Delivered on: Wednesday, November 16, 2022
Maximizing Your TSP for 2023
Highlighting the important changes for the new year and how to leverage the TSP to your advantage
- 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
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Transcript of this webinar
Hello everyone, and welcome to today’s FedImpact webinar on Maximizing Your TSP for 2023. So of course, as we enter into the new year, there’s always lots of questions surrounding the TSP; not just how much you can put in, but what are the other factors that really go into your ultimate success in the TSP once you finally retire? That’s what today’s topic is all about.
Of course, I want to welcome you to our webinar today. We’ve got lots of you on today’s call. Like I always do, I’m going to stay focused on delivering today’s material, but our awesome support team is standing by in the Q&A to answer your questions. If you have a question, type it into the Q&A. You’ll receive a response back directly from our support team.
The handouts are available for download. You can get them in two places. Next to the Q&A area, you’ll see a little red dot next to the word “Handouts”. If you click on that, you’ll see a PDF that you’re able to download. The alternative is you can go to the bottom of your screen on the webinar portal and you’ll see a link to be able to download today’s handouts.
Now, like we do on all of our sessions, this one is being recorded. We will send out the instructions to be able to get the replay along with the link to the handouts in the event that you are not able to listen to today’s entire episode, or perhaps you’re listening on your phone and you’re not able to download the handouts. So you’ll have a way to get all of this.
Now for this session stay until the end, because I’ve got a lot of FAQs that we are asked all the time about the TSP as it relates to maximizing the contributions and what you’re doing inside the TSP. I’ve made some special time at the end here today to be able to answer a lot of those questions.
If you don’t already know me, my name is Chris Kowalik. I’m the founder here at ProFeds and the developer of the FedImpact Retirement Workshop, as well as the host of the FedImpact Podcast. I am surrounded by a really great team on today’s session. We have our support team standing by, like I mentioned, to be able to answer any of your questions. So again, I’m going to stay focused on delivering today’s content. They’re going to be standing by to answer the questions in the Q&A area.
Today’s session is all about maximizing your TSP for next year. We’re going to highlight the important changes for the new year and how to leverage the TSP to your advantage. Oftentimes, we only think about, “Well, how much can I put in?” Or, “What’s my rate of return?” But to maximize your TSP, it must go a lot further than that. That’s what we’re going to be talking about today.
For our agenda, of course we’re going to talk about contribution limits because those have changed pretty significantly for the coming year. We’ll talk about making sure that you get your entire agency match. This goes for everyone, not just the people putting a little bit in the TSP, but even for those maxing the TSP (there are ways that you can not get the full agency match, and we want to make sure you avoid that).
Next step, we’ll talk about the available funds that you’re able to contribute to, some tax diversification strategies, and the timing of your changes for 2023. We want to make sure that you make the changes at the right time so that they’re in effect at the appropriate pay time for the next year. And like I mentioned, we’re going to talk about the FAQs and the biggest regrets that we hear with respect to TSP and our challenge to you.
Of course, what this webinar will not cover. I’m not here to give investment advice. I’m here to show you what the options are that are available to you, but it is up to you to weed through this and really figure out what is most appropriate for you. I’m going to give you some strategies throughout today’s session that I want you to consider, but as far as knowing what to do next, that’s not my place to tell you. So either you’ll need to figure out how to do it on your own, seek the advice of a professional that does this all day every day, or somewhere in the middle. But today’s session is not to give specific advice.
Contribution Limits
Let’s start with the easy one, which are contribution limits to the TSP. So as you may have heard, the IRS has changed the limit to how much can be contributed to the Thrift Savings plan for next year. Of course, they’ve made this change for all 401(k)s. The limits have changed for 2023, and I want to caveat here. When I say “limits,” I’m talking about your contributions into TSP. We’re not talking about your agency’s contribution, we’re not talking about the growth in your account, and we’re not talking about loan repayments. We are talking about new money being added to the TSP.
The IRS has increased the regular contribution limit to $22,500 per year. This is available for all employees no matter how old you are. There’s a special type of contribution called the “catch-up contribution” that the IRS has limited to $7,500 per year, and it’s only open for employees who will be turning age 50 or older in the year 2023. You don’t have to have actually reached age 50 to be able to do this. You have to be in the calendar year in which you turn 50 that you’re able to contribute this extra $7,500. So we’re looking at a total of $30,000 a year that if you can work that into your budget, you can set aside for your retirement. This is a pretty aggressive goal from a budgeting standpoint that a lot of people struggle to be able to do, especially since the limits increased so much. But really a great opportunity to be disciplined in your budget today so that you have more freedom in retirement later.
It is important that you update your contribution amount effective in the last pay period of 2022. The reason is is the last pay period of 2022 will be paid in 2023. So we’re looking at the payday. When is the first payday of 2023? It’ll be early in that first week. Even though it was 2022 money that you’re earning, the fact that you receive it in 2023 is what the IRS cares about. So really important that we make sure that that change happens at the right time. If you wait until you’re in the first pay period of 2023, then you’re going to be a pay period behind in your contributions and you’ll miss out on your agency’s match.
Agency Match
Let’s talk about that match here a little bit. Of course, any time that someone can get free money from their employer, we want them to do so. It’s an important aspect of saving for retirement when you can get somebody else to help you save, too. In order to get the full agency match, an employee must contribute at least 5% of their salary to TSP each and every pay period of the year. So every single pay day that you have in 2023, we want to make certain that at least 5% of your salary is going into your account. So the breakdown, this isn’t technically all a match. The breakdown is your agency will automatically contribute 1% of your salary no matter what you decide to do with your TSP. You can put in nothing and your agency still puts in 1% of your salary. We don’t recommend that, and you all know that if you’ve listened to me for any period of time, but it is part of the formula here.
Now, the match, the true match, is the extra 4%. In order for you to get the extra 4% from your agency, you must contribute 5% of your salary. It’s a total of 5%. You put in 5%, they put in 5%. It looks like a 5% match, although it’s just broken out in these two different areas. As long as you’re contributing more than 5%, it doesn’t really matter what this breakdown is because you get it no matter what.
Now, missing out on the match, or at least some of the match, is something that far too many employees do. I’d like to examine just a quick case study to put some numbers to all of this so that we can see how this happens in real life, oftentimes without employees even realizing it. Let’s say we have an employee who’s 45 years old. They only are allowed to contribute the $22,500 to the TSP because they’re not in the year in which they’re going to turn 50. If they have a $100,000 a year salary, just to make this some easy math for us, if they plan to contribute the full amount allowable, which is that $22,500 to the TSP, that ends up being 22.5% of their salary.
If I said, “Do you think they get the full 5% match?” Of course we would say, “Yes,” because they’re putting in far above the 5% that would be required to get it. But will they get the full 5% match? Well, it depends, and it depends on when they put it in the account.
I want to talk about two scenarios. Follow along with me, there’s kind of a lot going on in this slide, but you’ll see where I’m going with this here in just a moment. In scenario number one, this employee has a $100,000 salary. They’re going to put in $865.38 into their TSP each and every pay period, and they’re going to hit the $22,500 limit because that’s what the IRS says they’re allowed to do, and that is their goal. We know that they’re going to get the 1% automatic contribution because that happens as the name would imply, automatically. But in order for them to get the other matched 4%, they had to have put in at least 5% every pay period, which they did. So they’re going to get their 1% automatic contribution, they’re going to get the other 4% matched contribution, for a total of $5,000 from their agency, which is beautiful.
But let’s say that this employee says, “You know what? I’ve got a little bit more in my paycheck and maybe it’ll be nice to have some money kind of at the end of the year with holidays, and maybe I take a trip, or whatever it might be, and the cash flow will just be better at the end of the year. So I’m going to front load the TSP. I’m still going to put in the $22,500 that you see in scenario number two, but instead of doing $865 a pay period, I’m going to do $1,125 a pay period. I’ve got it in my budget, I’m still going to get to $22,500. The IRS doesn’t know any better.” And they’re right, the IRS doesn’t know any better. All they’re going to see is $22,500 going into this account.
Here’s the problem. Once this employee reaches the $22,500, the TSP will not allow any further contributions beyond that point. So by the time this employee reaches pay period 20, they would’ve maxed out their TSP contribution, and the TSP won’t let them put in anything else. That means from pay period 21 through 26, there’s nothing for the agency to match during that time. So although the employee still gets the automatic 1% of that $1,000 we see in this example, they’re only going to get $3,077 of the matched 4%. Again, because there was nothing that the agency could match from pay period 21 through 26, they missed out on the matching money during those pay periods – and for no good reason. So please make sure to spread out your contributions over all 26 pay periods.
TSP Funds
Next up, let’s talk about TSP funds. This is something that’s changed a bit from last year. We’ll kind of go from the order of simplest to most complex. We’ll start with the regular funds.
TSP Funds: the Regular Funds
The regular funds are the G, F, C, S, and I Funds. You’re probably at least familiar with these funds. I’m going to run through them really quickly just to give a little perspective here. The G Fund is your government securities fund. It is not “indexed” per se, because the word index really refers to the stock market, and this is simply an interest rate based account. That interest rate changes every quarter.
The F Fund is a mix of government and corporate bonds, so it’s going to be indexed against Barclay’s Capital US Aggregate Bond Fund. So whatever that bond fund performs at is what the F Fund will perform at too. There are some slight differences, but roughly that’s what we’re looking at.
Then we have the C, S, and I funds that are directly indexed against funds in the stock market. The C Fund are large US companies, and it’s indexed against the S&P 500. This is the largest 500 companies in the United States stock market that are publicly traded.
The S Fund, I don’t love the way this is described because it says small and medium sized US companies, and it’s indexed against the Dow Jones, the total Stock Market Completion Index. But the reason I don’t love the description here is because what the S Fund really is, is if we take the entire US stock market and we subtract out the S&P 500, (so we subtract out the 500 largest publicly traded companies in the US stock market), the S Fund is everything else that’s left. And those are huge companies. They’re not small with respect to small business or any of those types of metrics that we tend to find, like in government contracting and all that. These are big, big companies.
Then looking at the I Fund, this is mostly large foreign companies, and it’s indexed against Morgan Stanley’s Capital International EAFE Index, or Europe, Australasia, and the Far East.
These are the five funds. They’ve been around for a long time. Of course, the S and the I were the most recently added funds, but even they have been around quite some time now.
TSP Funds: the Lifecycle Funds
If you’re not exactly sure what mixture you’re supposed to use, or how to even get close to the right mixture of these five funds, you might have been drawn to the Lifecycle funds. The Lifecycle funds were designed to provide an optimal balance between the expected risk and return associated with each of the individual five funds that the TSP offers. The Lifecycle funds, if you look to the far left, this is the most aggressive Lifecycle fund that we have, the 2065. You’ll notice based on the legend in the upper right hand corner that the C, S, and I Fund make up the vast majority of the 2065 fund. You’ll see a small little part of the G and the F fund, so small that you can hardly tell they’re part of the bar chart.
As you move your eyes to the right hand side of the screen, you’ll notice the orange piece of each bar gets larger and larger. You only really see it for the first time in the L 2050 fund; that’s when it becomes real visible on the bar chart. But as you move to the right hand side, you’ll see that orange part get bigger and bigger and bigger. By the time you get to the Lifecycle Income fund, which is designed for people needing the money either now or within the next five years. That Lifecycle income fund is designed to be mostly safe, mostly conservative, with the G and the F Fund. But there’s enough of that Lifecycle fund that if there’s a major shift in the market, especially like a 2008 that we saw, the Lifecycle income fund will lose money. Anytime we have market based accounts in here, there is a potential to lose money in an account.
While the Lifecycle funds are not perfect by any stretch, they do give a little bit of guidance. If you are not working with a financial professional, maybe you’re scared, maybe you feel like you don’t need it, I would argue something different. But if you’re a little bit more of a do-it-yourselfer and you’re looking for, are you kind of on the right track? You simply choose the Lifecycle fund that is closest to the year in which you plan to begin needing money out of the TSP (not necessarily when you retire from the federal government). You might retire in 2035, but don’t plan to need the money until 2040 or so. And so you would be looking at the 2040 fund. That is what is stated by the TSP as far as the intent of these mixtures. You could simply pick that, and then your money automatically runs based on these percentages and rebalances every single quarter based on a set division of the G, F, C, S and I funds.
I’m not going to go too much deeper into the Lifecycle funds. It is an interesting concept and one that they’ve borrowed from the private sector, what we call horizon based or timeline based portfolios. They’re not perfect by any stretch, but they’re way better than a “scientific wild ass guess,” which unfortunately a lot of feds take and then end up regretting it. So this will at least get you closer to the direction you need to be going. But to fine tune that, you really want to be working with a financial professional that knows what they’re doing in the TSP.
TSP Funds: the Mutual Fund Window
There is a relatively new option for investing in the TSP in what they call the mutual fund window. The TSP offers this option to be able to invest in those mutual funds. However, they must first invest in the core funds, which are the G, F, C, S, and I, or the Lifecycle funds, which are simply a combination of the G, F, C, S, and I, and then the money can be transferred into the mutual fund window. It happens on the same way out. You can’t take money out of TSP directly from the mutual fund window; it has to come back into the core funds, and then it can be distributed. This session is all about getting money into the TSP, so that’s really where we’re going to stay focused, but you should know that if you’re interested in the mutual fund window, there’s a minimum initial transfer of $10,000 and it can’t exceed more than 25% of your total TSP value at the time that you transferred the money into the mutual fund window. This is not quite the home run that the TSP was hoping it was going to be, but if it’s something that you’re considering, of course, this is a time to be able to make some of those changes in 2023.
A fair warning, the mutual fund window does carry some pretty heavy fees that are not present in the rest of the TSP funds, and frankly, aren’t present in a lot of private sector funds. But fair warning, do your due diligence before you invest in the mutual fund window.
Fund choices
Fund choices: EXISTING money in TSP
Let’s talk about fund choices in the TSP. For your existing money in the TSP, these are prior contributions that you’ve made. You can choose for those to be invested in any of the regular funds, the G, F, C, S, and I, the life cycle funds, which again are just a combination of the G, F, C, S, and I, or the mutual fund window in any combination that you wish, of course, as long as you don’t violate the percentage rule for the mutual fund window that we talked about on the previous slide. So up to two times per month, you can change how your existing money is invested.
Fund choices: NEW money in TSP
For new money in the TSP, so this is all your future contributions that you plan to invest, you can choose to be investing that new money in any of the regular funds, so that’s the G, F, C, S, and I, or the Lifecycle funds, which by this point we know is a combination of the G, F, C, S, and I. And throughout the year, you can change the amount of your new contributions, so that’s either the dollar amount or the percentage of your salary that you’re contributing. And, you can also change the funds that your new money will be invested in, so that’s again, the regular funds or the Lifecycle funds. So you do not have to make one change that affects it for the whole year. Of course, this is a very timely point in the year to make those changes because we’re moving into a new year with a new contribution limit, but know that you do have flexibility throughout the year to do so.
Tax diversity
Let’s talk about tax diversity. When we think of being diversified, we normally think of different kinds of money. Maybe I have real estate, maybe I have bonds, maybe I have mutual funds, maybe I have some money in a checking account. That’s typical financial diversification. But here we’re going to talk specifically about tax diversification. The concept here is that we have different tax buckets, and you get to choose when to take the money from each one of the buckets. Based on different tax and economic issues that are going on, your buckets may perform differently, and of course we know they’re going to be taxed differently. With the concept of tax diversification, you get to be in control when you go to take money out of these buckets, whether you’re going to be taxed on it or not. And ideally, each of those buckets works independently of one another. You don’t want there to be any connection between the different buckets. That way you have the most flexibility in how to use them.
Tax diversity: Traditional TSP
I want to talk about the tax diversification options within the TSP. We’re going to start with the Traditional side of TSP. This is the part of TSP that’s been around since its inception. With the Traditional TSP, we’re going to show you how this works kind of from left to right. When the money goes into your Traditional TSP, you save tax on that money today on the principal that you’re putting into the account. It’s not taxed, but you know when it comes out later it’s going to be taxable. Because you didn’t pay it when it went in, so Uncle Sam’s going to get it on the way out.
Unfortunately, what a lot of people don’t recognize is that the whole purpose of this account is to make the money grow. And when the money grows, all of the growth is taxable, too. So you don’t just pay tax on the money that’s coming out, you pay tax on the growth of all of that money too.
Tax diversity: Roth TSP
But let’s compare that to the Roth TSP. When the money goes into a Roth, you have to bite the bullet and pay the tax today on that principal that you’re contributing. We know that blue part of the illustration here, it’s taxed when it goes in, and so when it comes back out, it’s tax-free, which is great, right? You’re not going to pay tax on the money twice. But again, what a lot of people don’t realize is that the growth on all of that money comes out tax-free as well. So you will not pay any income tax on the principal or the growth.
That’s why the Roth is so advantageous. A lot of people would say, “Well, why would I put money into an account where I have to pay tax today?” Well, either way, you’re going to pay tax on the principal; that’s a given. It’s whether you want to pay tax on the growth of that account is really the part in question here, and are you willing to do the hard thing today to make it more financially appealing to you later?
Now, not everyone is suited for a Roth type of account. Although I love this concept, it’s not for everybody, especially the closer you are to needing money out of your account. But it is a really interesting concept that the TSP introduced in 2012. Of course, the private sector has had Roth accounts for a long time since the late ’90s, but this was a welcomed addition to the TSP for sure.
Limitations in TSP
There are limitations in the TSP. The first, and probably the biggest one that I really harp on, is that the TSP does not allow participants to differentiate how the Traditional or the Roth monies are invested. And so it would stand to reason you want your high growth accounts in Roth styled accounts because all that growth is tax-free. Meanwhile, you might want Traditional money to be in a little bit more conservative funds where you know you’re going to eventually have to pay the tax on the principal, but you’re not going to have a huge amount of growth, but it’s safety and all that. So you might say, “Well, I want my Roth contributions in the C Fund, and I want my Traditional contributions in the G Fund.” These are kind of polar opposites here. That sounds great, but the TSP doesn’t let you do that.
You essentially have two layers of the decision that you are making when you put new money into the TSP. The first layer is, when you go to put new money in, which funds does it go into? The G, F, C, S, and I in some sort of combination, either through the true regular funds or through the Lifecycle fund combinations.
The next layer is, how is all of that taxed? Now you can say, “I want 50% Roth, I want 50% Traditional.” That means 50% of the contribution that you’re making, no matter which funds it’s going to, is going to be Roth, and same thing on the Traditional side. But you’re not able to pick and choose, “I want my Roth contributions to go to the C Fund and I want my Traditional money to go to the G Fund.” You could do this out in the private sector all day long, it’s a huge strategy. But it’s unfortunately just not available in the TSP.
I’m not going to talk about the limitations on TSP when you go to take the money out later. That is a topic for another webinar and one that I can kind of get down and dirty on with respect to all the details there. But limitations in the TSP are very real, so today we’re just really focused on getting the money into the account and the distinct limitations that exist in the TSP for that reason.
Timing changes for 2023
Let’s talk about timing your changes for 2023. Like I mentioned before, we want to make sure that you get all of the money into the TSP and that you don’t miss any of the match. So if you are considering making changes to your TSP for 2023, and specifically the contribution limits that are going in, we want to make certain that you make your changes effective in the last pay period of 2022. So the first pay day of 2023, that pay level that you receive includes the new contribution amount. Don’t wait until the first pay period to make the change, because then it won’t hit until the second pay period. Make it in the last pay period of 2022, so that very first pay day of 2023, your new contribution amount is in effect.
Beneficiary designations
I’d be remiss if I didn’t talk about beneficiary designations. One, because this was such a cluster for my husband and I earlier in the year when the TSP made the big changes. My husband’s a fed and I watched very, very carefully what was happening to things like beneficiary designations, because let’s face it, this is a huge part of the TSP of making sure that the right person gets it if you die. Very important, make certain that you have a valid designation of beneficiary on file with the TSP. Because whoever is named will get your money. Even if you have fallen out of love with that person, there can be a hundred court orders that say you’re no longer married to that person, and the TSP doesn’t care. If there is a valid designation of beneficiary on file, even for somebody like a former spouse, they will get the money. So please make sure it’s updated for the right person to get it.
To do so, you will have to log in to TSP.gov to be able to update your beneficiaries. This is something new that came out of the website modifications that happened earlier this year. Let me give you my tip, and this is really based on my and my husband’s experience, and that is even if you think you have a beneficiary designated, log on to double check. Login to your account, double check that who you think is named is listed there.
The reason I share this with you is because when this website change happened earlier this year with the TSP, prior to that point, my husband had me listed as the beneficiary to his TSP account, and our trust listed as the contingent beneficiary. When the change happened, I still remained as the primary, but the trust designation of beneficiary fell off. We had to go through the process of reestablishing that and making certain that took. So do yourself a favor, please double check that your beneficiaries are still listed on your account, and then print it out, keep a copy in a safe place for your family to know that money’s there and where to go to get it in the event that you die.
Frequently Asked Questions
That’s it for the main content that we have today. But like I mentioned, we have some frequently asked questions that kind of trip feds up a little bit. There’s a lot of water cooler talk out there about misconceptions that people have about the TSP, and a lot of bad information floats out there. I wanted to take some time to bring these to the surface to make sure that you don’t fall prey to the bad information that’s floating around out there.
FAQ #1: Why don’t I see the changes I thought I made?
The first question: “I thought I made changes to the funds I was invested in, but it only seems to affect my new contributions. What’s up with that?” Remember, there are two ways to change how you invest in the TSP. First is where your existing money is, and the second is where your new money will go. You don’t have to change both of those at the same time, or at all. Let’s say you have a lot of your money in the C Fund, and you want to really stop acquiring C Fund shares but grab more G Fund shares. You can say, “I want all my new money to go to the G Fund,” or vice versa. They don’t have to be aligned. Where your existing money is does not have to be where your new money goes. But if you changed one and you’re like, “Wait, why am I still seeing this?” It’s likely that you changed the wrong one or you didn’t change both if that’s what you were intending to do.
FAQ #2: Should I contribute a $ or % to TSP?
Next question. “Is there an advantage to contributing a certain dollar amount instead of a percentage of my salary?” This is kind of a hard one to answer because the answer is really, “Maybe.” If you plan to only contribute enough to get the 5% match, for instance, you should just choose the percentage. Don’t try to do the math and get all that right. Just put 5% in there and be done with it if that’s all you’re planning to do. But if you plan to contribute exactly the amount that the IRS allows, the $22,500 or the $30,000 if you’re at least in the year in which you’re going to turn 50, you should really choose the dollar amount option, because that’s going to allow you to fine tune more of what it is that you’re doing and making certain that you hit the dollar amounts that you really want with the IRS. So all in all, as far as the TSP, they don’t really care, but it might make some difference in you getting the full match or you hitting the nail on the head with what the IRS will allow you to contribute.
FAQ #3: Can I contribute from my checking account?
Next question: “Can I make a contribution to the TSP out of my checking account?” The answer here is really easy. It’s, “No.” You are only allowed to contribute to the TSP through your paycheck, so be certain to make that election early enough in the year to get all of your contributions in. Of course, we want to make sure that you do that over all 26 pay periods in the year so that you are sure to get your full match.
FAQ #4: If I retire early in the year, can I still contribute the full amount?
Next up: “If I retire before the end of the year, can I still contribute the full amount to TSP?” Ooh, the answer here is, “Yes.” The IRS does not care how long you were working for your employer. You are allowed to contribute the full amount in that year as long as you made at least that much. So you can contribute that full $22,500 or $30,000, again, in the year in which you turn 50 or older, and it does not matter when in the year you retire.
FAQ #5: Does my loan repayment amount count against how much I can contribute each year?
Next question: “I have an outstanding TSP loan. Does this count against how much I can contribute to the TSP?” Ooh, the answer here is, “No.” You are allowed to contribute new money, this is not loan money, this is new money, up to the IRS limits each year. The loan repayment that you might have is totally separate from the contributions of this new money going into the TSP. So don’t count it against your $22,500. Let your loan sit completely separate of your thought on how much you put into the TSP.
Of course, sometimes a loan repayment might keep you from being able to contribute the whole amount. Like, your budget just might not support it because you have a big loan repayment. So that’s certainly a possibility and something to consider. But as far as what the IRS allows to go in has nothing to do with the loan repayment.
FAQ #6: Does my agency only match money I put into the Traditional TSP?
Next question: “Is it true that my agency only matches contributions that I make to the Traditional TSP?” Ooh, this is a water cooler talk because we hear this rumor all the time. The answer is, “No.” You can choose to contribute to the Traditional side and/or the Roth side of the TSP. It does not matter. It does not affect your match at all. The difference is, or the thing to pay attention to, is that your agency’s match will always be deposited into the Traditional side of your account. It’s not that they just match your Traditional contributions; they match all of your contributions. The difference is what goes into your account and where.
The reason it goes to the Traditional side of your account is that money contributed to the Roth side of your account has to be post-tax money, meaning money that you’re already going to pay tax on. And because you don’t get to deduct the Roth contribution from your earnings that year when you file your taxes, it means that you’re going to pay tax on that money. Well, the agency and the government at large does not want to pay your tax bill, and so the way in which they’re going to make this taxable to you and make you pay the tax on that contribution of your match is putting it on the Traditional side of your account. So eventually, when you take the money out of your account later, you’ll have to pay the tax on it.
So that’s a little bit of the why behind why this happens, but I do not want you to believe that you have to put at least 5% of your contribution in the Traditional side to get your agency’s match. That is completely bogus information, and one that I would love if you would help me to stop spreading in the agency. Get people on the right side so they understand how this really works, and make them listen to this webinar if they need some validation.
FAQ #7: Is it possible I make too much money to contribute to the Roth TSP?
Next question: “I’ve been told that my spouse and I make too much money to contribute to the Roth TSP. Is that true?” It doesn’t matter how much you and your spouse make, there are no income limits that apply in the Roth TSP. Those limits that you’ve probably heard about are specific to Roth IRAs. Those are different types of accounts out in the private sector. And, couples with a modified adjusted gross income more than $228,000 are completely disqualified from contributing to a Roth IRA. This has no effect on the TSP at all.
When I mentioned earlier that the Roth TSP was a welcome addition back in 2012, one of the biggest reasons it was so celebrated to bring the Roth over here was because there were a lot of federal employees that between them, either them as a single person or perhaps them and their spouse, they exceeded whatever the limits were that the IRS had set to be able to contribute to a Roth IRA. Let’s say they wanted that tax-free growth and they were willing to pay the tax today, and all the good parts that are associated with a Roth-styled account, prior to 2012, they couldn’t contribute to a Roth IRA because they made too much money. So when the Roth TSP came to life, it was a great opportunity for higher earners to be able to set aside money that they otherwise could not make tax-free in the future as far as the growth.
All in all, no matter what, we’re going to pay tax on the principal. We all know that. We have to believe that in our hearts that that happens. It’s the growth that we get to decide whether it’s going to be taxed or not. And in this case, if we have a federal employee contributing to a Roth TSP, it does not matter what their income is. There are no income limits set by the IRS or the TSP to contribute to a Roth TSP. The rules are really different in the private sector with the Roth IRA, but that has no effect here in the TSP.
FAQ #8: Can I change my “Traditional” to make it “Roth”?
All right, last of the frequently asked questions. When people realize the difference between the Roth and the Traditional, this is a question we get an awful lot of. “Most of my money in TSP is labeled as Traditional. Can I change that to make it Roth?” Oh, gosh, the answer is “No!” with an exclamation point here. The TSP does not allow you to convert, that’s the technical term, to convert Traditional money to make it Roth money inside the TSP. You are only allowed to do this type of conversion in the private sector. This is called a Roth conversion strategy.
Please get help for this. Don’t try to do this on your own. Taxes get complicated in conversions like this, so please seek the advice of a financial professional. If you need an introduction, let us know. We’re happy to give that to you. In fact, we’ll put the link in the Q&A area to do so. Throughout this session, if you have realized like, “Wow, things are getting more complicated for me, and I want to make sure that I’m doing the right things. Maybe I do need to be working with a professional,” don’t be afraid to ask for help. We’ll put the link in here to be able to ask for an introduction to an advisor in our network that understands how the TSP works, and some of these special nuances that are really, really important in your planning.
Regret vs. challenge
But let’s talk about regret versus challenge. I told you I was going to have some challenges for you. The regret on the left hand side.
Regret #1: Getting started too late
The first one is, gosh, I’m getting started too late. Our challenge to you is know that most people never feel ready to invest. There’s always something that they could take care of first. So don’t be afraid to get started. Even if it feels a little early, or you don’t feel like you have all your ducks in a row, they’ll come together.
Regret #2: Not contributing more (and sooner)
The next regret is not contributing more and sooner. My challenge to you is find a way to up your game, whatever that might be. Is it, how do I get to 5%? Is it, how do I get to 10%? How do I max out the TSP? Gosh, what do I have to do to be able to contribute the catch-up limit of the $7,500? If you always are looking for a way to up your game in the TSP, and frankly, any other type of investment, you can find those incremental wins that put you on a good path. For instance, you’re about ready to receive a ginormous pay raise. Why not take that pay raise that you’re already used to not living on and putting it towards TSP? Or at least half of it to TSP. Increase your standard of living or maybe pay for groceries and gas with inflation. Don’t be afraid to use some of that for your standard of living, but also carving out some of that for your future as well.
Regret #3: Missing out on agency match
Now, one regret that we see more early in someone’s career is missing out on the agency match. My challenge to you is 5% every single pay period. If you’re closer to the end of your career and you’ve long surpassed this 5%, please go find the younger people in your office and make sure that they know 5% every single pay period in TSP so they don’t miss out on this, and find out 10 years from now that they really should have been contributing.
Regret #4: Too aggressive or too conservative
Next regret is, gosh, I was way too aggressive or way too conservative in the TSP. We see both sides of the pendulum here. Do your best to keep your emotions out of this decision, and make sure that your choices that you’re having in the TSP with respect to what funds you invest in are aligned with your goals and aligned with your risk tolerance, that gut feeling that you have when you think about losing money. If you need a little bit of help on this, ask for an introduction to one of our financial professionals in our network. These are people who do not work for ProFeds. We are simply partnered with them because they have the expertise and the licenses to be able to provide this type of advice to federal employees. We want to make sure that you have a path to put all these things in motion.
Regret #5: Trying to time the market
Next regret is trying to time the market. Just stop it. We don’t know what’s happening with the market. We never do. And if you think you as an amateur can time the market better than people who do this for a living, you are crazy. So stop it. Slow and steady wins the race, especially when we’re talking long term. It doesn’t mean you can’t have some of your money more at risk and having a little bit of fun trying to time the market, but don’t do that with the entire TSP account that you have. It’s way too risky, and you’ll probably come out on the short end of that stick.
Regret #6: Not taking tax diversity seriously
Next regret is not taking tax diversity seriously. Please consider the Traditional and the Roth strategy, and what combination is going to make sense for you. The Roth is a bigger commitment because you have to agree to kind of choke down the tax today and do it. But what we love is seeing people have access to tax-free money in retirement. And unfortunately, those who just have Traditional styled money, either in the TSP or in a 401(k) or an IRA, they simply might have money, but it’s going to be taxed, and that probably won’t feel very good.
Regret #7: Not seeking professional help
The last regret that I have listed here that I’ve made reference to a number of times is not seeking professional help. Do yourself a favor and tip the odds in your favor and do it now. When you seek professional advice on anything, you have a better opportunity to reach the goals that you’re setting. You might even be able to set higher goals because you can leverage the expertise of a professional. And this is not just financial professionals. These are professionals that might influence a lot of your life.
Tipping the odds in your favor
So do yourself a favor, on all of these regrets, how can you tip the odds in your favor? Do you need some help? Do you need to keep your emotions out of things? Do you need to take a closer look at your budget to get things straight?
The very best way that I can help you to tip those odds in your favor and get the ball rolling for you is to help you to double check your retirement math. These are our workshops that we do in person. There is no cost to attend our sessions, and we cover all of the federal benefits topics and those decisions to be made. And for all of you who are wondering like, “Gosh, how do I get a little bit of help? Maybe I’m nervous about sitting down with a financial professional.” You will have an opportunity to have some one-on-one help immediately following our workshop if that’s what you ask for.
If you feel better about going to the workshop first and kind of getting your brain right on all of these things, TSP included, of course, then this will help put those wheels in motion and you can have a better foundation by which you’re able to make those decisions. So you can see all of the open workshops that we have for registration at FedImpact.com/attend.
Last up are handouts. We will send out handouts and the link to the replay to all of our registered participants. Of course, if we have folks who were not registered that want to get this, they can ask to do so, and we’ll be able to get you everything that you need.
Next webinar
The next and final webinar that we’re going to have for 2022 is Striving for Financial Freedom in Retirement. This will be on December 15th at 1:00 Central. In this session, this idea was really prompted by a recent trip that my husband and I were on. We were talking a lot about freedom in retirement. He is a federal employee, and this idea of looking forward to figuring out what we can do now to put ourselves in a much better position later in our lives. I know that this is a message that I think federal employees will really benefit from, and a little perspective on what it takes to get that financial freedom that you’re probably looking for.
Striving for Financial Freedom in Retirement: How taking these steps early can help you retire with financial confidence, which of course is our goal here at ProFeds. You can sign up for that next webinar at FedImpact.com/webinar, and we’ll be delighted to have you on December 15th.
That is it for today’s session. To find a workshop in your local area, please go to FedImpact.com/attend. And to sign up for next month’s webinar on Striving for Financial Freedom in Retirement, you can go to FedImpact.com/webinar. All right, thank you all so much. Have a wonderful Thanksgiving. We’ll see you back here on December 15th.
