Delivered on: Friday, February 24, 2023
Your TSP – Love It or Leave It?
Helping federal employees understand their often complicated relationship with the TSP – and deciding if a breakup is in their future
- ADVANTAGES: Unique elements of the TSP that are great for employees to capture
- CHALLENGES: Functions of the TSP that are frustrating or disadvantageous for employees and retirees
- BLACK SWANS: When you don’t know what you don’t know
- EYE OPENERS: How misplaced loyalty to the TSP can cost you big time
PLEASE NOTE: This session will be very candid about the TSP (the good and bad). We’re not here to bash the TSP, but we’re not here to defend it either. Show up with an open mind and set aside your preconceived beliefs to get the most out of this webinar.
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Transcript of this episode:
Welcome to today’s FedImpact webinar on “Your TSP – Love it or Leave it?” In the month of love here in February, I thought we’d have a little bit of fun with the TSP, and talk about some of the unique nuances that happen within the TSP. That way, you all can get a sense of how this program not only works now, but works into retirement as well. Our topic today really came out of a lot of questions that we get in our retirement workshops regarding the TSP. Folks wondering, is this the right program for me to stay in long term? I felt like it was an important enough topic to talk about today.
Now, Q&A, I do have my support team standing by in the Q&A area. If you have questions, please type them into the Q&A area right here in the webinar portal. All that I ask on the questions is that they pertain to today’s topic, because there are so many of you. We’ve got thousands registered, and you guys keep pouring into today’s session. We want to make sure that we’re able to get to everyone’s questions by the end of today’s session. The handouts are available right next to the Q&A area here in the webinar portal. You are able to download today’s handouts, so that those are nice and handy for you. As we always do, the session is being recorded, and we will send you instructions to the replay following today’s session. Now, stay until the end. I’ve got some important observations with respect to the TSP that I want to share with you, that hopefully help you to get a really good handle on what you’re looking at with TSP.
Of course, I’m Chris Kowalik, for those of you who have been on plenty of these webinars. You know who I am. Obviously we do retirement workshops. We have our FedImpact podcast, all that good stuff. I’m surrounded by an awesome team on the session with us today, of course. We’ve got them in the Q&A area to be able to answer the questions. Really delighted to be here with you today.
This topic, “Your TSP, Love it or Leave it?” helping feds understand their often complicated relationship with the TSP, and deciding if a breakup is in their future.
Now, fair warning, I’ve actually got a couple of fair warnings. The first is that my husband’s a federal employee. We participate in the Thrift Savings Plan. So I have a personal sense of how this program works, and its advantages and disadvantages. Definitely want to be upfront with you on how this stuff works, but I’m looking at this as an insider too. Not just as an outsider looking at the program as a whole, but as a user of the TSP, as a participant in our family. There’s some red flags that get thrown for me too, even as much as I love this program.
Real quick, let’s talk about today’s agenda. We’re going to talk about some of the advantages, some of those unique elements of the TSP that are really great for you as an employee to capture. Next, we’ll talk about some challenges. What are the functions of the TSP that are frustrating sometimes, or maybe even disadvantageous for employees and for retirees? Then we’re going to talk about a concept that some of you might not have heard of, the black swan. When you don’t know what you don’t know, how do you go figure those things out if you don’t even know what you’re looking for? Then we’ve got some eye-openers. This idea that the misplaced loyalty to the TSP can cost you big time. Okay? Now I’m not going to review these in a linear fashion, like you see here on the bullets. These are all going to be intertwined in the topics that we’re going to be talking about today.
So here’s my second and third warning. This session is going to be very candid about the TSP, the good and the bad. Okay? We are not here to bash the TSP, but we’re not here to defend it either. I’d encourage you to show up with an open mind, and set aside some of those preconceived ideas or the notions that you have about what TSP is going to be in the future, so that you can get the most out of this webinar. Don’t show up here to defend the TSP. You will lose some of the message that’s here that you really need to let sink in. I promise I’m going to be fair, but I definitely want to make sure that we get through all this material today.
Let’s talk about what this webinar will not cover. I always have this slide in here, because I want to make sure that the understanding of what’s happening in this webinar is very clear. I’m not here to give advice. I’m not here to tell you what to do in the TSP. I just want you to know how the program works so that you can make better decisions for yourself.
When You First Met (the TSP)
If we’re going to have a little fun with this webinar, who better to have fun than with Bugs Bunny? When you first met the TSP, what was your initial reaction? Did you have the hearts fluttering around your head like Bugs does here? Are you like, “Wow, oh my gosh. This is so amazing. How could anything be better than the TSP?” Right? You might have had love at first sight.
Love at First Sight
In the beginning, gosh, it looks so simple. There were only five funds. Some of you have even been in the TSP long enough that there weren’t even five funds. There were only three. Next, it just looks so easy, this idea of set it and forget it. You can set your contributions. You can set where the money’s going, and it just rides. Next, it looks so sweet. The FERS get that 5% match. That feels pretty good, doesn’t it? This idea that it looks so good, what do things look like as your life changes, and as the TSP has morphed and changed over time as well? The next thing you might have noticed in your love at first sight here is that it looks so smart. The tax advantage that can come out of the TSP, that’s brilliant. Then it looks so cheap. The fees appear so low. It looks so safe with the G fund, where you can’t lose any money. Gosh, it just looks so perfect. It must be forever, forever love right?
Now, most of these descriptions that you see here on the screen would be a great way to evaluate maybe some personal relationships that you have. Maybe not the cheap and perfect part. Maybe that’s not perhaps the criteria that you want to use. But I do want to acknowledge that there is this natural love affair with the TSP that I think we can appreciate that we have.
Your Relationship with the TSP
Let’s talk about your relationship with the TSP. Now, they might have wined you and dined you a little bit. Maybe brought you some flowers, some chocolates. All is good. But we’ve got to do an honest assessment of what the relationship is that we have with the TSP.
Defining the Relationship
To define the relationship, we have to first understand that TSP’s sole job is to make this plan available to you. That’s it. You need to know, though, in that relationship that they’re not permitted to give you advice. They might be good order takers. They’ll do whatever you tell them, as long as it’s on the list of approved things that they can do. But they’re not financial strategists. They’re not fiduciaries. They don’t have any obligation to look at the full scope of your financial picture, and they are certainly not responsible for the outcome. We need to appreciate what this is and what this isn’t, and the kind of relationship that you can have with a plan provider like the TSP.
If you were in a normal relationship, and someone just told you that, you might say things like, “It’s like you don’t even know me. You didn’t even ask about my financial situation,” or, “You never ask about my day,” or, “You don’t even care about me.” Of course, we’re having a little bit of fun here. But this idea that so many feds believe that the TSP has the ability to give them all this advice and all of this great strategy, that is not at all what the TSP is structured to do. It is to provide the plan, and make that available to you. But what you do with that plan is solely up to you, within at least the guidelines that the TSP has.
Three Sides of the TSP Coin
Let’s talk about the different sides of the coin here. Let’s talk about capabilities. Will the TSP allow you to perform a certain action? That’s one of the first questions. Is what you want to do allowed? Next, will the TSP limit you in any way from performing that action? When we’re talking about the capabilities of the TSP, what is capable of being done within the account? We have to answer those two questions. The next step is guidance. Will the TSP give advice, if you ask? Could you call the TSP and say, “Hey, I was thinking about taking $300,000 out of my TSP to pay off my house. What do you think?” Real quick, the answer to that is no.
Next, will the TSP warn you, even if you don’t ask them? If you go to initiate an action, will the TSP step in and say, “Hold on. What are you trying to do? Are you sure this is what you’re intending to do? Is there maybe another way?” The answer to that question is no as well. When it comes to transparency, this is a part that I think is important as well. That is, is their process transparent, and does that operate in an efficient manner? Then, will the TSP be fair in their assessment of other options that you have? Do they think they’re the only game in town, and the only reputable group that you can do business with? Or do they acknowledge that there may be some strategic advantages in other types of accounts that are not available in the TSP?
I think all six of these questions are very fair questions to ask of a plan provider. I think that us looking at all these questions through these lenses of the sides of the coin, so to speak, will help us to be able to have a fair assessment of the TSP today.
When Things Get Complicated
So what’s to love? Here’s the deal. There are things that get complicated in the TSP, and frankly any relationship that we have. Over time, your needs change. Your situation gets a little bit more complex. Your expectations grow, right? As you get more savvy with what you’re doing, your sophistication evolves along with that. This is a normal change that happens in any type of relationship, and certainly one that happens within an investment relationship as well. You are not the same person you were when you first started in the TSP. Whether that was five years ago or 35 years ago, it doesn’t really matter.
Evaluating any relationship
Let’s talk about evaluating a relationship. I would offer to you, I think it’s really easy to look at the good parts of a relationship. Those are easy things to point out. They’re easy things to tell your friends about, all the good parts. That’s the easy stuff to live with. What I want everyone to be able to look at objectively here is to look at those bad parts. Maybe those parts that we’ve outgrown, or that at one point might have served us well, but no longer. Again, I want to approach this from a place of fairness, but I also know that there’s an awful lot that we have to think about here.
Let’s start with the low fees. If there’s anything I know feds love to talk about with respect to the TSP, it’s how low they think the fees are. Honestly, the TSP has relatively low fees for investing in the G, F, C, S and I funds. The same concept holds true for the lifecycle funds. Those are all made up of the G, F, C, S and I. Mutual funds are a little bit different. I’m not going to get into great detail on that today. For what it is that you’re investing in, the fees are relatively low, but here’s the bad news. They’re not the lowest. There’s a catch. I think both of these bullets are important here.
If we’re looking apples-to-apples, to get an account in the private sector that’s structured just like the TSP, where you don’t get advice, it’s just a plan that you can self-direct and go make it happen. You can invest in those similar accounts in the private sector, and pay even lower than what you’re paying in the TSP. I want to be very, very clear about that point, because it’s something that’s misunderstood by so many people. I don’t think it’s a fair assessment to compare the advice that you would get from a financial advisor and the fees associated with that, versus an account exactly like the TSP out in the private world, that has no advice. It runs essentially like the TSP does. Cheaper out there in the private sector, but here’s the catch. You get what you pay for.
You’re left to make decisions without any guidance or caution from the TSP. Same way that would happen out in the private sector, if you were in one of those types of accounts. It’s important that we appreciate the TSP for what it is. I love that there are some low fee options within this account, that allow feds to invest a pretty significant amount of money in a pretty broad way across the five different funds, and do so at various tax levels. We’ll talk a little bit more about the tax piece here. I think the fees, we had to talk about those. I wanted to put them right up front, because I know everybody’s got that on their mind. I want to simply acknowledge that, while the fees are low, you get what you pay for. You’re going to see that come out through today.
Combining Federal and Military TSP
Next, let’s talk about combining the federal and the military TSP. The TSP allows you to combine your federal and your military TSP accounts. They allow that. I’m not saying that’s a good idea. The bad news is here, if you were to combine these accounts that might not be in your best interest, and here’s why. If you are separated or retired from the military, and you have a military TSP account, that money is accessible to you right now. You could take a withdrawal from that TSP account, that military TSP. If you’re under 59 1/2, you might have a penalty. But absent that, you’re able to access that money in case of an emergency, in case of an investment strategy, in case of a kid needing money to go to school, whatever it might be. You have access to that military TSP.
If you combine it with the rest of your federal TSP, you will not have access to it until you separate or retire from federal service, or you turn 59 1/2. So why not keep these accounts separate, so that you maintain access to one? You’re still not going to have access to your federal TSP until you hit those windows that I talked about. But if nothing else, retain that access to your military TSP. Frankly, what I hate to see is someone suggesting that, just for ease, bring these two accounts together so they’re all on one statement. If we really understand what we’re doing by locking up the military TSP within the federal TSP, when we do that, we probably would think twice. That’s what I hope that you will consider if you’re thinking about combining these types of accounts.
Next up, naming beneficiaries. You can name beneficiaries to receive your TSP after you die. I think everybody probably has a general sense of that working. But the TSP erased thousands of beneficiaries in June of 2022. Was yours one of them? It might have been. If you haven’t logged into TSP.gov in quite some time, I encourage you to do so to check your beneficiaries. If there’s a change that is necessary, I really encourage you to do that. My husband and I experienced a problem like that, when all of this happened in June where a lot of changes in TSP happened. We logged into his account, and although I still remained as the primary beneficiary, our contingent, which was our trust, fell off of the account. So we had to go through the process again.
There were some challenges with updating. The wrong people were notified to witness the account. They got a copy of our beneficiary designation. All sorts of things that really, I mean I would’ve hoped would’ve been tested during the TSP rollout phase for this new program. It was kind of frustrating that it all happened that way. If you haven’t recently, please go in and check your beneficiaries.
Next up, this idea of setting your program on autopilot. The good news is, you can set it and forget it. The bad news is, you can set it and forget it. The idea that we can become complacent either in the investments that we’re choosing, or the tax obligations that we are expecting in the future, which might drive the tax options that we select and the amount that we’re contributing, those need to be looked at regularly.
Back to Beneficiaries (really quick)
I saw a question that just came in. They say, “I don’t think this is true. According to a TSP class I took yesterday, he emphatically declared that the designations are still there.” Well, you know what? If I don’t see it when we log into the account, I’m going to assume for my family’s sake that beneficiary is not on file.
I’m going to make certain that I see it, because I’ll be damned if the last thing that we do on this earth is to leave our family without the money that they’re supposed to have. We can believe that the TSP somewhere in their files has the old beneficiary, and they’re going to go to great lengths to figure that out when we retire (I’m talking about when we really retire and die). I’m not buying it. I’m not buying it because of the absolute cluster that happens when federal employees die, and we are left to deal with their widows who can’t seem to get any answers from the TSP. I just want to be really clear. I get fired up on beneficiaries, but I’ve got to get back to that topic.
Back to Auto-Pilot
Okay, so thinking about auto-pilot, this idea that we set it and forget it. We can become super complacent. We say things like, “I’ve just always done it that way.” But that is not a good enough reason. That’s not a good enough reason just to set things and forget them. Keep in mind that TSP is not going to come out and ask you questions like, “It’s been a while. Are you sure this strategy still works for you?” That is not their role. That’s not their responsibility. It’s not the way it’s structured to happen. We have to really be careful when we’re putting ourselves in auto-pilot or auto-drive mode, and perhaps not paying attention to the very things we should be paying attention to.
Next up. Tax advantages. The good news is you choose to contribute to the Traditional or the Roth TSP. They each have their own advantages. These are called qualified plans. There are tax advantages with each one. The bad news is, if you put all your money in retirement accounts, what happens when you need money for reasons other than retirement? You start a new business, your spouse lost their job, your kid needs some extra money for school. Maybe they got into grad school, and you need some extra help that you weren’t planning on, whatever that might be. If you have all of your money tied up in retirement vehicles, these are called qualified plans, so TSP, IRAs, those types of things, that might leave you with very little access when you really need it before you retire.
I encourage you… I love that we’re thinking long-term goals…I love that… But what are the medium range goals that we have that need to be taken under advisement? We need a plan around that too, not just for the way out their retirement time, but now and what needs to happen so that we have access to money today. Because once this money goes into these qualified plans, until you reach those critical moments where you’re either separating or retiring, or you turn 59 1/2 and you’re still working, then that money might as well be locked in a vault in the bottom of the ocean, as one of our presenters Steve says. You’re not going to have access to it, whether you like it or not, at least not in its totality. There’s loans and stuff like that we’ll talk about, but that is definitely a big deal here. We’ve got to have some medium range goals too, and have those funded properly.
Tax Strategies (Going In)
Let’s talk about strategies with respect to taxes, when the money is going in. When you’re deciding to put money into the TSP, you get to choose the tax strategy that’s best for you. You can go Traditional, you can go Roth, or you could do a combination of both. The bad news is, how do you know what the best option is? How do you know? There are tax strategies that require some sophisticated maneuvering to get it right. Now, I’m not talking about just making the election.
That part’s easy. You log in, you say, “I want all my money to be Roth now,” and that’s what’ll happen. That’s the super easy part of this. But how do you know what the right combination of Traditional and Roth is, and when to put that into effect? Keep in mind, you can’t call a TSP and say, “Hey, I was thinking about maybe doing the Roth TSP. What do you think?” That is not their role. That is not their responsibility to answer that question. If you want that type of advice, you have to look out to the private sector to get it.
Tax Strategies (Coming Out)
Now we’re talking about tax strategies when the money is coming out. You get to choose which tax bucket, either Traditional or Roth, to pull the money from. Now this assumes, of course, that you have put money into the Roth side of the account. If you haven’t, then all you’re going to have available to you is Traditional. But when the money is coming to you, you get to pick which box it comes out of, or which bucket it comes out of. Here’s the bad news. How do you know which is the best option? The exact same bad news as the slide prior. Those tax strategies have some sophisticated maneuvering that has to be done, both when the money goes in and when the money comes out. Again, the TSP is not able to give advice on this topic. When you need money, you can’t say, “Well, should I pull from Traditional or Roth?” The TSP is going to say, “Hey, listen. You tell us what it is that you want, and we’ll just do it.”
Changing from Traditional to Roth
Let’s talk about changing from Traditional to Roth. Let’s say that it’s taken a little while, but you’ve finally gotten the idea of the Roth TSP. Maybe you attended a workshop or a webinar, or a buddy in the office really sat down and explained how this thing works, and that all the growth in it is tax-free. You’re like, “Holy moly, I didn’t know that this is how this works. I have all this money in the Traditional side of TSP. How can I make it Roth?” Okay, you’re still working. You’re still contributing. You’re wondering, how can I do that?
We know those Roth TSP contributions are going to grow tax-free as long as some basic conditions are met. Five years have to pass from the year that you first funded that account, and you need to be 59 and a half before you take the money. Those are two IRS rules with respect to Roth money. Assuming that you meet that, and you’re thinking, “Well, how can I make all the Traditional money that I have in my account, how do I make that Roth?” Well, you are not allowed to do that within the TSP. You’re not allowed to make Traditional TSP, Roth TSP money. This strategy is known as Roth conversion. We do this all the time in the private sector, but it can only be done in the private sector once you separate or retire from federal service.
Let’s say you’re 45, and you’re listening to this webinar because you’re trying to get your head on straight about how all this stuff works. You’re like, “Whoa. I’ve got a bunch of money in the TSP. I’d really rather it grow tax-free, than all be taxable when I take it out. Is there anything I can do between my current age of 45 and when I retire?” The answer’s no. There’s nothing you can do about the money that’s already in there to make it Roth money. Plenty of 401(k)s allow what we call “in plan conversions,” that allow that very strategy that I’m talking about to happen. Unfortunately, the TSP is not one of them.
The G Fund is Safe
Next step. Let’s talk about the G fund. The G fund is safe. That’s the good news. You’re guaranteed not to lose any of your principal or any of your interest in the G fund. Beautiful. The bad news is, your money is going to barely keep up with inflation in the G fund. It’s not where feds go to make it rich. Here’s the sad part about why we find so many people in the G fund for so long, and that is that they’re unsure about what to do, or they’re just scared of making a big mistake. I need you to realize that being too conservative for too long can be harmful, too. We all know the idea of compound interest, and this idea that the longer time that we have, the more we have a chance for our money to compound on top of itself in interest on interest, and that continuing to grow. But that doesn’t happen in the G fund.
So we need exposure to the market to be able to get those bigger gains. Certainly for someone who’s much younger, who has a little bit more of an appetite for some risk, because they don’t need the money right away, that is something to consider. Anybody that tells you the G fund is perfectly safe is not being fully honest, because there’s harm, there’s risk that comes with being too conservative for too long. We need the money to grow, not just keep pace with inflation.
This last bullet here. Not meant as a scare tactic, but I do want to cover this because it happens pretty often. That is, Congress has a debt ceiling addiction to the G fund. What I mean by this is, when we see Congress go into the wee hours of the morning, where the government’s about ready to shut down. Then the next morning you’re wondering, “Do I have to go to work today?” They’re like, “Ta da. We were able to come to an agreement to continue the government being open.” Chances are that happened because they took money from the G fund. The idea that Congress can raid the G fund, even though they promise to put it back, which they always have, in all fairness. But the idea that they can go in and take money from that account to satisfy running the government, without it counting against the national debt, is very scary to a lot of people.
I’m seeing lots of good questions come in. I want to make sure that we’ve got time to be able to answer all these questions. Be as specific as you can in your questions, so that our support team can help you out.
Several Fund Choices
Next up, several fund choices. You can choose from available funds to invest in, so regular funds, lifecycle funds, the mutual fund window. Again, not going to get into the detail of the mutual fund window. If you want to learn more about that, I did an entire webinar on it. We’ll link to it in the show notes on the replay. It’s great that there’s several options for you to be able to invest in. The bad news is, the TSP is not going to help you decide which one is best.
If you don’t have a full understanding of the risk tolerance idea, that gut reaction, that scared feeling that so many people have when they lose money, it is possible that the funds that you select on your own are going to be either too risky or too conservative. All of that is really based on the timeline that you have for needing the money, and the goals that you have set. Again, that’s not to say that you’re going to make bad choices here, but we have the potential to make bad choices because we don’t know any better.
Next up, the TSP bears no responsibility for determining whether the choice that you’re making is appropriate given your circumstance. Let’s say that you are six months from retirement, six months. You realize that you are just not where you need to be. You’ve got to save more. You’ve got to lay it all on the line, because you need a bigger TSP account to kick off retirement. You take all of your money that was in the G fund, and you move it all over to the C and the S funds, maybe even some I fund. You’re not going to get a call from the TSP that says, “Hey, man. What are you doing? You’re about ready to retire. This is way too risky for you.”
That’s, again, not the role of the TSP. It would be unfair to ask that of them. But there probably should be somebody that either you’re asking the question in advance from. Or somebody that’s looking at this like, “Hmm… Are we sure that this is the right strategy to accomplish what you’re looking for, given the risk that’s associated with these types of funds that you just moved to, or that you’re thinking about moving to?” We’ve got to think about those fund choices as they relate to kind of the end result here.
Next up, let’s talk about the agency match. The good news is, the agency matches the FERS employee’s contribution up to 5% of their salary. For anybody who’s on here that’s under the old system, CSRS, sorry, you don’t have any match over there. But for all of our FERS employees, which of course make up the vast majority of the federal workforce, you do have a match in the TSP. The good news is, they’ll give you 5% of your salary. The bad news is, the kind of bad news is that you have to contribute at least 5% every single pay period to get the full match. Every single pay period.
So they’re going to look at your pay period salary level and say, “What’s 5% of that number?” Looking to the amount that you’re contributing and saying, “Did you contribute at least 5% of that number?” If you did, then you get the full match. If you don’t, then there’s going to be some money that you’re missing out on the table. Very important to think about, and we definitely want to make sure that you are getting all of that free money.
Accessing TSP Early
Accessing TSP early. The good news is, if you meet certain requirements when you retire or separate from service, you can access your TSP funds before reaching the age of 59 1/2, and not pay any penalty. You’re still going to pay tax on any Traditional money, but there will be no penalty associated with that. When it comes to retirement accounts like the TSP, like IRAs, the IRS really wants you to wait until you reach the age of 59 to access these funds. Why they came up with that 59 1/2 rule, I’m not exactly sure where that came from, but that’s been the standard for many, many, many years.
But within the TSP and other 401(k)s, you have some special rules. That is, as long as you retire or separate in the year in which you turn 55 or older, you will have penalty free access to your money between the time you retire and the time you’re 59 and a half. Any money you take directly from the TSP. For those of you who happen to be in the special provision category, so law enforcement, firefighters, air traffic controllers, your rules are a little bit different. If you retire in the calendar year in which you turn 50 or older, or any age as long as you have 25 years of covered law enforcement, firefighter or air traffic controller service. That’s a special change that’s just happened here recently, that we want to make sure everybody’s aware of. It essentially said, “If you’re eligible to retire under a law enforcement retirement, you’re eligible to get penalty-free access to your TSP.” Law enforcement firefighter, air traffic controller, that whole group.
Here’s the bad news. I see the TSP use this rule as a reason that federal employees should not move any of their money out of the TSP when they retire. I would say, if you need all of your money to come out of the TSP to use between the time you retire and 59 1/2, I would agree. You should leave all the money there, if you plan to use it all by the time you’re 59 1/2. But that’s not what most people do. They want to use it for the rest of their life. You need to know that you’re allowed to keep money in the TSP, and use it prior to 59 1/2.
Again, if you’ve retired under these special rules, say you’re 55 when you retire, you can access that money for the next four and a half years penalty-free, and you’ve left enough money behind to do that. Meanwhile, the remainder of your money can be moved out, if you so determine that that is appropriate for you. Again, lots of strategies out there, but something to consider when we’re thinking about what things can really look like down the road when you’re taking money out.
Now let’s talk about peer pressure. The good news is, you might be encouraged by your coworkers to participate in the TSP. I hope that you are. I hope that you have mentors around you that are encouraging you to save for your future. The bad news is that sometimes you can feel a little bit pressured to invest in a certain way, or make a change that you’re not really comfortable with. Most of the time this happens when we find a self-appointed office expert. Pretty much every office has one. It’s the person in your office who thinks they know what everybody else should be doing with their money. They’re very, very happy to tell everybody, even when they’re not asked. That’s the self-appointed part.
Here’s the deal. I think most of the time this is very well-intentioned advice. They found something that worked for them in their circumstances, and they feel compelled to tell others about what they found. That’s great, except if it’s not good advice for you because of your financial circumstances, this can cause a real problem, a real problem. Always think twice before taking advice from a self-appointed office expert. There is no recourse if they provide you bad advice. We want to make certain that you understand that this person doesn’t really know your financial circumstances, and that can be frustrating.
Next up, let’s talk about TSP loans. The good news is, you can take a loan from your TSP while you’re working. Unfortunately, that’s also the bad news. Because when we take from retirement accounts, we can be super counterproductive and jeopardize the end goal that you really have for your money. While any of that money that you’ve taken in the form of the loan is out of the TSP, it’s not earning any interest. It’s not earning any gains that it would have, had it been in the TSP. Now the flip side of that, if we’re being fair, it also doesn’t experience any loss. If you took a TSP loan and the market tanked after that, then that money of course didn’t get lost along with your other money, in full transparency here. But in reality, if we’re trying to make sure this account continues to grow and grow and grow over time, we’ve got to be thinking about what the opportunity loss is here by the money not being there to grow.
Here’s the part of the loan process that a lot of people don’t know, and we get pushback on this all the time. Let me explain it as clearly as I can. We have a whole diagram in our workshops, but let me just verbally explain how this works. When you repay your loan, you pay that with after-tax money, which means you defeat the purpose of the tax deferred status that you have. Follow along with me. If we’ve got the money going into the TSP, let’s say it’s the Traditional side. When you put the money in, you don’t pay tax when it goes in.
Later, you decide you need $30,000 out of that account in the form of a loan. They carve out $30,000, they pay it to you in a loan. It’s not taxed at that point either. The tax is kind of hidden here, because it’s when you repay the money that you have to pay the tax on it. You’re paying the repayment of your TSP loan with after-tax money. So you don’t get the same tax advantage that you did the first time when the money went in. Now you’re paying the tax. Here’s the real kick in the teeth, though. Later, when you go to take the money out of the account for good, that same $30,000 that you originally borrowed and paid tax to put it back in, is now going to be taxed again. There is a lot that goes into this, but loans as a whole we want to try to avoid within retirement accounts.
Lots of great questions coming in. I’m going to try not to get distracted here, because I want to get through all these slides here.
Required Minimum Distributions
Next up, required minimum distributions. The good news is, the TSP is going to make sure that whatever the IRS says that you have to take out of your TSP account gets pushed out. Either by your own accord, of you going in and electing a distribution that satisfies the dollar amount that needs to come out, or if you haven’t made an election at the required time, they are going to push the election out for you. You’re not going to separate any penalty, like you would out in the private sector. At this point, it’s a 25% penalty on any amount that you should have taken, and that is a pretty steep penalty.
The bad news is that right now the Roth TSP is included in the calculation for the Required Minimum Distribution. What this does is it causes participants in the TSP to perhaps take more from their account than they needed. You see in the private sector, Roth IRAs are never subject to Required Minimum Distributions, but for some reason in the TSP they are. Luckily, this rule is changing in 2024. So as long as you’re not retiring and taking money from the account in the Required Minimum Distribution phase, you don’t have to worry about this. 2024, this rule is changing, so the Roth TSP balance will no longer be included in the calculation.
If Your Spouse is the Beneficiary
Next up, if your spouse is the beneficiary of your TSP account. The good news is, the TSP will allow your spouse to take over your TSP account, and they can leave it in the TSP. Several slides back, we talked about just double checking your beneficiaries. Well here, we’ve assumed that your spouse has been your beneficiary. You die. The spouse is able to leave the money in the TSP. They might not know any better, they don’t really understand any of the ramifications. The bad news is that there are some unexpected issues that arise if your spouse leaves the money in the TSP. If your spouse leaves money in the TSP, again after you die and they’ve inherited it from you, they’re going to naturally name a new beneficiary.
When your spouse dies, the next beneficiary, the one they’ve named, let’s say it’s your children, those children will be required to take all of the money in cash at that time. There will be no opportunity for what we call stretch IRAs, which are inherited IRAs that can be stretched out over a long period of time. The rule right now is that account needs to be depleted in 10 years. But that’s way different than one of your kids getting a check for a half a million dollars that they have to claim as income in one single tax year, and cause an enormous and really unnecessary tax issue.
Here’s the deal, though. With respect to this scenario, while your spouse can leave the money in the TSP, they can also move it out to an IRA. It’s a special type of IRA in this circumstance, because they’re inheriting this money. But if they were to remove it to that account, and then name a new beneficiary, those beneficiaries would still be able to do the 10-year stretch. All because we didn’t know the rules of the TSP and how this really worked. Something we really have to think about. We want someone looking over our shoulder, and making sure we’re doing the right thing.
Next up, let’s talk about tax diversification. I’ve seen a couple of questions that have come in so far on this. I think you thought I wasn’t going to cover it, but I assure you I am. That is, you can contribute to the Traditional or the Roth TSP in any combination that you wish, but you are not allowed to invest Traditional and Roth funds differently. For instance, you are not allowed to say that you want your Traditional contributions to go to the G fund, but your Roth contributions to go to the C fund.
It’s a little bit of a nuance here. If these same types of accounts were out in the private sector… G fund of course is a very safe type of fund. A C fund is very aggressive, in the S&P 500. We may want different funds to have different tax strategies or tax diversifications that go along with them. We have to be looking at that as we’re thinking about how all of this is going to play out long term.
Next up is fund distribution. I’ve seen a couple of questions on this topic as well. You are able to take money from the various funds that are invested in the TSP, but you are not allowed to decide which of those funds to pull your money from when it comes time to take the money out of the account. When money is withdrawn from TSP, it comes out proportionally to the funds in which it’s currently invested in. If you have half of your money in the G fund and half of the money in the C fund, the money is going to come out in that same ratio.
Having “the Talk”
Let’s talk about having the talk. We’re not talking about the birds and the bees talk. Get your mind out of the gutter here. We’re talking about what to do with the TSP. Here’s some observations. The transition that happened within the TSP in June of 2022, this was a fumbled transition by every measure. Everything from the beneficiary problems that I mentioned earlier, to past statements being lost, like all the historical documents, access to the website, the withdrawal process, all of it. It was a mess. Frankly, it still is a mess for so many people. Many felt like there were a lot of unnecessary changes that were made in the TSP itself. Whether that was the website that feds didn’t feel needed to be changed, or the new statements.
The new statements, while there’s some additional information on there, here’s the challenge. Feds can’t even find a pie chart that shows the percentage in which they’re investing into the different funds on their statement. That pie chart doesn’t exist on your statement. You have to go in and do the math of all of the contributions, and how it’s being divided into each of the funds. There’s some basic things that the TSP could do to make this so easy for everybody, but unfortunately they’re simply not doing that. Here’s I think the challenge for most people. There doesn’t seem to be anybody taking responsibility for TSP’s mistakes.
Now, listen, we all realize mistakes happen, but when they’re as large as they were and as widespread as they were with the TSP’s transition, the fact that nobody stepped up to say, “This was my responsibility, and this is going to be fixed. We’re going to make everybody whole,” was kind of surprising to me.
Let me give you just a quick example. We’ve had quite a number of federal employees trying to transfer their money out of the TSP into an IRA, either traditional and/or Roth. The paperwork that’s now, of course, all online that is used to make all this happen is so poorly worded that it is not clear to participants what they are supposed to do. So they do the best they can with the elections that are being made right there on the screen.
Unfortunately, we’ve had several cases where feds are trying to move out only their Traditional money or only their Roth money, to a custodian, to a new company, and the entire account was moved. If we’re moving all the money to a Roth IRA, that’s all the Roth TSP to a Roth IRA, there’s no tax at that time or anything, and no tax burden at all. But if Traditional money goes over to that account, we’re going to have a big problem, because all that’s taxable money. So we have a huge 1099 problem of all the money that’s coming out, and all of that will have to be fixed.
We want to be really careful in what we’re looking at, before we decide that we’re moving money out of the TSP. It’s not to say you shouldn’t do it, but the problems that have existed in their system, that aren’t user error, but system errors, is causing a lot of problems. This is true as well if you’re just trying to receive the money yourself. It has really nothing to do with the IRAs in the private sector, but simply taking money out of the TSP as a whole. Then participants not receiving payments like they’re supposed to. That’s been a challenge as well.
Next step, blind loyalty. Federal employees often have a loyalty to the TSP that I would offer might not serve them well into the future. I’m not saying the TSP is a bad program, or that you’re crazy if you want to stay. I’m just saying, if you’re blindly believing that the TSP is some perfect product, that can be really dangerous. I don’t want you to blindly believe that any product out there is perfect, without doing your due diligence. That’s true for both the TSP and any private accounts that you might have. We want to be looking at this with a sharp eye, and making certain that we’re really doing what’s in our best interest.
To do that, you really have to be honest with yourself if you’re capable of properly managing a strategy of retirement income planning for the money that you have accumulated in the TSP. Guys, it’s complicated. You’ve been on the easy side of TSP up to this point, where you’re just putting the money in. When the money comes out, it gets a little bit more complicated than that. Please, don’t be afraid to get help if you need it. I’ve seen a couple of comments or questions come in that I want to address real quick. All of you who have followed us and know what we do, we do retirement training. We have a network of financial professionals we work with. I unabashedly will tell you that working with a financial professional will put you in a different category of success.
I’m just going to put that right out there, because people who have a mentor and guidance when it comes to retirement planning have a far greater chance of achieving their goals. Whether that’s psychological, or their strategy from a financial planning standpoint, a lot of that goes into this equation here. When I see comments like, “Well, you should really disclose your relationship with financial professionals.” You know what? If anybody pays attention to anything that we do here at ProFeds, you know that we are connected to financial professionals. Because without them, we don’t stand the appropriate chance of getting to success like we should. I don’t hide behind that at all.
That is something very candid that we talk about every single webinar, every single workshop, because of the importance of that strategy. Very, very important that we are honest with ourselves about our ability to do this on our own without anyone’s help. What is the likelihood that we are going to get to success? Only you can answer that for yourself. I would argue even the best athletes have coaches. I have a financial professional. I work with these benefits all the time. I still want guidance on what I’m supposed to be doing. So don’t look at that as a negative thing. That’s actually a great positive, that you can leverage the expertise of another individual who does this day in and day out, and can help you.
As Time Changes
So here’s the deal. As time changes, we need different things at different times. While you’re working, you’re going to be in this accumulation phase. That’s probably where you are right now in the TSP. You’re putting money in. You’re gathering assets. You’re growing them, hopefully, fingers crossed. You’re hopefully creating these future tax opportunities, but it requires you to make some of those decisions today, like the Roth TSP for instance. But in retirement, things look pretty different. At that point, you’re in what we call the distribution phase of investing. This is where you strategically use assets, and you capitalize on the tax opportunities that you set yourself up for while you were still employed and contributing to the account.
Both of these things, both of these stages that we find ourselves in are important. We don’t want to screw up either one of these, but they both look very, very different. The accumulation phase, again, is where most of you sit in the TSP right now. This is where you’re working. You’re continuing to contribute, and hoping that you’re making the right decisions for the Traditional or the Roth, and which funds you’re invested in. Once you step into retirement, you can’t contribute anymore (so we know that ship has sailed).
Now the question is, how do I use this money properly so that I’m able to live the retirement that I want and not run out of money doing it? That’s the idea. That’s the goal I think everybody has when they step into retirement. They don’t want to have to return back to work. They don’t want to have to backpedal into any of the financial decisions that they’ve made. They want to be looking forward, full steam ahead, knowing that they’ve made a lot of great decisions that have teed them up for the future.
Quick wrap up. I encourage you to double check your retirement math. If you have not already, please attend one of our workshops. If you show up and you just listen, and you do nothing else in that session, at least you’ve heard it. Now, of course, we’re going to encourage you to take action and do something about what you’re learning, but this in-person training is face-to-face. We have an opportunity to answer your individual questions. There is no cost for you to attend. We’re going to cover all of the benefits that you have available to you as you’re stepping into retirement, and the decisions that you’re going to need to make about each one of those benefits. Go to: FedImpact.com/attend
If you so choose to get some more clarity on those federal benefits, you have an opportunity to do that one-on-one with a financial professional who is in our network. Again, not hiding behind that at all. I want that to be straightforward for everyone. That the reason we work with financial professionals is they give an opportunity for you to have a better chance for success in retirement. Don’t think you can do this on your own. I don’t do this on my own. Tiger Woods doesn’t play golf on his own. Don’t be bashful asking for some help.
The handouts in the replay. We’ve got of course the handouts here. If you haven’t downloaded them already, you’re welcome to do so. Otherwise, they’ll be available along with a replay link in the email that will be sent out shortly after today’s session ends. Give us a little bit of time to just clean up the recording, get it posted, all that good stuff. But we’ll be very delighted to be able to get that replay to you if you need to take another listen.
Our next webinar will be on March 31st. The topic will be “Maximizing annual leave and sick leave.” We hear some confusing comments about annual leave and sick leave from feds that we’re working with. We want to kind of clear the air of how this really works. And really to highlight the differences between the two different types of leave when it comes time to retire, and how to maximize each one of them. You can sign up for that webinar just like you did for this one at FedImpact.com/webinar. We would be able to deliver another lively session next month on this topic. Annual leave and sick leave, always a hot topic for feds to make sure they get that right.
That is it for today. Thank you very much for joining us. Always a lot to cover. I appreciate the questions and comments that came in. I think you can probably tell I’m a little fired up on this topic. Because I think that feds have such an opportunity to make good decisions for themselves, I want them to really see how the TSP operates, good and bad. There was good and bad on every one of these slides that we mentioned, and we want to make sure we’re going in with eyes wide open to have the best chance for success.
Thank you very much for joining us. If you want to come to one of our workshops, you can find all the locations at FedImpact.com/attend. To sign up for that next webinar on annual leave and sick leave, go to FedImpact.com/webinar. We’ll see you next month. Thank you, guys.