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How to Avoid the Impending Retirement Crisis/by Aubrey Lovegrove
There is an impending retirement crisis coming. Nearly half of all families in the United States have no money put into their retirement savings. While things are okay now, in 20 years time, it could prove disastrous to the economy, and future generations of Americans.
Currently, there are no retirement plans offered through the workplace for over one-third of all employed peoples. 44 percent of people that are over the age of 35 are at risk of running out of money in their retirement funds. And nearly 40 percent of all Americans are unable to pull together an emergency $400 for unexpected expenses.
This is a huge problem, and surely there is an impending crisis for most working Americans.
In 2020, there are three and a half working adults for every current retiree. In 2060, that number will drop to two and a half to one. And right in the middle, by 2035, people over the age of 65 will outnumber their children. This is the first time this has happened in American history.
Wage growth from 1989 to 2013, saw a small increase for already older Americans, but for people who are 61 and younger saw a 30 percent downturn in wages, according to a study done by the Federal Reserve Bank of St. Louis. This is a definite trend. It’s difficult to put money aside for retirement when you’re struggling to stay afloat.
In 20 years time, when the workforce of today is entering their retirement years, Americans are projected to be much poorer. And then we are left to wonder when the time comes, who is going to be taking care of these older Americans financially if they don’t have retirement funds put away?
To that end, we could potentially help avert this imminent crisis by taking a few simple steps today.
When you’re trying to make money and provide for your family, it can be burdensome to worry about your IRA or 401(k) but saving for retirement should be made a priority for families and individuals now. It will add up quickly if you stash a little bit of money away for retirement each month. The earlier you start doing this, the better.
By the time you’re 65, a little bit of money put into a retirement fund each month, and each year can add up to quite a bit of money, especially if you start when you’re just joining the workforce. 25 to 30 is the suggested age to start saving for your inevitable retirement.
A little example: if you were to put away $10 a day into a retirement fund, and did so for 40 years, you would end up with a return of $500,000, if the account has the typical 5 percent compounding interest. If you upped that to $650 a month, after 40 years that account would have $1 million in it. Even if you were saving at half the time (20 years) the return is still substantial, respectively at $132,000 and $267,000.
And beyond just you saving money, Congress must respond to this impending crisis as well.
The Bipartisan Policy Center has endorsed bills put forth by Todd Young (R-IN), Tom Cotton (R-AR), and Cory Booker (D-NJ) that would provide security for families and individuals embarking on their retirement. Families should be able to save towards their retirement today, to avert this crisis tomorrow, and these kinds of measures agreed upon by both sides of the aisle are surely needed. Coupled with education and incentives for families and individuals to work towards their retirement, and we might be able to prioritize our future, and the future of our children as well.
Public Pensions in California are Worse Than Initially Anticipated/by Aubrey Lovegrove
The California Public Employees Retirement System (CalPERS), which is also the country’s biggest pension trust fund, fully benefited from the ease in which in capital investment and stock profits rose for the fiscal year of 2017, and through most of 2018 as well.
For local government and state employees, the space between a pensioner’s future liabilities and their assets narrowed quite a bit with these healthy earnings. But this prosperity was not to last. And because of a new method of calculating liabilities, CalPERS may soon find that these yields have not only regressed but might soon be in the red.
For most of its existence, through the 90s and 00s, CalPERS had never encountered any trouble. In fact, it had been so successful that state officials voted to retroactively boost pension benefits. Times were good.
This changed during the Recession of 2008. A $100 billion hit was what CalPERS alone lost. To this day, most have not recovered in full.
The total liability for CalPERS rose a shocking amount – 76 percent – between 2007 and 2016. To put that in terms of dollars, that is an increase from $248 billion to $436 billion. CalPERS unfunded liabilities also steeply rose, when, in addition, the aforementioned numbers, assets went up by only 19 percent, a relatively meager dollar jump from $251 billion to $298 billion.
Mandatory contributions from local governments and the increase in earnings managed to raise the CalPERS fund to 70 percent, but that was still well below the 100 percent it had stood at for so long. And figures now indicate that that that number is dropping once again.\
A precipitous drop in the stock market in the latter half of 2018 decreased the CalPERS fund down below 67 percent, with CalPERS officials informing the board that the fund lost 3.9 percent throughout the year.
This means, the state has only two-thirds of the money it needs to cover pension promises, which in itself might be an optimistic reading. The Federal Bureau of Economic Analysis, doubled its calculated number of unfunded local and state pension liability to $4.1 trillion using a new method of called “projected benefit obligation.” The purpose of this method is to line up liabilities and assets with how the government figures out the value of its own workers’ pensions. This would follow the government’s own standards of accounting.
The $179 billion unfunded liability that is the current amount for CalPERS, would be closer to $360 billion were the “project benefit obligation” method go into effect. On paper, this would read bankrupt.
Head of the Govern for California, David Crane, had tried to get CalPERS to use the methods we just laid out by the Federal Reserve while serving on the California State Teachers Retirement System board, under Gov. Arnold Schwarzenegger. All of this, to no avail.
While Crane may now be having the last laugh, The Federal Reserve’s accounting system taking effect also illustrates the current crisis California faces when it comes to public pensions. And although it appears to be dire already, data indicates that things are going to get much worse before they get better.
Getting Your Adult Children Off Your Payroll/by Aubrey Lovegrove
As almost any parent knows, the responsibility to your children doesn’t end when they turn 18, and they may still be financially dependent on you, even if they’ve left the house. According to a Pew Research Center survey, 61 percent of parents with at least one adult child of legal age said they contribute to their financial wellbeing.
But, invariably, moving the burden of paying the bills from you to your grown children is a responsibility every parent must eventually face. It’s unfeasible and irresponsible to cover things like your kids’ credit cards, car payments, or cellphone bills forever.
Ensuring your children are prepared to dive into financial independence is crucial, according to personal finance professionals. Freeing up your own funds for things such as debt reduction, home repairs, car payments, and retirement accounts can be achieved much quicker once your children are taking care of themselves.
The challenge is, of course, to get the kids off of your payroll and onto their own. Here are some helpful tips to offload your kid’s bills:
Setting Your Kids Up For Success
If your children practice fiscal responsibility from the start, they will be less inclined to end up moving back home later. It makes sense to make sure they have the resources and knowledge to survive the transition before you cease paying the children bills completely.
Basic budgeting, avoiding credit card debt, and the benefits of putting money away for retirement in a 401(k) or other savings plan, are a few of the simple financial techniques that you can instill in your children at a young age.
If you think it could be helpful, you may way to expose them to a fund company website or point them towards a podcast that may have easy-to-follow beginner’s information on investment. Or, if you’re comfortable with it, you may even want to show them your own finances.
The point is, you don’t want to cut your child off before they have to knowledge to succeed on their own.
List Your Children’s Bills
Once you are at the point to where you know your child is be able to accomplish certain things, like paying their rent on time without racking up massive credit card debt in the process, you should add up the total of all the bills you’ve been paying for them over the years: things like cars, allowances, cellphones, gas, clothing and food, and cellphones.
This last one, cellphones, is especially true, as recurring bills like that often end up under the parent’s account forever, according to Anthony Ogorek, CEO of Ogorek Wealth Management in Buffalo. These things can end up as lifelong commitments if you’re not fastidious about it.
Consider cutting your over-eighteen child off if they have the funds to absorb any or all of these costs. That will put that money back into your own pocket. This could be a monthly net to you of several hundred dollars, if not more.
How quickly you ultimately cut the cord will be dependent on your children’s own financial security.
Costs and Needs
Unanticipated disability, loss due to disaster, health issues, car accidents: insuring yourself and your children against these burdens is an important part of personal finance. According to the director of financial planning at Creative Planning in Kansas City, Jonathan Knapp, the time to review your children’s policies is when they’re ready to move out of your house for good. Then you can evaluate what coverage they can pay for on their own. It is also a good time to review your own coverage and see if any of changing needs affect the costs.
For example, if your child’s student loans are all paid off, and if your personal mortgage is paid or about to be, it might not make sense to have an expensive life insurance policy.
Knapp says, stopping the coverage you don’t need will save you countless dollars in the end, and setting up a plan for long-term insurance care will help the financial strain of any nursing-home care you may need in your golden years.
If your child gets insurance coverage from their employment, for instance, you can save a lot of money in monthly premiums by reducing the coverage you used to be responsible for. The same is goes for auto insurance if your child makes enough money to cover their own.
New Changes to TSP Being Considered/by Aubrey Lovegrove
The TSP Modernization Act (effective September 15, 2019) isn’t the end of the Thrift Boards planned changes. Being implemented are several other modifications to the TSP.
All of the newly on-boarded personnel should be the recipient of a full government match by October of 2020 when the default deferral rate given to new hires will increase from 3 percent to 5 percent. And at least 80 percent of all participants contributing at least 5 percent of their income to the TSP is the goal of the Thrift Board. But for lower-graded workers just starting their fledgling careers who have other pressing financial needs, this may be difficult to reach the goal.
“Strive for five” is the saying, and the number all workers should aim for. But if curbing their TSP contributions is necessary, the employee must consider which savings goals – such as children’s college fund, home ownership, or retirement savings – would a bank or credit union not lend the money toward.
Currently, there is a half-a-year hold on TSP contributions if you have taken a hardship withdrawal. This will be eliminated, coinciding with the TSP Modernization Act, which will go into effect on September 15th.
As the Act is put into place, the Roth Tax Trap will be removed. Traditional and Roth balances used to have to be in equal to one another when they were taken out of the Thrift Savings Plan. This was something the Modernization Act did not focus on. If you withdrew from you TSP before the age of 59 and a half, the part of the Roth balance that was not “qualified” was accountable for federal income tax. To be qualified and not accountable to the federal income tax rates, it would take five years of the Roth in the TSP, and the recipient must be older than over 59 and a half.
The workers who took money out of their TSP accounts will now be able to let them know whether it is the Traditional or Roth balance that they would like their withdrawals to be pulled from. This starts September 15th.
As these changes near launch, expect renewed discussion from the Thrift Board.
Tax Season 2019: Figuring Out Your Tax Bracket/by Aubrey Lovegrove
Figuring out your tax bracket is a necessary, yet surprisingly complicated, endeavor. This equation and calculation could be instrumental in finding additional ways to reduce your federal tax bill and to recheck any of the work that was already done by tax-software program or tax preparer.
It should be known that in 2019, the Tax Cuts and Jobs Act has already lowered tax rates. Also, amongst other factors, a loss of personal exemptions and an increase in the standard deduction can affect the formula used to decide the tax bracket into which a person’s income may fall.
There are seven general taxable brackets:
The filers’ annual income is used to decide the taxable bracket. A progressive tax system is employed by the federal government, meaning that higher tax rates are applied to people with higher incomes. Also, it is organized in such a manner so that taxpayers are paying higher rates on each dollar after a certain threshold is crossed, as opposed to everyone paying the same rate on every dollar earned.
Your tax bracket, and furthermore, your tax burden can be figured out by following these steps:
-Determine your filing status.
-Figure out the total of all of your income.
-Research the 2019 tax brackets.
-Learn about the effective rate vs. marginal rate.
-Understand all the other ways your tax rate may be lowered.
Additional information on how to use these steps in order to either increase your refund or reduce money owed can be found below.
Determine Your Filing Status
You should be aware of your tax-filing status before you can figure out what bracket your taxable income falls into. The most common statuses are:
-Married and filing jointly
-Married and filing separately
-Head of household
You will use different statuses depending on several different factors: if you’re married or single, having qualifying dependents, etc. and other specifics. Married couples are free to jointly file their taxes, but others often choose separate filing for many reasons, some of which include divorce proceedings, or separate student loan debt.
Adding Up Your Income
This is the trickiest step and can be somewhat daunting, but it helps in the long run.
To find your gross income, you must first add up all the earnings you accrued from things such as work, alimony, rental properties, various investments, and any other places you receive taxable income – and then you’re going to subtract from that any money that maybe be exempt via the current tax code. The number you end up with is what is known as your ‘gross income.’
As Christ Raulston, wealth strategist at Raymond James in Memphis, Tennesse puts it: “Gross income is pretty much everything, and it’s defined in the law as income from all sources unless there’s an exception in the tax code.”
Next, adjustments such as individual retirement account (IRA) contributions or student loan interest will need to be subtracted. This will yield your ‘adjusted gross income.’
You should subtract these tax deductions after the adjusted gross income has been determined. This is where you’ll opt to either itemize your deductions (which you can do by subtracting things such as mortgage interest, charitable contributions, and other below-the-line deductions) or you decide to go with the standard deduction (which is $12,000 for single filers; $24,000 for married filing jointly.)
The final step is to determine your tax bracket using the taxable income you have just figured out. Don’t forget that certain investments are taxed not at ordinary income levels, but using the capital gains rate. While you do this exercise, it is important that you remember that.
Learning About Effective Rate vs. Marginal Rate
Let’s say you earned $50,000 in 2018 in taxable income, and you’re a single-filer. That would mean the tax bracket you fall into would be the 22 percent, as per the table above. This is what is called a ‘marginal rate.’ But that doesn’t mean you must pay the federal government 22 percent of every taxable dollar.
Rather, any amount that exceeds $38,700 is what you’ll be paying tax on. Your tax rate will actually look more like this:
10% x $9,525 = $952.50
12% x $29,175 ($38,700 – $9,525) = $3,501
22% x $11,300 ($50,000 – $38,700) = $2,486
The ‘effective rate’ ( which is the amount of three of those) is $6939.50, which is nearly 14 percent, and that is your total tax liability.
Other Things to Consider when Attempting to Lowering Your Tax Rate
There are strategies that filers may want to use that can lower their tax bill by placing themselves in a lower tax bracket. If the taxable income falls on the cutoff line between brackets, this is especially true.
Experts say that the best time to examine moves such as delaying income or making contributions to personal trusts, like retirement funds or health savings accounts, is right before the end of the tax year. Even if it’s after January 1st, there are still some moves you can make to lower the burden. As Jaeger puts it: “Now that we’re in 2019, making those moves is starting to wind down. But you can still make that traditional IRA deduction until April 15.” However, be sure to make this retirement plan contribution before you file your taxes if you’re looking to lower your taxable income in 2019.
To narrow down any additional ways to lower your tax bracket, work with your financial professional or tax preparer. Deductions such as “bunching” may be suggested by a financial advisor in the 2019 tax season, which means you’d to qualify to make itemized deductions and, ultimately, lower your tax bill.
To sum it up: Understanding your tax rates is the first step to lowering your tax bracket, and reducing your bill.
TSP Guidance on Loans/by Aubrey Lovegrove
Due to the most recent government shutdown, the TSP has issued new guidance on investment catch-ups and loan policies for account holders in a non-pay status. As TSP had previously said regarding loans, is that it is not necessary for the present for employees to have a form showing they are in non-pay status submitted by their agencies. After the borrower misses two and a half payroll deduction loan repayments and is notified and given a chance to make it up, those forms will be used to put the loan in ‘suspended’ status and avoid them being declared being in default.
TSP said that those who have outstanding loans and miss one or two payments will not be affected immediately provided that payments are up to date at the beginning of the furlough.
Also, legislation has been signed into law guaranteeing backpay to those furloughed. Agencies are to deduct the missed investments and also make deductions for any loan payments missed, for employees with loans. This is to be done when employees receive that back pay. Those deductions will be adjusted for gains or losses that the investor would have experienced, if they are made beyond 31 days from the date they would have been made normally.
TSP added that it may take 2-5 business days to process the files once received due to the expected volume of agency submissions. Lastly, more guidance will be provided on how agencies should submit payroll files to avoid errors to participant contributors and ensure that participants with loans are not negatively affected as soon as more information is available.
Eligibility for Retirement and the Effect of Leaving Your Job/by Aubrey Lovegrove
The effect of leaving your government job without being eligible for prompt annuity payout will leave you with two choices: leaving the contributions you put in savings, your take the refund when you go.
If you want to leave your contributions in your already-established retirement fund, you must first find out if a deferred annuity is something you are eligible for. After leaving your job, you must be at least age 62 and have five years of government service. Any less than that, and it’s not really enough money to leave in, and would probably be the smart move to take it out.
This could always be paid, if you desired, should you return to government work in the future, but there will be a required interest added to the amount if you’re looking to make up the funds to match the time you missed.
That is why, regardless of the size of the annuity, it might be the smart move to leave the funds alone if you qualify for retirement deferment. The money is this fund will continue to pay out for the rest of your life, back by a governmental credit line. That is a smart investment when you look at it that way.
But perhaps, upon leaving your job, you need money immediately, and taking the refund is the way you want to go. There are many complicated steps you’ll have to take to secure it. First, you need to fill out the paperwork. Then you’ll have to send it to OPM. The OPM then will have to notify your current or former spouse and inform them that you are requesting your refund. That is because you would not be allowed to receive those funds should the money end any right that person has to your future benefits.
The interest rate on paying those funds back is 3 percent, which is annually compounded from your last date of employment. This is only for parting employees who had put in less than five years time. More than five years, and you are not required to pay those rates.
Adversely, interest would be paid on contributions to FERS, based on the market rate for all service of over a year. The month before OPM pays out to you, that amount too is annually compounded.
If you’re enrolled in the FEHB or FEGLI programs, you have only thirty-one days before your coverage ends. This coverage can be put towards another insurance policy. Persons using FEHB can also get their coverage extended with the Temporary Continuation provision, giving yourself extra time to find a new policy. The downside being that the government will not be matching premiums, which will have to be paid by you in full. FLTCIP insurance is the same, with premiums your responsibility.
Dwindling Social Security Check? Here’s a Few Reasons Why/by Aubrey Lovegrove
For viable workers looking towards the future, Social Security benefits may be lower than what current estimates are showing. Listed are six possible reasons your Social Security benefits might be dwindling as you head into retirement:
Claiming Benefits Too Soon
An estimate of your anticipated benefits at retirement, aged 62, and aged 70, would be available on your Social Security statement unless you’ve registered to receive Social Security at a different age, which would mean those numbers would be different. 66 or 67 is what is considered full retirement age, and if you claim any of your benefits before then, payments can be reduced beyond the estimate once you retire. Charles Green, principal at Cheshire, Connecticut’s Springboard Asset Mangement suggests that a person should assume their benefits to be lower if a person plans on retiring before the typical retirement age of 66.
An Adjustment in Your Earnings
Your 35 highest-earning working years are what your personal Social Security benefits are calculated from. If you don’t pay into Social Security over those 35 years, then you are looking at a reduction in your monthly check. It is assumed you will continue earning what you are earning when the estimate for your Social Security is listed. Benefits will be lower if you get demoted, take a pay cut, or are not working during any of that time. As Alexandra Baig, the financial planner at Brookfield, Il. Companions On Your Journey put it: “If you worked some years at a very low level…those low-earning years would bring down your average.”
Withholding Premiums on Medicare Part B
In 2019, the standard monthly premium for Medicare Part B is $135.50. Withholding premiums from your Social Security is what most beneficiaries do. If you are enrolled in both Social Security and Medicare Part B, you won’t see lower benefits even if your premiums increase. That is because it’s illegal to reduce payments for most recipients of Social Security, though it could cut into some of your cost-of-living adjustment. Higher Medicare Part B premiums are paid by married couples making over a combined $170,000, or single people making over $85,000. And according to John Stanton Burns, the CEO of St. Charles, Mo. Oakview Wealth Solutions, this could be especially true in years where Social Security sees no cost-of-living increases.
Increase of Premiums on Medicare Part D
Medicare Part D premiums can fluctuate based off your plan and the current year. It is technically legal for the premiums on these to decrease your planned Social Security benefits, even if you had Medicare Part D withheld from your Social Security check. Therefore, a premium increase would decrease the money you’re taking home. Make sure that you’re aware of all your options, as beneficiaries are permitted to change plans each year when the open enrollment period rolls around. Make sure you’re picking the plan that is right for you.
Withholding Money from Your Taxes
If you are retired, you shouldn’t have to pay taxes on your benefits if Social Security is your sole source of income. If you have a secondary source of income though, you may owe the taxman a percentage against your benefits. There are thresholds. If half of your benefits is greater than $32,000 as a couple or $25,000 and a single individual, your Social Security benefits may be subject to partial taxes. Withholding your federal taxes from your Social Security check is an option for retirees at 7 percent, 10 percent, 12 percent, or 22 percent respectively.
Working and Collecting Simultaneously
Working after you begin collecting your Social Security benefits if you haven’t reached the full retirement age will have part or all of their benefits held temporarily. If you are under 67, you will have $1 held against every $2 earned, if you make more than $17,640 this year. This continues every year until the full retirement age is reached. After that, there is no longer any penalty for continuing to work and claiming benefits, and you should receive a credit for what you withheld while you previously continued to earn.
Big Refund? Don’t Spend it All Yet!/by Aubrey Lovegrove
Are you one of the many Americans anticipating a large refund come April 15th? Well, don’t spend it all yet! A large refund from the federal government may not be the windfall it may initially appear.
The Tax Cuts and Jobs Act is in its first year, and the agency predicts 150 million federal tax returns or more this year.
Already approximately 4.6 million refunds have been processed by the IRS, with the average check amount adding up to $1,865. For many Americans who were expecting to receive the same amount or more as last year, this was a happy turn.
Though there is another factor that would contribute to such a large refund, and that is that it’s likely that, over the course of the taxable 2018 year, too much money was taken out the first time,
As Tim Steffen, the director of advanced planning at Robert W. Baird & Co. put it: A big refund may seem like a nice bonus, but it’s just your own money coming back to you. This is akin to lending an interest-free loan to the IRS.
Withholding Your Balance
All working people should’ve filled out a W-4 form when they were first hired. It is through this form that you set up the withholding per paycheck you will put aside (or not) for taxes.
Yourself, your dependents, and your spouse are just a few of the personal allowances you can claim on this form. The more you claim, the less taxes are taken out of your gross paycheck. This can backfire, of course, because if you don’t pay enough over the course of the year come filing season you may end up owing the federal government the difference.
The Tax Cuts and Jobs Act has made this slightly more complicated; the tables it used to withhold funds, and the W-4 has changed from years prior to comply with the new regulations.
It might be an optimal time to go over your W-4 and find out if you’re withholding the right amount as you file this year, as the recent tax law has changed what you can personally exempt and raised your standard deduction.
Your Taxes From the Year Prior
If you were to ask Jeffery Levine, the director of financial planning at New York’s BluePrint Wealth Alliance, he’d tell you the best course of action is to pay on your taxes whatever your liability was from the year prior, so as to circumvent a possible penalty for under-paying.
This is not necessarily a fool-proof plan, and you could still end up owing money when April 15th comes, but at least here you wouldn’t have interest compounded or get penalized for not paying enough.
Because of the new laws possibly confusing earners this year, the IRS is waiving the penalty, as long as 85 percent of that liability was paid over the course of 2018.
As Chunk Rettig, the IRS Commissioner said, “This penalty waiver will help taxpayers who inadvertently didn’t have enough tax withheld.”
He also is imploring people reevaluating their withholding status to ensure that they have withheld the right amount of tax funds for the 2019 season.
So how does one evaluate their withholding status and ensure they don’t get penalized? Follow these few steps:
Review Your Return from 2018: It doesn’t matter if you got a big refund, or ended up owing the IRS, a quick review of your return from last year is an excellent guide as to what you withheld as you file under the new tax law.
W-4 Reevaluation: Your tax bracket is the combination of you, or you and your spouses earnings and is used to figure out the amount you can and should withhold. With these new changes to the tax code, you may be withholding too few funds for taxes, even if that means making slightly more on the paycheck level.
Consult an accountant: There is a $10,000 limit on local deductions, and a lot of the former itemized deductions have been done away with, under the new tax code. An accountant can determine what you could and should be withholding in order to comply with these new laws.
The standard deduction would be doubled this year, which would mean that less people filing are going to be itemizing their returns. According to the Urban-Brookings Tax Policy Center, 3 out of every 10 filers, or 49 million people, itemized their returns for the 2018 tax season. If you happen to be one of that 30 percent, allowances may have to be reevaluated to make sure the amount you’re withholding is correct.
This new tax code gets even more confusing when you factor in different income sources, rental property, or retirement funds. Steffan suggests paying an estimated quarterly amount on your taxes if this applies to you.
“In a perfect scenario, you’ll have a balance due when you file your return, but not one that’s large enough to create a penalty,” Steffan said.
401(k) and IRA Account Money: It Isn’t Entirely Yours/by Aubrey Lovegrove
When it comes to retirement, those with higher incomes might not be as prepared for retirement as they would like to think.
It can be concerning that those who are approaching retirement with IRA and 401(k) balances are not aware that their accumulations require taxes to be paid. It may be difficult to accept that the money that one has worked so hard for in an account that they have contributed to throughout their working years does not all belong to them.
There have been definite benefits throughout the years of not being mandated to pay taxes on contributions paid into IRA and 401(k) plan accounts and on investment returns on the same contributions. A little calculation reveals that deferring taxes for a long time can have real, true value. The benefit is equal to exempting taxation from investment returns on plan assets. So even after paid taxes on withdrawals, one is still ahead.
The issue isn’t whether or not the tax treatment accorded is a good deal. It really is, especially for high-income people who benefit the most. The concern comes in for people with moderate and higher incomes who haven’t assessed how well prepared they are for retirement.
The key point of this discussion is to remind those of us who are aware of the benefits of retirement savings and to alert those who are unaware. In fact, if you are unsure of how well-prepared you may be for retirement, or if you have money saved up in a plan like a 401K IRA, then it is highly advised to start acting now. A qualified financial advisor can help provide guidance and possibly even help you answer questions that you haven’t even thought of yet.
Understanding Short-Term Disability/by Aubrey Lovegrove
Short-term disability is, by the government’s definition, a mental or physical condition that renders one unable to do their job for any period that is less than a year. Unfortunately, many employees aren’t offered programs that cover such situations. If you do have disability options, then be thankful that these exist for you to fall back on.
Leave Transfer Program
If you must take an extended leave without pay, fellow employees may ease your financial burden by donating their annual leave to you. You would be paid at your usual hourly rate of pay until the donated leave ends, or until the medical emergency ends.
You may be eligible for workers compensation if your disability was due to a disease or personal injury occurring while performing your job. Workers compensation payments begin when your leave runs out.
Every pay period, employees earn both annual and sick leave. You can use your accumulated sick leave if you have short-term disability. If the sick leave runs out, you can use any accrued annual leave that you have saved up. Your current supervisor may have the authority to advance both your annual and sick leave in the case that both your accumulated sick and annual leave has run out. The maximum amount of advanced sick leave that you can receive is 104 hours, and even less when you work part-time.
Leave Without Pay
If you have depleted your sick and annual leave, and the advanced ones granted by your supervisor, or your supervisor doesn’t have the authority to grant any advanced leaves, he or she might be able to grant you periods of leave without pay. Your supervisor might even be able to do that before you exhaust your annual or sick leave. This is if the agency policy allows it.
You could file for disability retirement if you have at least 18 months of service under FERS and, most importantly, if your disability is expected to last a year or longer. By definition, CSRS employees already have the five years of service needed to qualify for disability retirement.
While these alternatives are not necessarily well-designed in the event of short-term disability, at least these options are available.
Maximizing Your Tax Returns in 2019/by Aubrey Lovegrove
The clock is ticking away when it comes to the various ways Americans can keep their hard-earned money in their pockets with April 15 being the tax deadline. Taxpayers tend to leave too much tax return money on the table, and this problem mostly occurs because they haven’t known about (or taken) all of the deductions and breaks that were permitted.
A research paper by the University of California notes that every year Americans pay roughly $1.5 trillion income taxes. That’s a really big number in which approximately 8.3% of U.S gross domestic product goes straight from taxpayers’ bank account into the U.S Treasury.
In addition, the report states that American taxpayers have a routine of selling themselves short on their tax returns and walking away from the money they could have saved. This has been seen especially in key areas claiming U.S government tax deductions and benefits and retirement savings.
All this boils down to the tax breaks, in the form of tax credits and tax deductions as you prepare to save money on your taxes this year it is important to understand the difference between the two tax breaks. Tax credit – this directly slashes your Tax bill to Uncle Sam it’s dollar for dollar cut on your tax bill. Tax deduction- this lowers the amount of income IRS can tax. A good example of a common tax deduction available to U.S. taxpayers is the standard deduction.
Simply, tax deductions are subtracted off the amount of taxable income you earn. It’s possible to overpay the IRS and in that case, get a refund, but that’s if you can stack up enough to overpay tax deductions.
These 10 tax breaks to get you your fair share:
1. Student loan interest deduction allows U.S. families to deduct interest paid on student loans. The amount can be up to $2,500.
2. American opportunity tax credit allows college households to claim $2,000 in federal tax deductions on assorted college costs like fees, textbooks, tuition, and meal plans. An additional 25% can be claimed by qualified taxpayers of %2,000 more paid out in college costs.
3. Child and dependent care credit allow households to claim a deduction of up to $3,000on daycare costs for kids that are under 13 years; this is also applicable for senior parents, dependent or an incapacitated spouse. The amount can double up to $6,000 for two or more family dependents.
4. Child tax credit provides a tax break of up to $2,000 for parents and $500 for a non-child dependent.
5. Earned income tax provides up to $6,431 in tax deductions depending on the amount of income and number of children in a household.
6. Charitable donation tax break is available to taxpayers who itemize their deductions and also enables taxpayers to deduct charitable donations from their taxes.
7. Medical expenses tax deduction allows taxpayers to claim medical costs exceeding 7.5% that is unreimbursed of the tax payer’s adjusted gross income over a year.
8. State and local deductions allow taxpayers to claim up to $10,000 In tax deductions for a combo of local and state taxes. This including property taxes.
9. Retirement plan tax deductions allow up to $18,500 into a self-employed or company sponsored 401(k) plans. Depending on your income status deductions on individual retirement accounts are available.
10. Health savings account tax break – with this health savings accounts up to $3,450 for individual contributions and $6,900 for family-level contributions.
If needed, work with a specialist to enable you to save the most money possible on your tax returns this year.
How to Start on the Retirement Process/by Aubrey Lovegrove
It is recommended that one should begin planning for retirement at the very least a year ahead of the expected retirement day. However, a RIF or an early retirement offer can help you make a quick decision on matters regarding retirement. Either way, it is advised to use the time you have wisely to plan ahead.
If the agency you are working with offers a seminar on pre-retirement counseling, it may be best to take it seriously. If your agency doesn’t offer such seminars, do consider attending one offered by a firm in the private sector. Your agency may even pay for it in some cases.
To make sure that your official personnel documents cover all your federal employment, get in touch with your agency’s benefits counselor and go through your folder. Also, go through the effective dates of each pay adjustment, life insurance coverage, and your present health benefits. The two of you can straighten out anything that is inaccurate or missing.
Go ahead and verify when you’ll meet the age and service requirements to retire if your OPF is updated and accurate. Also, ensure that you meet the requirements needed to carry your life insurance coverage and health benefits into retirement.
Ask for an estimate of your annuity retirement; you’ll also need an estimate of your special retirement supplement (that is if you are a FERS employee). You need to find out how your annuity can be affected if you are currently receiving military retired pay. It’s a rule that you have to waive your military retired pay and make a deposit before retirement for that time to be included in the calculation for your civilian annuity. On rare occasions, you might receive both, but even then, a deposit needs to be made so as to get credit for that time. Filling out your retirement application is the last step, and if everything checks out you’ll be well on your way to retire on the day you have chosen!
Retirement Funds vs Emergency Fund/by Aubrey Lovegrove
You may end up frustrated at the low return on your investments if you choose to save your money in an emergency fund. Don’t be; this rainy day money is meant to be ready and accessible in the event of a storm.
A certified financial planner helped answer some important questions on if you should pull out retirement money to pay off consumer debt, as well as where to park your emergency fund.
Question 1: At the age of 65 and recently retired from federal service, what should be done when it comes to the Thrift Savings Plan? What happens in the event that there is a large sum of tax and consumer debt?
Answer: There would be a huge tax bill withdrawing all your TSP at once. It’s important to figure out how much can be taken out each year in a low tax bracket. Consider working with an hourly financial planner or an accountant to do this. Also, create a plan to pay off the debt using your current funds and the small amounts you can take out of the TSP over time.
Question 2: As a retired federal employee in the late 60s with a spouse turning 71, what can be done about a larger home that is no longer age-friendly?
Answer: It is important to figure this out sooner rather than later if your house can be made age-friendly. Consider talking to an hourly financial planner to help you determine the cost of your options and see if you have the resources to meet them.
Question 3: Let’s say that there is $75,000 in a money market account for emergencies, like a layoff, for example. Does it make sense to make $65,000 work harder in a year and leave $10,000 in the money market for fluidity’s sake?
Answer: For one year, that is a good rate. However, be sure to have at least one month of expenses in the liquid money market to avoid getting hit with penalties if you need to tap some of that money.
Overall, the best way to make sure you are making the right decision when it comes to what should be done with your retirement funds is to reach out to a financial planner and work with them directly.
Are You Ready for the New Federal Income Tax Form?/by Aubrey Lovegrove
The number of various major changes under the new tax law may make your 2018 federal income tax return unlike anything you’ve seen in the past. The first proper steps can help you fight anxiety and tackle your taxes. The earliest IRS will accept returns is Jan 28, seeing as the deadline is April 15.
Pick up a copy of last year’s tax return. The tax rules have dramatically changed, and there’s a 1040 form with a new look. The old return for the 2017 tax year can be a road map for making sure you have gathered all the paperwork you need to file your 2018 tax return.
An old 1040 may remind you that you don’t have a 1099-INT from a bank account or the latest 1099-DIV from a mutual fund to report dividends and capital gains.
Find valid social security numbers; IDs ensure that you have the accurate social security numbers for you, your spouse and your children as well. If you had a baby in 2018, you would need the newborn’s social security number for your tax return. Some tax preparers for some form of identification to prove who you say you are. You can make it a point of carrying your drivers license or state identification number. In addition, some states will reject an e file on a state return if you don’t submit information from a state ID or driver’s license.
See if you can file for free. The IRS site offers a program that allows taxpayers access to brand-name tax products, free of charge, to prepare a federal tax return and file it for free, depending on their income. The program has reportedly been made more consumer-friendly to chop off some outside marketing efforts. H&R Block also offers its free file program via the IRS site to those between the ages of 17 and 51 and with an adjusted gross income of $66,000. In addition, H&R Block offers free file of a state return if you qualify for the federal return.
Take time to review a checklist. You might receive a checklist via email or in the mail if you are working with a tax professional. Sites such as H&R Block also provide a checklist that can easily be used by anyone to help them figure out what information they need to complete a tax return. If you currently reside in the United States and need a replacement form SSA-1099 or SSA1042S, the Social Security Administration (SSA) allows you to go online and get an instant, printable replacement form with a My Social Security account.
Know your bank account. If you would like your tax refund directly deposited into your account, it would be wise to triple-check your routing number and bank account number. A lot of tension can be avoided if you make sure to key in the correct number.
It may be possible to make the correction to your bank information before e-filing your tax return again. That is if the IRS rejects your return. By using direct deposit, you would get your refund faster. Additionally, direct deposit also helps avoid the chance of a tax refund check getting lost or returned to IRS because the post office said it could not be delivered. The IRS emphasizes to taxpayer’s that they should only deposit refunds directly to accounts that are their own; in their name, their spouse’s name, or both if it’s a joint account.
Difference between CSRS and FERS
TSP CSRS, or the Civil Service Retirement System, offers the Thrift Savings Plan as a supplement to your CSRS Annuity or military pay- as of January 1st, 2018, military employees also participate in a military TSP.
TSP and FERS, or Federal Employees’ Retirement System, makes your TSP one part of a three-part retirement plan. This also includes the FERS Basic Annuity and Social Security.
The difference between the FERS or CSRS Annuity and the TSP is that the annuity is based on your years of service, rather than how much you have contributed, and is also voluntary, as opposed to the annuity.
Regardless of which retirement system you qualify for, contributing to the Thrift Savings Plan is vital to your retirement, especially if you contribute early. TSP compound interest means that the earlier you start to make contributions, the better. However, if you did not start saving at an earlier point, committing to a steady and consistent contribution schedule will almost always produce positive results.
How does TSP work?
If you are a new federal employee, you most likely have an established account and were enrolled in a 3% payroll deduction. If you were hired before July 31st, 2010, you were not automatically enrolled in a TSP account and will need to create it yourself. For CSRS employees and members of the uniformed services, you must elect to contribute to the TSP. You are also not eligible for agency contributions.
You can elect to stop or change your contributions at any time. Check with your payroll office or agency to find out how to sign up for TSP. You may be required to use your agency or service’s electronic system, or you may have to submit Form TSP-1 (Form TSP-U-1 for uniformed services). The Thrift Savings Plan website has the forms available if your agency or service accepts them.
There are five core funds in the Thrift Savings Plan- four of them are index funds, which mean that they are exactly matched to a broad market index.
- G Fund (Government Securities Investment Fund)
- This fund does not invest in an index. The only fund that it is connected to is a nonmarketable treasury security issued for the TSP by the U.S. Lowest return and risk
- F Fund (Fixed Income Investment Index Fund)
- Matches the Barclays Capital U.S. Aggregate Bond Index. Slightly higher return and slightly higher risk.
- C Fund (Common Stock Index Investment Fund)
- Out of the three stock funds in the TSP, the C is considered the most conservative. It is connected to the Standard and Poor’s 500 Index, which has greater volatility than either the G or F funds.
- S Fund (Small Capitalization Stock Index Fund)
- This fund is connected to the Dow Jones U.S. Completion Total Stock Market Index, which is a total of 4,500 companies that fall outside of the S&P 500’s list. Potential for large growth, but also large losses.
- I Fund (International Stock Investment Fund)
- The only internationally invested fund. High risk, but potentially high reward.
There is another option for Thrift Savings Plan investment funds- the L funds. These are funds that actually invest in a variety of all the other funds and target a specific retirement date, initially investing in the more aggressive funds and slowly moving into the more stable bonds funds as retirement approaches.
How to change my TSP contribution
If you have not made a contribution election through your agency to start contributions or change the way your contributions work, there are a few steps:
- Ask your personnel or benefits office whether your agency or service handles enrollments
- Determine the amount you want to contribute and whether you want a Roth or Traditional TSP
- Return your completed TSP-1 or TSP-U-1 to your employer to get your payroll deductions set up. Your election should be effective no later than the first full pay period after your agency or service receives it.
Withdrawing from the TSP
You have several withdrawal options that you can choose from. Partial withdrawals are allowed in a single payment. You can also make a full withdrawal with any one or any combination of the following methods:
- A single (lump sum) payment
- A series of monthly payments
- A life annuity (Thrift Savings Plan Lifetime payment options).
A combination of any of these three full withdrawal options is called a “mixed withdrawal.” You can have the Thrift Savings Plan transfer all or part of any single payment or, in some cases, a series of monthly payments, to a traditional IRA or an eligible employer plan by completing the TSP-70 form. Payments to you can be deposited directly into your checking or savings account using electronic funds transfer (EFT).
If you are a married Thrift Savings Plan participant (even if you are separated from your spouse), spouses’ rights apply to annuity purchases. If you are a married FERS or uniformed services participant with a total account balance of more than $3,500 and you are making a full withdrawal of your account, your spouse is entitled by law to an annuity with a 50% survivor benefit, level payments, and no cash refund. If you choose any other withdrawal option or combination of options by which your entire account balance is not used to purchase this particular type of annuity, your spouse must sign the statement on your withdrawal form that waives his or her right to that annuity.
FEHB Modernization is OPM’s Goal/by Aubrey Lovegrove
Contrasting different Federal Employee Health Benefits (FEHB) plans, and then enrolling in them, can be a daunting task, which is why the Office of Personnel and Management (OPM) is currently looking for vendors that can help set up a one-stop shop for all federal employees health care needs. Until February 15th, the RFI was open to inquiries, but March 11th is the date they are open until for responses.
This proposed portal would be used to find coverage for all current and retired federal employees and their families.
To put the need for modernization into perspective, the FEHB currently has 4 million people enrolled in it, with one million transactions each year. Premiums for the FEHB are over $54 billion.
Though the administration of FEHB is overseen by the OPM, things like enrollment and reconciliation, as well as most areas of benefactor’s services are spread out across different avenues in both the federal and private sectors. This complicates the process for most people who have enrolled and is more expensive to run on a technical and administrative level.
To rectify this, the Office of Personnel and Management is looking to streamline much of the current system, including enrollment processing and support, decision support, enrollment and premium reconciliation, and the warehousing and reporting of incoming data.
As the OPM has noted, the Central Enrollment Program (CEP) would be the ideal source for this data reporting, as they are able to show transactional data for all the insurance carriers and related agencies in the entirety of the FEHB.
The OPM is also looking for vendors who have an insight into AI capabilities that can administer multi-factor authentications and real-time data validations, while also giving employees the support and functionality they need.
The OPM is also looking into artificial intelligence that can figure out patterns in data and give an overview to authorized people enrolled in the program, while still complying with all the current regulations like the FISMA, FedRAMP, and NIST guidelines. As technology improves, so should the program.
Maximizing the Efficiency of Retirement Savings/by Aubrey Lovegrove
In recent times, there has been a particular focus in the US on retirement security. While assessing potential solutions to the multi-employer pension plan financial crisis, policymakers are also considering a plan that would allow small businesses to offer group retirement plans with other small entities. In Canada too, the Canada Pension Plan is getting stronger thanks to a consultation from the federal government.
Though the various talks and discussions have had very different topics and policies in mind, they all seem to have one theme; maximizing the efficiency of retirement savings. For each dollar of contribution, can we maximize retirement income for all workers?
Thanks to a recent report from the Healthcare of Ontario Pension Plan and Common Wealth, we can compare many different approaches to financing retirement. In order to reduce the cost of retirement for the average American citizen, five value drivers were tested;
-Fiduciary government improvements
-Longevity/investment risk pooling
-Better investment discipline
How will these five changes in the industry impact the cost of retirement? In truth, the results were surprising when compared over a lifetime of work. For example, if we consider all five of these value drivers a ‘good’ pension plan, the typical individual approach would require C$1 million more for the EXACT same retirement income.
For a dollar of contribution, the research showed the following yields;
-Typical Individual Approach – C$1.70
-‘Good’ Pension – C$5.32
Of course, not everything in the report is applicable to the United States, but the five value drivers are relevant for all countries. As proof of this, similar results actually came out of a study in Australia when comparing retail funds with its industry superannuation funds.
Real Opportunities for Progress
Perhaps the most important detail to note from this study is that a ‘good’ pension isn’t unachievable. Rather than being theoretical, all of the five value drivers can be found in the world’s best developed pension plans. In fact, Canada’s own HOOPP is a prime example and could be used as guidance for those looking to improve the efficiency of retirement savings.
Among other things, the need for expanded workplace retirement plans is obvious. In recent years, decreasing participation has quickly become a theme, but both the US and Canada are now attempting to fix the coverage gap. In the same report, some suggestions included using regulation and public policy as the driving force for increased coverage and even allowing access for contingent workers (consultants and freelancers).
As well as improving coverage, the efficiency of plans has also been a topic of conversation. How could we improve the efficiency of workplace retirement plans? With the five value drivers used in the report;
-Low Costs and Transparency – In-house investment managing (for the larger plans), economies of scale, and transparency across the board.
-Mandatory Contributions – Although the US is certainly ahead of Canada when it comes to automatic enrollment, there’s still potential for improvement.
-Investment Discipline – All workplace retirement plans could have streamlined investment choices; all default choices should also be individually chosen (and diversified) according to age.
-Improved Fiduciary Governance – Put members at the top of all concerns with non-profit, independent agencies governing the plans.
-Investment/Longevity Risk Pooling – For stakeholders, a common preoccupation is to provide support in the decumulation stage for DC plan members.
In the coming months, improving the efficiency of retirement building for all workers in the US is likely to be a continuing debate. Fortunately, research is now suggesting actionable advice, and the coverage gap seems to be a problem with solutions ahead!
Incentives for Federal Worker Early Retirement/by Aubrey Lovegrove
In recent times, it’s fair to say the federal workforce has been experiencing some changes. With both sizes and scope adjusting, many employees have been offered incentives to retire early. Not only have agencies been forced to reorganize, but some have also needed to restructure and even downsize their operation. As a result of the Voluntary Early Retirement Authority (VERA), those agencies experiencing these changes may offer employees the opportunity to retire early.
When times call for large organizational changes, VERA was initially set up so that agencies could meet new demands without large disruptions to the workforce and the tasks they complete. As well as helping agencies, VERA also helps certain federal workers, years before normally eligible, to receive annuity payments.
If you’re wondering about the difference in the provisions under the Federal Employees Retirement System (FERS) and the Civil Service Retirement System (CSRS), they’re exactly the same, so there’s no need to worry here.
Early Retirement Requirements
Are you eligible for early retirement under VERA? Are your colleagues or other employees of the agency eligible? There are some requirements under the regulations, and we’ve listed them below;
-Before the agency requested the approval of VERA from the Office of Personnel Management (OPM), you must have been in continuous employment at the agency for 31 days.
-The US Code for CSRS and FERS employees also has VERA minimum age/service requirements that apply in this very situation. For example, anybody who has 25 years of creditable service under their belt will automatically qualify. For anyone with between 20 and 25 years of creditable service, they’ll need to be at least 50 years old.
-For either poor performance or misconduct, you mustn’t have received a final removal decision.
-Your position at the agency must be a permanent one, rather than a time-limited one.
-Your position should also be covered by the VERA authority.
If you pass all these requirements and you want to take an early retirement, you will be eligible to do so during the agency’s VERA acceptance period.
Before making any decisions, we highly recommend contacting an attorney. If you’re eligible for a VERA offer, make sure you understand all the implications of accepting and a lawyer and finance professional will both help you to do this.
When looking for an attorney, remember to look for experience. The more experience they have in dealing with people in your position, the better placed you’ll be to not only make the right decision but to handle the process in the right way!
Is $1 Million in a 401(k) Really $1 Million?/by Aubrey Lovegrove
Though $1 million might be staring back at you when you look at the details of your 401(k) account, we must always remember that retirement accounts are ‘tax-deferred’ rather than ‘tax-free.’ Often, those approaching retirement think that they’ll keep 100% of the money in their retirement account, but this is sadly untrue.
How Does Tax Work?
While you might have enjoyed many years of building the fund without worrying about tax, it will now be due on every withdrawal. No matter what funds you’ve built, you’ll be taxed ordinary income tax rates. Furthermore, those who withdraw from the account while under the age of 59 and a half years will have to pay a 10% early withdrawal fee. Too often, these implications are forgotten, and it can lead to quite a shock.
If you’ve thought about taking a large withdrawal to pay off a mortgage and debts, you’ll need to be careful because financial planners suggest this could be the difference between your current tax bracket and the one above. According to the president of AJW Financial Partners, Nicolas Abrams, it’s common for retirees to want upwards of $200,000 from their 403(b), 401(k), and TSPs to pay off a mortgage. However, this lump sum will be treated as income, and it can end up costing more than $50,000.
Instead, Abrams suggests sitting down with a financial planner and assessing other routes to prevent significant chunks of retirement funds being wasted. Unfortunately, many only seek professional advice after taking a huge withdrawal. Not only are many being pulled into the 24% tax bracket, but they’re also forgetting about the early withdrawal penalty too (another 10%).
Expert Withdrawal Advice
When dealing with 401(k), 403(b), or any other retirement accounts, Abrams says your first thought should always be to contact a financial professional. Before even considering withdrawals, this will allow you to avoid tax losses that are not only significant but also unnecessary. With a finance professional, a plan can be devised to avoid tax complications. If tax isn’t taken at source and is then not paid on time, this can lead to additional penalties and perhaps highlights the minefield in which retirement account withdrawals operate.
For one financial planner in Boca Raton, Harvey Bezozi, he says he often has to fight for tax relief with clients. Depending on the situation, he’ll assess how the IRS calculated the penalties and tax fees before then suggesting solutions. In some cases, Bezozi will request a reduction due to first-time penalty abatement or a hardship withdrawal.
Sadly, stories of people running into danger after inheriting retirement accounts are also becoming more common. In one case, somebody inherited a $500,000 IRA in their mid-30s and wanted to withdraw the whole lot immediately. After not realizing the repercussions of this, they went into a higher tax bracket and lost 40% to tax. While on this theme, a common solution to inheriting a retirement account is to open an inherited IRA and gradually bring the balance down.
Since IRA and 401(k) distributions are considered income, the amount you withdraw will also impact Medicare premiums which is yet another consideration (and potential trap!). All things considered, we highly recommend talking to a financial and tax professional so you can sit down and assess your financial position. After spending decades building this brilliant retirement fund, we’d hate to see you fall into the trap of many before you and lose a significant percentage. With the right team, you can save your retirement and prevent crucial mistakes!
Loans Available for TSP Participants in Next Shutdown/by Aubrey Lovegrove
Should another government shutdown arise, the Federal Retirement Thrift Investment Board (FRTIB) has taken steps to ensure that all Thrift Savings Plan (TSP) participants can request financial assistance in the shape of a loan. For those in non-pay status as a direct result of a lapse in appropriations, borrowing from retirement accounts will be an option with these new changes.
As well as taking a loan, the rule changes will also allow for loan payments to be suspended before resuming again upon the end of the lapse. As long as the worker is excepted and working without pay or has been furloughed, this will apply; those in a non-pay status for other reasons will not have the same luxury.
New Stance for the FRTIB
In a recent interview, the director of external affairs, Kim Weaver, noted how these changes were essential since this year’s shutdown reached five full weeks. As many federal workers experienced during the shutdown, current rules give a penalty for missing loan payments, and this caused havoc as the whole system is automated. With workers receiving no pay, a certain percentage couldn’t go towards the loan payments, and they couldn’t request a loan since they weren’t in pay status.
With this interim rule, this kink in the rules will be fixed somewhat; the FRTIB is willing to take public comments before the final ruling, but they’re trying to push the changes through as a matter of urgency.
Is a Second Shutdown Likely?
With the White House and Congress constantly at war over the wall’s funding, another shutdown is entirely possible. Replacing the automated processes, manual systems have been introduced to allow for the immediate introduction of the interim rule. If a shutdown were to occur tomorrow, for example, the systems would be in place to allow for TSP loans.
Despite these changes, the FRTIB wants to make clear that a TSP loan should never be an adequate replacement of salaries. By taking a loan under these circumstances, investment earnings can be missed, and repayments are still necessary to avoid extra tax. However, it seems to be a case of ‘something is better than nothing,’ and it should at least allow for some financial relief in troubling times.
Federal Worker Advice
How can federal workers apply for a loan if another shutdown occurs? All information will be available on the TSP website. Thankfully, the FRTIB is working with the Office of Personnel Management, the Office of Management and Budget, and the IRS so federal workers have an easy process to follow.
After the previous shutdown, a number of Congress members suggested TSP rule changes with many focused on hardship withdrawal availability. While looking at the problem from slightly different angles, they all seemed to suggest a removal of the 10% early withdrawal fee and the ability to repay the loan. For the FRTIB, they’ve already noted how the provisions during a presidentially-declared natural disaster could be extended to include government shutdowns. With this in mind, it would allow workers to take penalty-free hardship withdrawals.
So far, hardship withdrawal changes haven’t been confirmed, and the FRTIB have said they will continue their work with congressional staffers. According to Weaver, the worst-case scenario would be passing a bill and then not having the tools to implement it quickly which is why this current stage is so important (and why we’ll have to wait for news in the coming weeks!).