money, you want to turn it around and make it Roth money. You can do that in the private sector. You cannot do that in the TSP. Here’s my plea to you though. Please get help for this strategy.
It is not as simple as just flipping the switch and making it Roth. You’re going to have to pay tax on all that money you’re converting in that year in which you converted. And so, we want to make sure that you’re doing this right. Don’t try to do this alone and end up with a really big tax bill. I promised you at the beginning, I was going to talk about some regrets. In fact, there are seven of them and I have a bit of a challenge for each one of you for each one of these regrets. We pulled these regrets from real life people that come to our workshops and the types of things that they say to us during the session. So, I think you’ll probably resonate with a lot of these.
The first is, getting started too late. Gosh, I wish I had more money in the TSP. I really want to retire. I wish I had put more in when I was younger. Yeah. Well get over it. Everybody feels like they’re not ready to invest and to not live on that money. So, most people never feel ready to invest. So just keep on trucking and get that money in there. The very best thing you can do is to start now, if you didn’t start sooner. Next regret is not contributing more, and I would say sooner as well. Find a way to up your game.
If you’re contributing 3% of your salary, what would it take to get to five? If you’re already contributing five, could you get to 10? What would it take in your budget to make that happen? If you’re already at 10, have your eyes set on, how do I max this thing out? How can I make that happen? Whether it’s with pay raises, with step increases, with promotions, with maybe modifying some things in your budget to be able to afford. To invest this way. Finding those ways to up your game and little by little, you’re going to get to that max level. Next regret is missing out on the agency match. All I can say is 5% every single pay period. Please make that happen. This is free money. We don’t want to see you give it up.
The fourth regret is people being too aggressive or too conservative. So please do your best to keep your emotions out of things. Those knee-jerk reactions, where you’re scared, you bounce out, you’re running to safety, or you’re trying to find the next investment. It just gets out of control. And then make sure that when you find that risk tolerance, that good gut feeling that you have of, it’s not too crazy, it’s not too conservative. Make sure that that feeling you have in your gut is what you’ve actually done in the Thrift Savings Plan. So, you might need a little bit of help on this with an advisor, someone who can actually help you to articulate what your risk tolerance is to see how aggressive or how conservative you might be and assure that your TSP accounts are aligned, or your funds are aligned with what you’re feeling.
Next regret is trying to time the market. We see this a lot when we’re having both the bear and the bull markets. Certainly, when we have a recession that is a scary time for a lot of people and an exhilarating time for other people who are trying to time that market, I would just offer, stop it. Slow and steady wins the race. This idea of you thinking that you are smarter than people who do this for a living every single day is crazy. So please stop trying to chase the market. It is very, very difficult for the average investor. And we’re all layman investors. We’re not the big-ticket guys. It is very difficult to time the market and win. So slow and steady. We call it dollar-cost averaging that when the market’s up, you’re buying maybe fewer shares, same dollar amount, but fewer shares.
But when the market goes down and the value of those shares have gone down, you buy more of them. But it’s all a nice, steady contribution to the TSP. And that gets a nice, steady slope of the growth of your account. So, you don’t always win that way, at least in the short term, by having that slow and steady approach. But it is very important that you don’t suffer big losses or that you’ve purchased shares way too expensive that you’ll have a hard time selling with a profit by timing the market.
Next regret is not taking tax diversity seriously. A lot of people are like, “Oh, traditional or Roth. Doesn’t really matter. I don’t know. I don’t want to really think about that stuff.” And believe me, I get it. I understand. But when we’re thinking about the way taxes change in the future, you want to have as much control over what our tax destiny really looks like. So, it’s not just tax diversity, it’s tax destiny of really what the picture’s going to look like and what we can control in retirement.
The last piece of regret that we hear from federal employees is not getting help sooner. Do yourself a favor, tip the odds in your favor, ask a professional for advice. These are people who do this for a living and help people to articulate what it is they’re trying to accomplish, what their gut tells them when the market’s up or down, as far as how scared or motivated they might be. And it’s important to get really clear, whether it’s in the TSP or any other investments, that you have doing everything you can to tip the odds in your favor. And I would encourage you to do it now. Don’t wait until you’re ready to retire and wonder what you could have done.
Like we do in all of our workshops, I want you to know the next steps. So, I’m a big fan of getting the rest of the story. We can’t just talk about TSP. That might be the fun part of retiring from federal service that you want to talk about, but there’s a lot that goes into this. So, I would encourage you to attend one of our workshops. All of our sessions in 2022 are in person. We are back to the normal way of doing business here at ProFeds. Prior to COVID we were solely in person. And that is where we’re way more effective with employees, and employees have a greater experience in our session with the kinds of questions that come out and the overall attentiveness of our audience.
We are doing in-person training in our 2022 sessions. We have sponsored sessions throughout the country. There’s no cost to attend, which is great. And we’re covering all of the benefits topics, and all those crazy decisions that you have to make. So, you can see all the details for all of the sessions that we have available throughout the country at fedimpact.com/attend. You can select your area and get signed up. For the handouts and the replay, again, if you’re still on here and you can download the handouts right from this portal, that’s beautiful. If not, they will be emailed to you along with the link to the replay for all of the registered participants. So, if you missed part of this, or if you needed to maybe re-listen to something that you took a double take on, then you’re able to do that.
Like we always do, we are announcing our next webinar, The Strategy of the Survivor Benefit Plan. This session’s going to be on January 20th, 1:00 Central just like all of our webinars are. Here in this session, we’re going to talk about the art of protecting your federal retirement check for your spouse. There’s a lot that goes into this program. Of course, this is a hot topic in our workshops because we’re always wondering, how do we protect income for our survivors, whether it’s our spouse or our children? And there are some interesting little features of the Survivor Benefit Plan that I think get left unsaid in most training that we see agencies provide. I think it’s worth you knowing how this benefit really works and what the government’s plan is to protect your retirement check.
I’m going to guess your spouse isn’t going to be very excited with the government’s plan. So, we want to arm you and your spouse with the knowledge of what is available to you, and we will cover all of that January 20th. So, you can sign up for that session at fedimpact.com/webinar. We look forward to seeing you there. Thank you so much for joining us. We have just so much to share with you, and certainly if you can make time on your calendar for yourself and your own future, please find a workshop in your area at fedimpact.com/attend. And certainly, if you want to hop on that Survivor Benefit Plan webinar next month, you can do so by going to fedimpact.com/webinar. Thank you all so much and look forward to next month.
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