Transcript of this webinar:

Hello and welcome everyone to the FedImpact Webinar today on optimizing your TSP for 2024. Now, there are lots of topics that get feds all riled up, and TSP is certainly one of them, and so we want to make sure that you are prepared with the most up-to-date information for what to do in the TSP this coming year so that you are walking into the New Year strong. Real quick, as everyone’s getting in and getting settled, today’s topic is one that we try to hit on each year as the natural changes in the TSP happen, and so always delighted to have such a broad audience with us today from tons of different agencies and walks of life. Welcome everyone for today’s session. Now, like we always do, we are going to be answering questions in the chat. The Q&A area right in the webinar portal is where our support team is standing by to be able to answer those questions via text.

I’m going to stay nice and focused on delivering today’s material, but they’re going to be standing by to answer your specific questions. All that I ask is that those questions pertain to today’s material, so we’re sure to be able to get to everyone’s questions. Now, handouts, they are available for download. You can either download them right next to the Q&A area in the webinar portal, or if you look to the bottom of your screen, you’ll see a link as well if you’re having any trouble accessing the other way. Now, like we always do, this session is being recorded. We’re going to give you instructions on how to get the replay following today’s webinar, so you’ll receive that by email. And stay until the very end of today’s session. We’ve got some special FAQs, very common, very, very common questions that we get that maybe confuse federal employees that we want to get some clarity to so that you know exactly what the rules are and not walk into these decisions with any misconceptions that aren’t true.

Okay? All right, so you guys know me. I’m Chris Kowalik, I’m the founder here at ProFeds. We’re really delighted to be able to bring all sorts of different types of training to federal employees. Of course today we’re on a webinar, but we also have our flagship program, the FedImpact Retirement Workshop as well as the FedImpact Podcast. We’re delighted to be able to talk to you guys on lots of different platforms and certainly for you to join us today. And like I mentioned, our support team is standing by for your questions on TSP.

All right, so optimizing your TSP for 2024. Today we’re going to highlight the important changes for next year and how to leverage the TSP to your advantage. Now to give you a little bit of an idea of where we’re headed on today’s session, let’s talk about the brief agenda here. We are going to talk about the new contribution amounts allowable by the IRS. Most of you know for the most part those change each year. We’ll also talk about the match to make certain that you are getting all of the free money provided by your agency. You’d be surprised how many employees miss out on the match because they don’t understand the matching rules. And so we want to get those nice and clear for you today.

Now the funds of course, we’ve got different funds in the TSP and how you choose to invest is totally up to you, but we do want to make sure that you’re fully aware of what those different options are. And then the part that probably is most confusing to folks is the tax portion of the TSP and understanding the different tax diversification options so that you’re always keeping an eye on retirement, which is when you’re actually going to use this money. Now this slide, what this webinar will not cover is super, super important. We are not here to give you advice on what to do in the TSP.

We just want to show you what the different options are that you need to be considering in the context of the bigger financial picture that you have so that you can make the decisions that are best for you and your family.

Contribution Limits for 2024

The first pit stop on our journey is to talk about the contribution limits to the TSP. So we know those typically change year to year, and so we want to make sure that you know what those limits are for next year. So for 2024, the IRS has set the new contribution limits. They do this not just for the TSP but for 401ks, IRAs, that type of thing. And so the limits have changed For the regular contributions, they are now $23,000 per year or about $885 a pay period, and these are open to all employees regardless of your age.

It does not matter if you are an 18-year-old who was just hired or the 65-year-old who’s about ready to retire, you are allowed to contribute $23,000 per year. Now the catch-up contributions, this is a special allowable limit set by the IRS. It is currently $7,500 a year. This one did not change from 2023 and it’s essentially allowing you to add in extra contributions above and beyond the regular contribution limit. So here we’re talking about $30,500 total as long as you are going to be turning age 50 or older in this year, so come January 1st, 2024, you might be 49 years old, but you’re going to have your 50th birthday in that year. And so you’re able from January 1 to start contributing that extra contribution amount in the ketchup contribution category so that you hit that 30,500 if your wish is to max out the TSP.

Now, some of you are not in a position to be able to do that and that’s okay, but we do want to make sure that if you are having your 50th birthday in 2024 or of course you’re older than that, you are able to add in extra contributions under the catch-up contribution provision and really accelerate how much you are saving for retirement within your TSP. Now I do want to make a special note. This is perhaps for folks a little newer to TSP or just maybe really starting to test the limits of the TSP with respect to your contribution amounts and it’s the asterisk at the bottom of this slide. These limits that we’re talking about, the 23,000 or the total of 30,500, if you’re also doing catch-up contributions, only count your contribution as an employee. It does not count your agency’s contribution in your match.

We’re going to talk more about the match here in a moment, but it’s important to know what number you’re counting so that you understand what the true limit is. I would hate for an employee to miss out on the opportunity to contribute more to the TSP because they factored in the agency’s contribution in this total limit where it doesn’t belong. Okay?

Agency Match

All right, next step, let’s talk about that agency match. Man anytime we can reach up and grab some free money, we definitely want to do that. Unfortunately, we see too many people missing out on some of that free money and so we want to set the record straight today. In order to get the full match from your agency’s contributions, you must you as the employee must contribute at least 5% of your salary to TSP each pay period, each pay period. I’m going to say it twice, I’m going to underline it on the slide.

Each pay period, you must contribute at least 5% of your salary to the TSP. Here’s the breakdown with respect to the match, you are automatically going to get 1% of your salary dumped into your TSP account no matter what you do, okay? This is just an automatic contribution from your agency, 1% of your salary, but in order to get the other 4%, you must contribute a total of at least 5% of your salary. Now, there’s a whole breakdown schedule. I’m not going to go into the details of that. We really want every federal employee, no matter if you were just hired in federal service or your leaving service to at minimum contribute 5% of your salary. The reason is this is a 100% return on your investment as long as you are willing to contribute 5% of your salary to your future, so is your agency.

And so we must must, must, must get that free money. Now, sometimes even though most well-intended federal employees can miss out on the match. I’d like to review a case study with you today just to put some numbers to all of this. Let’s say that we have an employee who’s 45 years old. They’ve got aways before they’re planning to retire. They haven’t hit that magic 50 yet, and so we’re going to take a look at their salary, how much they’re contributing and what happens to the match. Again, 45-year-old, they have a salary of a $100,000 per year. Yours might be higher or lower. Just roll with me on the mat here. So this person plans to contribute the full amount that the IRS allows this year. That’ll be $23,000 to the TSP. That is exactly 23% of their salary. The question is will they get the full 5% match?

You might automatically say yes because you’re like, well of course they’ve contributed at least 5% of their salary to the TSP, why wouldn’t they get the full match? But the real answer is “it depends.” It all has to do with when this employee puts in the money. There’s a lot going on this slide. I want you to follow along with me and scenario number one right in the middle of the table. So if the annual income is $100,000 and this employee puts in $884.62 cents per pay period, that will get them exactly $23,000 in the TSP and they did that consistently over all 26 pay periods of the year, their automatic 1% contribution from their agency is going to be $1,000. Again, 1% of a hundred thousand and then they got the full 4% match, another $4,000 because every single pay period, they contributed at least 5%.

So they get a total of $5,000 off $100,000 salary. Easy math. But scenario number two is one we see happen way too often and that is someone who still wants to put in the $23,000, they just want to compress their contribution timeline to be able to have maybe some extra money at the end of the year or maybe they get started late, they forgot to make some changes, and so they’re trying to get caught up on the schedule. In this scenario, this person still makes a hundred thousand, but they’re going to put in $1,150 a pay period. They’re still going to get their full $23,000. The IRS doesn’t care when you put it in, right? You still get the $23,000 tax advantage or wherever the advantage happens, whether it’s now or later traditional or Roth. We’ll talk more about that in a minute, but in this case, because the employee accelerated their contributions at $1,150 a pay, the TSP is going to say, hold on, this account is full and we’re not going to accept anything after pay period 20.

You can’t put it in anymore. You hit your max at $23,000. And so what happens to the match? Well, the automatic 1% is just as the name would imply it is automatic. They still get their $1,000 from their agency. But look what happened to the matching 4%. They only got matched on the pay periods in which they were contributing pay periods one through 20. Pay periods 21 through 26, they got no match and so they missed out on almost $1,000 of matching money for that year, okay? Now yours might be higher or lower depending on your salary and your contribution schedule as far as how quickly you are putting money in, but I refer to this as an unforced error. There is no reason to miss out on the $1,000, the difference between the $4,000 and the $3077. There’s no reason for this. Just spread out your contributions. You can make the math really hard on yourself, or you could just do this right from the beginning of the year and make it nice and simple, okay?

We’ll talk about some of the timing of all of this here in a moment. The real takeaway from this section is I want you to make sure that you spread out your contributions over all 26 pay periods and spread the word. Tell everybody in your office to make sure that they’re doing this because there is zero reason to miss out on that agency match.

TSP Funds

All right, let’s shift gears here a little bit to talk about the TSP funds themselves, like what you’re actually investing in. We have the five core funds within the TSP, the G, F, C, S and I, they all represent different parts of the market. The G Fund is your government securities fund. There is no index per se. The word index refers to the stock market and because the G Fund is not in the stock market itself, it’s just going to get an interest rate and that changes every quarter.

Here’s the deal on the G Fund, you’re guaranteed not to lose your principal or your earnings in the G Fund, but you’re also guaranteed not to make a whole lot of money, right? The G Fund is not where the big gains are. It’s also not where the big losses are. I’m not casting judgment on the G Fund, there’s a place for that, but typically it is for those much closer to retirement as they’re looking to protect a bigger and bigger portion of their portfolio within the TSP. Now it’s indexed against Barclay’s Capital U.S. Aggregate Bond Fund. They have to put an index meaning that it’s tied to something so that we know how it performs. Government and corporate bonds operate differently than stocks do, but the idea is that hopefully you’re making more money over the long term.

Then we have the C, S and I funds. These are the funds specifically in the market. We have the C Fund, which are large U.S. companies, and it’s indexed against the S&P 500. The 500 largest publicly traded companies in the U.S. stock market. The S Fund is a mixture of small and medium size U.S. companies and it’s indexed against the Dow Jones, what we call the U.S. Completion Total Stock Market index. This is not the Dow Jones Industrial Average. I want to be clear here. What the S Fund is if we take the entire U.S. stock market and we subtract out the 500 largest publicly traded companies in the market, the S Fund is everything else. It takes a wide swath of different types of companies who are publicly traded into account in the returns and losses in the S Fund. Next up, we have the I Fund, which are mostly large foreign stocks, foreign companies, and its indexed against Morgan Stanley’s Capital International EAFE Index, or the Europe Australasia and the Far East, okay?

Now each of these funds carry risk to some degree. On the more extreme end, the C, S and I funds carry risk because you can lose not only your principle but the earnings that you’ve made over time. Also, that’s where you have the most opportunity for gains. The G Fund, on the other hand, even though people say the G Fund is risk-free, I would argue something different. For someone who is too conservative has too much of their money in the G Fund, the risk that they face is that they’re missing out on the opportunity for the game when it happens. Now, I’m not suggesting that you take all your money from the G Fund and go put it in the stock market, but what I am suggesting is that there is inherent risk by being too conservative because we keep our money benched, we keep it on the sideline instead of putting it in the game, okay?

It’s all a matter of choice of what you’re going to invest in, but it is important to know that there are risks and rewards to each one of these different types of funds. All right, next up we have the TSP lifecycle funds. There are 10 different lifecycle funds. We have them illustrated here on the screen. It used to be some nice little pie charts and then they added five more and it made it hard to put all these charts on here. Your eyes kind of went sideways. I’m going to start with the 2065 fund on the far left-hand side. So the 2065 fund, there is an itty bitty portion of that. That’s the G and the F fund. It’s such a nominal amount that it’s hard to even put it on the chart, okay? It’s less than 1% in each one of those funds.

Then we have 51% of the account that’s in the C Fund, 13 in the S and 35 in the I. By any measure, the 2065 fund meaning people who are going to need the money starting about the year 2065, that’s how the lifecycle funds are organized, that is a super aggressive fund because again, people don’t need the money right now so they can go let it ride a little bit and try to capture all those gains. Now, the 2060 and the 2055, although the percentages look identical here, there are minor, minor differences, not enough even for our chart to pick up. For the most part, these are all structured exactly the same right now, super minor differences, but again, they’re designed for people to put the money in the account in the lifecycle fund based on when they plan to start needing their money. Is that around the year 2065? Is it around 2060 and so on?

You’ll notice, and I’m not going to go through each one of these, but you’ll notice if you keep your eye on the orange part of the graph, the G Fund, you’ll notice that over time the lifecycle fund gets more and more conservative. So a bigger portion of that portfolio goes into the G Fund where it’s “safe.” You’ll also notice of course, the opposite of that statement is less and less of the account is in the market based part of the TSP, the C, S and I, which of course is the more volatile portion of the TSP. Some interesting observation is the percentage of the bond part of this portfolio, the F Fund doesn’t change all that much once you get into the 2050 and beyond. Next up, we have the mutual fund window within the TSP. This is something that is now available in the TSP. There’s a wide variety of different options to invest in mutual funds, but it is important to know that for you as an employee, you cannot invest directly into the mutual fund window.

You first have to invest in the core funds, again, the G, F, C, S and I or through the lifecycle funds to those core funds, and then you’d have to transfer your money into the mutual fund window. There is a minimum initial transfer of $10,000 if you want to participate in the mutual fund window, and you are not allowed to exceed more than 25% of your total TSP value at the time that you transfer it. I will share with you that very, very, very few employees do the mutual fund window. I think TSP maybe missed the mark a little bit here on what they thought people wanted, but it’s a challenging piece. I’m not going to go into great detail on the mutual fund window today. It’s not part of the changes that happen each year. It’s simply available to you to be able to move your money around within the year. Let’s talk about these fund choices in the TSP.

For your existing money in the TSP, these are contributions you’ve already made to the TSP, you are allowed to choose to be invested in any of the funds that you wish the G, F, C, S and I, the lifecycle funds and or the mutual fund window, and you can do that in any combination that delights you, okay? Now don’t confuse yourself and make this harder than it needs to be, but you have some freedom in the TSP to decide where that money is going to live. And that of course determines the rate of return that you are going to get in the TSP. Up to two times per month, you can change how your existing money, that’s the money that’s already in TSP is invested. This is called an interfund transfer. There’s some different names for it out there, but the idea that you’re just moving around the money that’s already there. It’s not investing new money, it’s just moving around the money that you’ve already put in the past.

If you exhaust those two transfers in the given month, the only thing you’re able to do at that point is to move to the G Fund for the remainder of that month and then the next month you’ll have two more opportunities to move around your money. There used to be an unlimited amount of transfers that you were able to do in the TSP of your existing money. We found that there were a lot of day traders and the TSP felt that was a really expensive thing for those folks to do, and so they put this limit on your ability to transfer money in the TSP a couple of years back. All right, for your new money in the TSP, this is your future contributions that you’re making to the account. You can choose for those to be invested in any of the funds that you wish when they enter into the account, either directly to the G, F, C, S and I funds or to a specific lifecycle fund.

Again, those lifecycle funds are made up of the G, F, C, S and I. It’s just a different version of how you put your money into the account, in what limits for each one of the funds that you’re contributing to. Now as far as the fund choices in the TSP throughout the whole year, you can change the amount of your new contributions and you can also change the funds that your new money will be invested in. You can change the dollar amount or the percentage of the new contributions. And with that, you can say where you want that money to go, which funds you want it to go to. Again, the regular funds, the G, F, C, S and I or the lifecycle funds that are a mixture, a predetermined mixture of the G, F, C, S and I.

Tax Diversity

All right, let’s talk now about tax diversity. You know that there are some tax diversity options in the TSP, but you might not really understand how they work and that’s okay. We’re going to set the records straight today. With the concept of tax diversification, the idea here is that you have different tax buckets and you get to choose when to take the money from each of those buckets. Is it taxed now? Is it taxed later? Is it taxed never? Okay. There are different types of buckets that are out there, and in an ideal world, each of those buckets work independently of one another, meaning that you are free to choose which bucket to take money from at any given point in time in this case in retirement, okay? That’s the idea of the overall tax diversification concept. Within the TSP you have two different options.

You have traditional and you have Roth. I want to talk about those tax advantages. For the traditional account, when the money goes in, you are going to save tax today on the principle that you are investing, okay? Because you know you’re not taxed on the money that you contribute to the traditional side of your account, it’s adjusted on your tax return. That principle that you contribute is not taxed when it goes in, but you bet your bottom dollar it’s taxed on the way out and it’s fully taxable at whatever your tax rate is when you receive the money later. What I don’t know that a lot of folks understand and fully appreciate is that all of the growth on all of the money that comes out of TSP is also fully taxable.

If it was traditional money that went in, when that money grows based on the different types of funds that you have and your return on investment, all of the money that you take that’s traditional money is going to be fully taxable regardless of whether it was your principal or the growth on your principal. So, you will pay tax later on both the principle and the growth on your traditional money. Now for many years, the traditional option in the TSP was all that you had. It wasn’t even an option, it was just the standard way that the program operated. Several years back, back in 2012, the Roth option was introduced to the TSP.

In this scenario, when the money goes in, you’re going to go ahead and pay the tax today on the principal, you’re just going to bite it. You’re going to say whatever that is, I’m just going to claim it as taxable income in retirement. I’m going to contribute it to the Roth TSP and here’s the good news. Although it’s taxed on the way in, it’s not taxed on the way out, and that’s true for the principle. That’s the money you put into the Roth TSP and all the growth on that money, okay? You’re not going to pay any income tax on the principal or the growth that comes out of the Roth TSP. Okay? Now some people will argue they think they’re going to be in a much lower tax bracket in retirement. I would argue that’s not typically the case for most people, especially federal employees who have a fully taxable pension and a wide variety of other assets to be able to pull from.

I would highly encourage you to look at this Roth TSP and decide whether it’s the right move for your family. But I think everybody likes the idea that there’s a bucket of money to pull from in retirement that you don’t have to pay tax on, but it does require a little bit of an upfront investment, so to speak, or a commitment that you’re going to go ahead and pay your tax today so that you don’t have a tax on the growth in the future. All right, when it comes to the TSP, there are some limitations in place as far as using this money. The first part is the TSP does not allow you as the participant to differentiate how the traditional or the Roth money that you have in the TSP, how those are invested, okay?

You are not allowed to put your Roth contributions in the C Fund and your traditional contributions in the G Fund as an example here. It’s important when we think about going back to those tax buckets, the tax diversification strategy, the idea is in an ideal world, these work independently of one another, and so you might choose to have your never taxed money in one bucket, your now taxed money, your Roth money in a different type of fund, and you might have your traditional money, the one that you know is going to be taxed later operating in a different type of fund. You are not allowed to do that in the TSP. It’s just one of the limitations in the account that I think is important for you to realize. Whatever you’re doing in the TSP, whether it’s traditional or Roth, all of those funds are invested in exactly the same way. So, they’re going to perform exactly the same way. They’re just going to be treated differently when they come out.

Timing Your Changes for 2024

We’re at the point of the year that feds are thinking about the changes that they need to make for next year, specifically those who are trying to maximize what they’re getting into the TSP based on the new IRS limits. I want to talk briefly about the timeline for changes. If you’re thinking about making changes to your TSP for 2024, you’re going to either log into your TSP.gov account or to your agency system, whatever that might be, myPay or a slew of other types of portals that you’re able to get into, make adjustments to the contributions that you’re making to the TSP. Every agency kind of has their own thing, but whatever that is. You want to make sure that you’re making changes effective in the last pay period of 2023, so that the first payday of 2024, which happens to be January 4th, that it includes the new contribution amount.

The timing of all of this always seems to get folks a little bit sideways. I want to show you even a little bit more detail than what we have on the screen right now. There are two different methods for making the changes. Method number one is you could set the effective date. If you log into TSP prior to December 17th, you’re able to go in and make the changes to your contribution amount and you simply state that you want the effective date to be December 17th, 2023. Now, method number two, if you wait to make those changes, you’re going to want to log into the TSP during the last pay period that is going to be payable in 2023, which happens to be December 3rd through the 16th. Within that timeframe, you want to log in and make the changes to the contribution amount and just the normal rules in the TSP is if you make a change to your contribution amount, it will become effective the next pay period.

In this case, it would become effective December 17th, just as if you had logged in now and set the effective date as that time December 17th. Okay, so hopefully that’s helpful to know when you’re supposed to log in. You don’t have to do it right now, but if you plan to get busy in the first part of December and you fear that you might forget, then you might want to just pop in there right now and simply set the effective date. This whole concept of the timeline for making the changes is most important for those who are trying to max out the TSP and they want to make sure they get the math right from the very beginning of the year, okay? If you’re only putting in 5% of your TSP, there’s not really a change that you’re needing to make, but certainly if you want to keep upping it, if you want that to be effective, the first payday of 2024, which is when the IRS cares that you’re making the contribution, you want to make sure to have that happening effective date December 17th.

Updating Your Beneficiaries

Next up, update your beneficiaries. This has nothing to do with the changes that happen for 2024, but please just go in and make sure that the right person is named to receive your TSP account in the event that you die, okay? You don’t want to have any former spouses, long-lost girlfriends or boyfriends, anybody you have otherwise fallen out of love with listed there. Please make sure to go in, keep a copy in a safe place for your family to be able to find it. You do not want to lead this up to chance and you have absolute control over who gets your TSP money. Make sure that you’re effectuating that by completing your beneficiary form.

You want to make certain that you have a valid designation of beneficiary on file with the TSP. If you remember from our webinars and podcasts last year, when the TSP made all of these changes, there were lots of beneficiaries that fell off of the TSP records and you want to make sure that the person you think you’re giving your money is actually getting your money by having them listed on the form. So, log into TSP. If you see them, great, keep a copy of it. If you don’t, make sure that you submit a new designation of beneficiary right there on your TSP account online.

Here’s the deal. Whoever is named on your TSP beneficiary will get your money. If it’s a former spouse, someone else that you no longer want to get your money. If their name is listed, they are getting your money. It does not matter what your will says. It does not matter what your estate plan says, your trust document, for instance, your designation of beneficiary supersedes all of those other tools. You have to make sure the person you want to get your money is listed there. You can log into TSP.gov to update your beneficiary. There’s a whole process there. While I don’t love the process, it’s at least there and you can make sure that you submit the information as you intend.

Here’s my tip for you. Even if you think you have a beneficiary designated, please log in to double check. My husband is a newly retired federal employee, just retired in October and last summer when all of the changes in the TSP happened, it turns out that one of his beneficiaries fell off of the account. It was the contingent beneficiary, but it fell off, and so we had to go through the process to log back in and resubmit that. Even if you think you’ve done it in the past, please make sure that it’s still on file with the TSP.

Frequently Asked Questions

All right, the next step is part of my favorite section of these webinars and that is the frequently asked questions. As much as we can put things in bullet forms, sometimes when we just ask the question that we get from people, it lands differently in your brain. Let’s start with the first question. The question is, I thought I made changes to the funds I was invested in, but it only seems to affect my new contributions. The answer here is, well, there are two different ways to change how you’re invested in the TSP. The first is moving around where the existing money is, and the second is where your new money will go. If your intention is to move from the L 2030 Fund all into the G Fund, for instance, just to make this easy for everybody, the question that TSP is basically asking is, do you want that just for the money you’ve already put in the TSP to make that change? Or do you also want that to be where all of your new money goes?

Okay, you have to answer both of those questions. There are two different ways to change how you’re invested. One is existing money; one is new money. Next question, is there an advantage to contributing a certain dollar amount instead of a percentage of my salary? The answer here is kind of, it depends, maybe. If you plan to only contribute enough to get that full match, you probably should just choose the percentage option, right? It’s easy because that’s the standard by which you’re asking the TSP to provide the match to you. If you plan to contribute an exact dollar amount, for instance, the $23,000 or the $30,500, as long as you’re at least 50 this year, you should probably choose the dollar option. That way there’s no confusion and you’re going to get exactly the dollars that you want in there.

All of this is a matter of timing and what it is that you’re trying to accomplish. Are you trying to just make sure to get your match? Are you trying to hit some max on the IRS standard? That will really determine which version of the contribution that you put, whether it’s a dollar amount or a percentage. Next question, can I make a contribution to the TSP out of my checking account? Gosh, the answer is no. You are only allowed to contribute to the TSP right from your paycheck. Be certain that you make that election early enough in the year, like we talked about on the timeline. Next step, if I retire before the end of the year, can I still contribute the full amount to the TSP? Well, gosh, the answer here is yes. The IRS doesn’t care when you retired in the year, you are allowed to contribute $23,000 a year, or again, if you’re at least 50 in 2024, you’re allowed to contribute that $30,500.

It does not matter when you retire in the year, but there is a little bit of a caveat. You had to have made at least that much money that year for the IRS to allow you to take a tax deduction. In order to contribute to an IRA, you had to have earned income. For instance, if you were going to retire in January, say January 31st, unless you made $23,000 or $30,500 in January, you will not be able to contribute that full amount because remember, it has to come from your paycheck. And so there has to be enough money there to be able to dump into TSP in those pay periods prior to you retiring. Just a little caveat there that I want to make sure that we’re clear on.

Next up, I have an outstanding TSP loan. Does this count against how much I can contribute to the TSP? The easy answer here is no. All employees are permitted to contribute up to the IRS limits. It does not matter if you have a loan outstanding. So, any of those loan repayment amounts, that is something completely separate from the contributions of the new money to the TSP. Now, for our avid listeners, you know how I feel about TSP loans. We want to try to avoid them at all costs. I know that sometimes it just happens, but it is important to know that if you have the capacity to contribute up to the full amount in the TSP, I don’t want the fact that there’s a loan repayment to in your mind, hinder how much you can contribute as far as what you’re allowed to contribute, okay?

The challenge with the TSP loan repayment is the very fact that you now have an obligation to repay a certain amount of money, probably several hundred dollars for a loan repayment might mean you don’t have the money to contribute as much new money to the TSP, and that’s a separate question, but as far as how much the IRS will allow you to contribute, it has no bearing at all whether you have a loan repayment or not. This is all new money that the IRS is counting.

Next step, is it true that my agency only matches contributions made to the traditional TSP? The answer is no. You are allowed to contribute to the traditional and or the Roth sides of the TSP. Here’s the deal though. When the agency puts in their money, it will always be deposited into the traditional side of your account. We’ve come across employees in our workshops that say, well, I really want to be all Roth, but I had to put at least 5% in my traditional TSP every pay period so that I got my match for my agency. That is flawed logic. That is not at all how the rules work. You can put your money either on the Roth or the traditional side or any combination between the two. The amount you receive from your agency is exactly the same.

The difference is instead of perhaps your agency’s match going to the Roth side of your account, which is maybe where all of your money is going, it is going to go to the traditional side of your account. And the reason is the agency does not want to pay the tax on the Roth contribution. If they put it on the Roth side, they would have to satisfy the tax obligation because that’s always money that’s already been taxed. Very, very important that you understand. You can decide however you are going to contribute to the TSP from a tax diversification standpoint, traditional and or Roth, it does not affect how much your agency is going to match. You just need to be prepared that the agency is going to put all of their money on the traditional side of your account. You’re going to see that part grow even if you’ve chosen to put all of your contributions on the Roth side.

All right, next up, I’ve been told that my spouse and I make too much money to contribute to the Roth TSP, is that true? The answer’s “no.” Those income limits for Roth IRAs do not apply to the Roth TSP or any other Roth 401(k) style plan. Those deemed as higher earners are disqualified from contributing to a Roth IRA, and that’s a private sector account, but this has no effect on the TSP at all. Let’s talk about those limits. For someone to be fully disqualified. For Roth IRA contributions, again, these are private sector Roth IRA accounts, if there’s an individual with a modified adjusted gross income of more than $160,000 or a married couple with a MAGI of over $240,000, they are fully disqualified. They are not allowed to put one dime in a Roth IRA.

Now, there is a little bit of a phase out. I’m not going to go into a great detail on those, but this is the total max that is a complete disqualifier under these limits. There’s a phase out of what you’re allowed to contribute. Again, I’m not going to muddy the water here, but it is important to know that these rules only apply to private Roth IRAs. It does not affect Roth TSP or other Roth 401(k) style plans. The Roth TSP is actually incredible for those higher earners that otherwise don’t have a vehicle in the private sector to allow them to have tax-free growth on their money. Something to consider if you otherwise don’t qualify.

Now, last question. Most of my money in the TSP is labeled as traditional. Can I change that to make it Roth? The easy answer is no. The TSP does not allow participants to convert traditional money to make it Roth money inside your account. The only way that you are able to do this is to move that money to a private sector account through what we call a Roth conversion strategy. This is complicated. Do not do this by yourself. It is an entire tax strategy to take money that is otherwise taxable and get it to be tax-free. You have to satisfy the tax on it now, but there’s a whole strategy of the timeline by which you do Roth conversions. So, please get some help. If you need help, let us know. We have a network of financial professionals throughout the country who do this type of thing for a living and work with federal employee families.

You need to understand that TSP does not have an in-plan conversion option to make money you already have in the traditional TSP to make it Roth TSP. If you want to do that, you have to bring it to a private sector account to a traditional IRA and then do a Roth conversion strategy to begin making that money likely over a long period of time to make that start growing in the tax-free environment under the Roth. Always great questions we get from feds, but it exposes some of the weaknesses and some of the rules of how unclear things are as they’re described specifically by the IRS. That can be complicated in and of itself, but even in brochures or what you might be hearing from your agency, we often find that it started out as a true statement, but the more people it went through, it started not quite being right. I felt like those FAQs were going to be helpful for everybody just to get their head wrapped around the real rules.

Regret vs. Challenge

All right, so let’s talk about regret versus challenge. I would love for you to be armed with the right information so that you are able to confidently make decisions and be the hero, right, the hero in your own retirement story. That’s one of the fundamentals here at ProFeds. We want you to be armed to be confident as you step into retirement where your hands are up and you’re like, yeah, I got it. We don’t want you to look like the little figure on the right, which is like what just happened, right? Man, I wish I would’ve done something differently. I didn’t know that this was how this was going to work. So, I want to cover just a couple of regrets.

The regret on the left, the first one is getting started too late. My challenge to you is you need to know that most people never feel quite ready to get started planning, to start investing or to have children. There’s all sorts of things that we never quite feel ready for, but we need to do anyway. And it’s important to challenge yourself to say, you know what? Yeah, money might be a little tighter, but I can do this. I can contribute more to the TSP. The next regret is not contributing more and doing it sooner. Find a way to up your game.

If you’re putting in 2% of your salary, find a way. What would it take to get to five? What would it take to 5%? What would it take to get to 10,000? What would it take to get to the max? How do I get there? Finding a way to always level up your game and make things ultimately better for yourself. Remember, you’re not giving this money away to other people. You’re giving it to your future self. Next, regret missing out on an agency match. My challenge, you must contribute at least 5% every single pay period, okay? Do not leave any of that free money on the table. Next regret. Gosh, someone felt like they were too aggressive or too conservative, right? Both sides of that coin. Do your best to keep your emotions out and make sure that your choices are aligned with your gut.

If you are afraid of losing money in the TSP, there’s risk in being too conservative. But if you are going to have a heart attack because being in the C, S and I fund just makes you go crazy, then you need to make sure that your investments are aligned with your gut feeling. Not to say that mathematics shouldn’t come into this equation, they absolutely should, but you’ve got to keep your emotions out and not allow that to drive the train too much. Next regret is trying to time the market. I would say just stop it. Slow and steady is going to win the race here. Long-term market gains is the way to make money in the stock market. It’s not to say there can’t be short wins and be able to have those big explosive gains, but that makes most people crazy. And the idea of trying to time when to invest based on market conditions is very, very hard.

Okay? Tons of studies are done all the time to show that those who try to beat the market have a very, very slim chance of doing so. In fact, they end up hurting themselves because they buy and sell at the wrong time. Just quit it. Okay? Next step. Not taking tax diversity seriously. For someone that says, well, why would I put my money in a Roth and pay tax now, I’ll be in a much lower tax bracket in retirement, so I’ll just pay it then. Yeah, well, that’s not really how this works. If we’re being honest with ourselves about the kind of income that you’re going to have in retirement, there has to be serious thought given to the traditional and the Roth strategy. There’s good in both and having a combination of the two is what most people land on, okay? Something to get your head wrapped around that tax diversification.

And last regret, not seeking professional advice. Listen, you want to tip the odds in your favor. There are too many things that we do as laymen who don’t operate in the financial planning world to try to do this on our own. You have to get some brains of these professionals that do this all day, every day and make sure that there’s not something really big that you’re missing out on. You might be focused on what funds you’re invested in and how aggressive you are, but they’re like, whoa, there’s a tax train coming that you need to get prepared for. So it’s another set of eyeballs on your strategy to make sure that you’re doing it well, and I encourage you to do it now. Get the advice so that you are on the right track and not in total damage control mode when the time comes in retirement to take the money.

How Can You Tip the Odds in Your Favor?

How can you tip the odds in your favor? Like I share with all federal employees, whether it’s webinars, podcasts, in our workshops, whatever it might be, you have to be in control of what your financial future looks like. If you don’t, you are going to be left to what the government has in store for you. Let that sink in there for a moment. If you are not in control of your financial future, you are left to the devices of the federal government to determine what your retirement’s going to look like, okay? No reason to put yourself in that position. You can be in control of this. I’m not saying you might not need a little bit of help to get there, like a financial professional for instance, but you want to be in the driver’s seat for all these decisions and not have them happen to you instead.

All right, so let’s talk about the big three things. When we think about moving into 2024, the big three decisions, the first is how much are you going to contribute? The second decision is are you going to make changes to the funds in which you are invested for both your existing money and your new money that you’re putting in? And then taxes. How is your money going to be taxed? Is it now? Is it later? And making those adjustments at that time. Okay, so these are the big three. Give some thought to each one of these because they are really going to be driving the end result that you’re going to have when you go to use this money later in retirement. All right? Our goal here at ProFeds is always to make sure that we’re helping federal employees to retire with confidence. Our flagship program is the FedImpact Workshop.

If you have not already been, or you need a little bit of a refresher, please find a workshop near you. While we can’t hit every city, we are in a whole lot of them. This is in-person training that allows you to just take a pause in your normal day, give yourself a little bit of time to think about your future. The good news is there’s no cost to attend. These are sponsored sessions and so the cost has already been picked up, and we’re going to cover all of the federal benefits topics and the decisions that you’re going to be making about all of those benefits right there in that workshop. And here’s the cool part. There’s some one-on-one help available following the session if you want it. If you’re thinking, man, maybe I really do need a financial professional to help me make some of these decisions and make sure I’m on the right track, you’re going to have a chance to raise your hand and say, yeah, I want to do that at the conclusion of the workshop.

We want to make this easy for you, not just to hear the information, but also to do something with it, to take action with the information that you’re receiving to make the most of your financial future. You can see all of the details and the locations open dates at FedImpact.com/Attend, okay? We want you to be the hero in your own retirement story, but it doesn’t mean that you don’t need a little guidance on the journey that you’re on. All right. Handouts and replay. We do have the handouts, of course, still available. Many of you are listening from your phone or another device that makes it a little bit easier to get those downloaded materials so they will be emailed to you. You’ll also receive a link to the replay. If you’ve been listening to our webinars for quite some time, you know that historically we have requested that folks opt in to listen to the replay where you had to enter some information. That’s no longer the case. We’re making all this publicly available to any federal employee who wishes to listen.

You’ll get a direct link to the replay on that email that you’ll receive, so you’ll have everything that you need. All right, next up, the next webinar that we are going to do is we’re going to skip December. We’re going to go to January 18th for your retirement scorecard. Okay, so this is actually a session that we’ve done in the past. We had a version of the scorecard that we have made considerable modifications to, and we want to explain not only what the scorecard is and how to get it, but also some of the preliminary results of the scorecard that many federal employees have already filled out. We’ve got thousands of people who have filled out these scorecards, and so give you an idea of some of the observations that we make in the scorecard. Again, that scorecard is a diagnostic assessment for your retirement readiness. And this is for you. This isn’t for me. This isn’t for your coworker to know. This is for you. I’d love for you to join us on that webinar again, January 18th, your retirement scorecard.

You can see all the details and sign up for FedImpact.com/Webinar and you’ll get all the details and a reminder by email. Okay? Thank you all so much for joining us. I hope that you’ll stay tuned to these webinars to continue to get the benefits and the news updates. We’ll keep you updated on a weekly basis to make sure that you know the things that are affecting your money and your retirement from the federal government. To find a workshop, just as a recap, you can go to FedImpact.com/Attend. We have workshops in tons of cities throughout the United States, so please check those out and get registered so that you can be in control of your own financial future. And then of course, our next webinar on your retirement scorecard, January 18th at FedImpact.com/Webinar. Thank you all so much. Enjoy the rest of your day. Have a wonderful end to the year since we’ll not see you back here on the webinar platform until January. Thank you so much and we look forward to a great new year with you.