Author: Todd Carmack

The Roth TSP by Todd Carmack

Todd Carmack talks about the Roth TSP

banner_3 Todd Carmack discusses TSP options.

Having the privilege of helping so many federal employees, it amazes me just how few people are taking advantage of the Roth Thrift Savings Plan, a simply fantastic opportunity.

The Roth Thrift Savings Plan was made available to federal employees in 2012. It differs from the Traditional TSP in that contributions to the Roth TSP are made with after-tax dollars instead of pre-tax dollars. The money grows tax-deferred, similar to a Traditional TSP; however, withdrawals from the Roth TSP come out tax-free. Distributions from a Traditional TSP are taxed as income.

We are currently in a low tax rate era based on tax rates over the last one hundred years. In my opinion, the low-tax era is unlikely to last. In the 1970’s, the highest marginal tax bracket was 70%. In 2013, the highest marginal tax bracket was 39.6%.

As a result of the staggering U.S. debt and increases to the budget for Medicare, Social Security taxes may have to increase to keep pace. In the United States, someone is turning 65 years old every seven minutes, the expenses that Medicare and Social Security must absorb will increase dramatically.

Some Tax experts like Ed Slott (CPA and author) and David Walker (former Comptroller General of the United States) predict that the tax rates will have to double or our country will go bankrupt.

What does all this mean? It means that saving now, in a Roth IRA or Roth TSP, along with using other instruments like Indexed Universal Life Insurance, which could provide for tax-free loans and withdrawals in the future, is probably a financially intelligent way to produce a tax-free income for the future. You will need to wait five years from the start date of your Roth TSP to qualify for the tax-free status for distributions but considering these are your retirement dollars it would be inappropriate to use these types of accounts for short-term liquidity needs.

There are always risks (taxes are a risk, as well as the risk of putting money away in an account that has a long-term objective) but if you are interested in having a more comfortable retirement you may want to do what you can to lower your future tax bill. You may want to consider a Roth TSP as part of that equation.

*Source: Kitchen, B. & Kap, E. (2015), Wealth Beyond Wall Street.

Other Todd Carmack Articles

Social Security for FERS Employees by Todd Carmack

Understanding The Thrift Savings Plan, By Todd Carmack

Is The Pension ‘Survivor Benefit’ Best For You? by Todd Carmack

Understanding Your FEGLI Coverage, by Todd Carmack

Disclosure: For informational purposes only. Investment advisory services offered through BWM Advisory, LLC (BWM). *Due to various registration requirements concerning the dissemination of investment and insurance product and service information, we are currently required to limit access of the following pages to individuals residing in states where BWM is currently registered. Investment and advisory services available only to residents where BWM is registered or where State determined registration thresholds have not been met. Please contact BWM Advisory for a copy of their most recent ADV for Registration and additional disclosure information. Investing involves risk. Always contact your own investment advisor before making any investment decision.

Getting the most out of the Thrift Savings Plan by Todd Carmack

For employees under the FERS system, the TSP is one of the best benefits to take advantage of. The TSP plan allows FERS employees matching contributions:

TSP Matching Contributions

1% is automatic from their agency

100% matching on the first 3% of contributions

50% on the next 2% of contributions

This gives you a total of 5%. Let’s face it, free money is too hard to come by, so make sure that you are contributing at least 5% to your TSP plan.

Contributing to your TSP:

Traditional TSP – where the amount is deducted from your check prior to taxes. You will pay taxes on any distributions.

Roth TSP – where the amount is deducted from your check after taxes have been taken out. As long as you keep the money in the account for 5 years and withdraw it after age 59.5, your distributions are TAX FREE !!!! If you are only contributing to the Roth TSP, your matching 5% will be deposited into the Traditional TSP.

If you withdraw money from either the Traditional or Roth TSP prior to age 59.5, you will pay a 10% penalty. There are a couple of exceptions to this rule.

TSP Contribution Limits

For the year 2015, if you are under the age of 50, both CSRS and FERS employees may contribute up to $18,000 a year (spread that out over the 26 pay periods).  If you are age SO or above, you may contribute the Catch-Up amount of $6000 a year.  These amounts can be contributed to either the Traditional or the Roth. The Roth TSP does not have the same income restrictions as a private Roth account!!! This will allow high-income earners (married or single) to take advantage of accumulating wealth for a tax free retirement income.

Employees can take money out of their TSP account in a few different ways:

TSP Loan – employees may that a loan from their TSP in the amount of their contributions, but not the matching contributions. Loan interest is based on the G-fund. Growth of this loan money is stopped until it is repaid bi-weekly. You can continue making your regular TSP contributions while repaying the loan.

TSP Hardship Withdrawal – this would be withdrawing money and NOT paying it back. This will result in a 6-month freeze of making any contributions and receiving the matching contributions. To add insult to injury, you will also pay income taxes and penalties (if under age 59.5) on the withdrawal. Try and avoid this option.

TSP Age Based Withdrawal – this gives the employee the opportunity to withdraw money after the age of 59.5 without penalty. The gives you the opportunity to take advantage of investment options outside of the Thrift Savings Plan that may help you achieve your retirement goals.

When money is simply withdrawn, 20% is withheld for taxes.  If you are transferring TSP funds to a self-directed IRA, financial advisor (still classified as IRA account) or a tax deferred annuity (still classified as IRA account), then you pay no taxes or penalties.

Other Todd Carmack Articles

Social Security for FERS Employees by Todd Carmack

Understanding The Thrift Savings Plan, By Todd Carmack

Is The Pension ‘Survivor Benefit’ Best For You? by Todd Carmack

Understanding Your FEGLI Coverage, by Todd Carmack

Evaluating Your Life Insurance Policy by Todd Carmack

Evaluating Your Life Insurance Policy

I received a phone call the other day from a client I have worked with for about thirteen years now. We have touched based over the years to make sure any life changes have been addressed. The reason for her phone call last week was to address her term life insurance policy. When the policy was taken out, her main concern was providing enough money for her son to pay off the house and for burial expenses.

With her term policy nearing its end date in two years, she has been re-evaluating her coverage. Her home is very close to being paid off, so this is no longer a big concern and her son has become more successful over the last decade, so leaving a large sum of money for him is no longer necessary in her eyes. Now her biggest concern is just making sure her funeral and burial expense are covered.

Everyone needs to evaluate their life insurance policies on a regular basis with their agent to determine if it still meets the needs that it was set up for. We also need to address life changes like birth, death and divorce. This will usually involve changes in coverage or beneficiaries. A common change we look over is changing beneficiaries after divorce and getting re-married. Very often the ex-spouse ends up receiving the life insurance payout. This would also be the time to change beneficiaries on retirement and investment accounts.

Other Todd Carmack Articles

Social Security for FERS Employees by Todd Carmack

Understanding The Thrift Savings Plan, By Todd Carmack

Is The Pension ‘Survivor Benefit’ Best For You? by Todd Carmack

Understanding Your FEGLI Coverage, by Todd Carmack

Planning for your Federal Retirement by Todd Carmack

federal retirement guidePreparing for your federal retirement starts the day you are hired! By this I mean you want to start taking advantage of one of the greatest benefits a FERS employee has as early as possible; the Thrift Savings Plan. In order to maximize the matching contributions, you want to contribute at least 5%. This may be difficult for newbies in the workforce, but free money is too hard to come by. For those who are high-income earners and can’t take advantage of a private Roth, you can contribute to the Roth TSP.

For those employees who have served in the military, take advantage of buying back your military time (service credits) to count towards your CSRS/FERS pension. This can enhance your retirement annuity by thousands of dollars a year.

If you intend on carrying your Federal Employee Health Benefits Program into retirement, make sure that you have been enrolled for at least 5 years. When it comes to ensuring your spouse or significant other can continue on the FEHB if you pass away, make sure to select either the 25% or 50% Survivor Benefit option. This will not only ensure part of your FERS annuity payment, but also continuation of their FEHB coverage.

Throughout your working career with the federal government, you want to make sure to be up to date on your beneficiaries for TSP and FEGLI. Life events such as children born, marriage or divorce or death can happen.  Part of retirement planning is making sure your loved ones are provided for both during the working years and after.

 

Start considering the issue of Long Term Care coverage when you are young. You may want to consider utilizing either traditional long-term care policies, available through the government (John Hancock) or private policies (sometimes less expensive). Another option to consider is permanent life insurance with long-term care coverage or living benefits which can potentially allow for accelerated payments in the event of in-home health care or nursing home care expenses.

 

I would also suggest 5-10 years out, attend a retirement seminar – sometimes more than one. This may help you plan and provide some tips on the benefits and process.

 

Other Todd Carmack Articles

Social Security for FERS Employees by Todd Carmack

Understanding The Thrift Savings Plan, By Todd Carmack

Is The Pension ‘Survivor Benefit’ Best For You? by Todd Carmack

Understanding Your FEGLI Coverage, by Todd Carmack

Understanding The Thrift Savings Plan, By Todd Carmack

Understanding The Thrift Savings Plan, bTodd Carmack

TSP thrift savings planThe TSP is the Federal Government’s retirement account

If I asked 20 federal employees, “How much does the government match for TSP contributions?” I would get several different answers.  The correct answer is 5% if you’re a FERS employee.  Providing education is the most important part of my job and I enjoy the benefits that truly educating my clients can bring them.

One of the most important pieces of advice I can provide to employees is to make sure you are contributing a minimum of 5% to your Thrift Savings Plan (TSP).  Free money is hard to come by and if you’re contributint to your TSP its about the same as giving yourself a raise just by doing the smart thing!  Example:  If your salary is $51,450 a year, your 5% contribution is $2572.50 a year and the government will match that figure, which means you will have a total $5145 in contributions to your account – not to mention any TSP fund performance.

Knowing your TSP investment options (TSP Funds) is also vital.  Here are the six options:

TSP G Fund – government securities

TSP F Fund – government, corporate and mortgage backed bonds

TSP C Fund – Large/mid cap U.S stocks

TSP S Fund – small cap U.S stocks

TSP I Fund – international

TSP L Fund – lifestyle funds (which is a combination of G,F,C,S, & I)

As for contribution limits, for those age 49 and under, you can contribute a maximum of $17,500 a year.  For those who are 50 and above, you can contribute an additional $5500 a year.

About the Author:

Todd Carmack,

Glendale, Arizona

Other Todd Carmack Articles

Social Security for FERS Employees, by Todd Carmack

Is The Pension Survivor Benefit Best For You?  by Todd Carmack

Understanding Your FEGLI Coverage.  by Todd Carmack

Social Security for FERS Employees by Todd Carmack

Social Security for FERSI am often asked by clients “When should I start taking my Social Security payments?”.  There is no single right answer to that question because everyone designs their retirement differently.  This added income can make a difference on when you decide to retire and how much of a benefit you are willing to accept.  I can only supply you with the options and facts to allow you to make an informed decision.

To be eligible for Social Security, you must first have worked a specific number of quarters.  You will need 40 quarters to be fully insured for life.  In other words, if you have worked for 10 years in jobs covered by Social Security, you can assume you are fully insured.

Social Security benefits are based on the age when you retire and your earnings history.  Cost of Living Adjustments (COLA) are increases usually adjusted yearly, which reflect the percentage increase of the CPI (Consumer Price Index).

The earliest age you may start receiving Social Security payments is 62.  For those who reach age 62 in the year 2000, the minimum age for full benefits is age 65.  This will increase to age 67 for anyone reaching the age of 67 in the year 2022 or after.  For every year that you start your Social Security payments prior to full retirement age, you will lose 6% a year.  Example, if your full benefit retirement age is 65 and you begin payments at age 62, you will receive 80% of your full benefit.  If your full benefit retirement age is age 67, and you begin payments at age 62, you will only receive 70% of your full benefit amount.

About the Author

Todd Carmack

Arizona

Other Todd Carmack Articles

Understanding The Thrift Savings Plan, by Todd Carmack

Is The Pension Survivor Benefit Best For You?  by Todd Carmack

Understanding Your FEGLI Coverage.  by Todd Carmack

Understanding Your FEGLI Coverage, by Todd Carmack

FEGLI CoverageAs a benefit counselor and retirement income specialist, I have come to realize that a lot of employees do not remember what they signed up for or understand their federal employee group life insurance (FEGLI) coverage.

Basic FEGLI Coverage

Basic FEGLI coverage, if elected, FEGLI Basic coverage provides a death benefit based on your gross salary, rounded up to the nearest thousand and then $2000 is added to that figure.  Example, if you make $51,486, your death benefit would be $54,000.  At age 65, Basic FEGLI coverage becomes free and the coverage will reduce down by 2% per month until it reaches an ultimate reduction to 25%.

 

Employees do have the option to elect NO FEGLI Reduction or a 50% FEGLI Reduction.  If elected, there is a premium payment required to maintain your FEGLI coverage.

 

FEGLI Option A

FEGLI Option A is a flat $10,000 death benefit.  At age 65, coverage is free and will reduce by 2% a month until it reaches $2500.

 

FEGLI Option B

FEGLI Option B is optional FEGLI coverage provides 1,2,3,4,or 5 times your annual salary as a death benefit.  Example – if your salary was $51,486, and you chose 5 times your salary, your death benefit would be $260,000 ($52,000 x 5).  This option can become very costly after the age of 50.  The cost or ‘premium’ paid to maintain FEGLI almost doubles every 5 years.  At age 65, you may elect to reduce coverage by 2% a month for 50 months until it reaches 0, or continue to pay premiums.

 

Because of the higher premium costs after age 50, it may be in the employee’s best interest to consider looking for a level term insurance plan in order to reduce the monthly premium over time.  A great resource I’ve found for reducing your FEGLI expense is www.CompareFEGLI.com.

 

FEGLI Option C

FEGLI Option C is optional coverage provides a death benefit for your spouse and eligible dependent children (under age 22).  There are multiples of 1-5 available.  The FEGLI coverage amount is increments of $5000 for spouse and $2500 for each child.  Example – if you chose a multiple of 3, there would be $15,000 of coverage on spouse and $7500 coverage on each child.

 

At age 65, you may choose to reduce coverage by 2% per month until it reaches 0, or continue to pay premiums.

 

About the Author

Todd Carmack

Arizona

 

Other Todd Carmack Articles

Understanding The Thrift Savings Plan, by Todd Carmack

Social Security for FERS Employees, by Todd Carmack

Is The Pension Survivor Benefit Best For You?  by Todd Carmack

Is The Pension ‘Survivor Benefit’ Best For You? by Todd Carmack

Survivor BenefitBoth CSRS and FERS have an option when they retire to choose a Survivor Benefit option which allows their spouse continued partial pension payments in the event of your death.

For CSRS, the Survivor Benefit option would provide a 55% annuity payout.  For FERS, the Survivor Benefit has two options:  a 25% or 50% continued benefit option.  Both provide for lifetime income for the employee and a reduced payout for the surviving spouse.  However, there are several other options that exist that may provide for a much great lifetime income stream and those alternatives are certainly worth consideration.  

Here is an example for CSRS:

For CSRS the election of Survivor Benefits will reduce the retirement annuity payout by approximately 10% for life.

Alan, a CSRS employee, and his wife Jane decide to take the joint life option (electing the survivorship option) and while both are living, their monthly income is $4000 per month (which includes the 10% reduction of Alan’s Pension described above).  If Alan dies first, then Jane will receive 55% of the $4000, or $2200 a month for the rest of her life.  If Jane dies first, then Alan will still receive his full monthly income of $4000.

For FERS, the Survivor Benefit has two options:  a 25% or 50% continued benefit option.

Here is an example:

For FERS, the election of Survivor Benefits will reduce the retirement annuity payout by either 5% or 10% depending on the Survivor Benefit option selected.  Likewise, these choices are irrevocable, once chosen. 

Carol, a FERS employee, and her husband Mike decide to take this joint life payout (survivor benefit) and while they are both alive, the monthly pension is $4000.  If they choose the 25% option, and Carol passes away, Mike will receive $1000 monthly for her life.   If they choose the 50% option, Mike would receive $2000 monthly for life.

Is there an alternative?  For both FERS and CSRS employees often times a life insurance policy may be a reasonable option to consider.  For FERS, the 5% or 10% employee Pension reduction and for CSRS the 10% reduction should all be considered an expense used to purchase the surviving spouse’s lifetime income.  Therefore the logical question is to consider the amount that is being spent to ensure the future income and ask whether or not that money could be better spent somewhere else – in essence, Is There A Cheaper or Better Option?  

A case for life insurance;  Although this may not be for everyone and you should always discuss your individual circumstances with a knowledgeable financial professional before making any decisions, life insurance could provide a higher benefit for your spouse and give you more control over your pension.

Let’s consider the fact that your spouse could pre-decease you.  In that event, if you had chosen the Survivor benefit, you would have spent 5-10% of yoru potential retirement income and received nothing for it.  Not to mention, once your spouse has passed on, your pension reduction will continue – your elections are permanent, regardless of circumstances and how much longer you have in retirement.

What happens if you and your wife pass much earlier than expected.  Life expectancy is no guarantee.  Car accidents, slip and falls, and just poor health can all lead to pre-mature death.  If you and your spouse pass much earlier than expected your CSRS and FERS annuity stops – there is no cash value or payout to your children or loved-ones.  In this case, the government keeps whatever you haven’t taken and your heirs receive nothing.

Moreover, the cost for the Survivor Benefit Option is rather high when compared to many life private life insurance policies that could provide a guarantee of income either equal to or greater than the FERS or CSRS Survivor Benefit – not to mention numerous other reasons why the Survivor Benefit may not be the only option to consider.  You may be able to use the costs associated with your Survivor Benefit and purchase a life insurance policy that provides your spouse and or your heirs with a much greater benefit.

Life is about knowing the options and choosing what is best for your situation.

About the Author

Todd Carmack

Financial Advisor

Bedrock Investment Advisors, LLC

Arizona

Other Todd Carmack Articles

Understanding The Thrift Savings Plan, by Todd Carmack

Social Security for FERS Employees, by Todd Carmack

Understanding Your FEGLI Coverage.  by Todd Carmack