Tag: thrift savings plan

thrift savings plan

The Thrift Savings Plan is one of the most important parts of a Federal Employee’s retirement plan.  The Thrift Savings Plan is similar to a 401(k) plan offered to Private Market employees and has very similar rules and regulations.  An Advantage of the Thrift Savings Plan is the automatic contributions that FERS eligible employees receive along with the relatively inexpensive average internal expense ratio that is charged to Federal Employees on TSP Fund investments.

Thrift Savings Plan (TSP) by Joe Kosek

Thrift Savings Plan (TSP)

By Joe Kosek

 

 

The Thrift Savings Plan (TSP) is a tax-deferred retirement saving and investment plan similar to a 401(k) plan in the private sector. For many federal employees, the TSP very likely will be their largest retirement benefit.

 

There are three types of TSP contributions:

 

  1. regular employee contributions;
  2. agency automatic (1%) contributions; and
  3. agency matching

 

Saving for retirement through the TSP has the following advantages:

 

  1. automatic payroll deductions;
  2. diversified choice of investment options;
  3. choices of tax treatment for contributions;
  4. traditional (pre-tax) contributions and tax-deferred investment earnings; and
  5. Roth (after-tax) contributions with tax-free earnings at

 

The TSP has a variety of investment options. The following is a brief summary of the available investment options:

 

  1. G Fund – Government Securities Investment Fund
  2. F Fund – Fixed Income Index Investment Fund
  3. C Fund – Common Stock Index Investment Fund
  4. S Fund – Small Cap Stock Index Investment Fund
  5. I Fund – International Stock Index Fund
  6. L Funds – Lifecycle Funds

 

If you are covered by the Federal Employee Retirement System (FERS), the TSP is one part of a retirement three-legged stool, which also includes your FERS basic annuity and Social Security benefits.

Retirement Assets Reach Over $19 Trillion in 2016

Per recent data shared by the Federal Reserve, retirement assets reach over $19 trillion. This data demonstrates the seriousness that people are approaching their retirement financial planning. Have a look at the numbers and see how the assets are doing when they are classified into various categories.

Retirement Benefits

Retirement Benefits Fund Assets for DB and DC Plan Also Grew

The data shared by Federal Reserve also states that retirement fund assets for Defined Benefit Plan and Defined Contribution Plans (like 401(k)s and the Federal Government’s Thrift Savings Plan) have also grown a lot in the last year. The total assets across the public and private defined contribution (DC) and defined benefit (DB) plans grew by 8 percent. It was $17.6 trillion in 2014, and retirement assets reach over $19 trillion in 2016.

Total financial assets available in private and public DB pension plans were $12.4 billion in 2016. It has increased by 8 percent as it was just 11.5 trillion in 2014. Similarly, the total financial assets in DC plans were $6.7 trillion in 2016. It is up by 10 percent from $6.1 trillion in 2014.

Private DB pension plan assets in 2014 were $3.2 trillion. They were at $3.3 trillion in 2016 which shows an increase of 3 percent. Private DC plan assets in 2014 were $5.2 trillion, and they grew by 9.6 percent in 2016 to stand at $5.7 trillion.

Pension Funds’ Biggest Asset Class Holding

When discussing the performance of retirement benefits fund assets, it is vital to consider pension funds’ largest asset class holding. The largest asset class held by pension funds was corporate equities as it was $4.8 trillion. It is closely followed by debt securities and mutual funds which stand at $3.9 trillion for both of the asset classes. The fourth biggest holding of pension funds in 2016 was Treasury Securities that stood at $2.3 trillion.

Government’s Assets

When reviewing the performance of retirement benefits fund assets, it is essential to see how the assets of the federal government have performed. The DB plan assets of the federal government were $3.4 trillion, and DC plan assets in 2016 were much less than that as they were just $466 billion. DB plan assets of state and local governments were just $5.6 trillion in 2016 while DC plan assets of state and local governments were just $490 billion.

Looking at the Flows

Debt securities were the biggest purchase of private and public DB plans in 2016 as they were around $190 billion, followed by Treasury Securities that were $120 billion and Corporate and Foreign Bonds at $61 billion.

For all the private DC plans, the highest numbers of inflows in 2016 were to mutual funds, at $24 billion. It was followed by debt securities at $22 billion and corporate and foreign bonds at $12 billion.

For the DC plans of federal government, the biggest purchasers in 2016 were debt and treasury securities as both were at $16 billion. They were followed by assets in the Thrift Savings Plan that were about $12 billion.

The biggest purchases of local and state DC plans in 2016 were unallocated insurance contracts at $8 billion and miscellaneous assets at $7 billion.

Conclusion:

The data shared by the Federal Reserve regarding retirement benefits fund assets is a good source of information for investors who wish to understand how these large plans are investing their asset, which may lead to an understanding of how these money managers perceive the economy and the potential investment risks that lie ahead.

Federal Employees With More Than $1 million in Their TSP

More and more Federal Employees are amassing more than $1 million in their TSP or thrift savings plan account.  The reasons vary from the safety of the investment options to government contributions, to good performance. It is believed that if the funds continue to increase and people continue to invest in them steadily, the number of people who have more than $1 million will increase even further.

more than $1,000,000 in their TSP

More and more federal employees are amassing more than $1,000,000 in their TSP

How Many People Have More Than $1 million  in Their TSP?

As per reports, about 10,000 individuals have a thrift savings plan account over $1,000,000. It is also reported that about 1.4 million account holders currently have balances between USD 50,000 and USD 249,000 after an average of 18 plus years with Uncle Sam. It clearly indicates that most people have a lot of time to grow these accounts further.

In mid-December, 35,161 TSP account holders had a balance ranging from USD 750,000 to USD 999,000. The average account holder had been in the government for just more than 28 years which clearly indicates that these people grew their balances by regularly investing in S, C and I funds of thrift savings plan. These are indexes of the Large Cap (C), International Index (I) and Small Cap (S).

Earlier Investors of TSP

It is pertinent to mention that when the thrift savings plan started, the only federal employees who had million dollar accounts were typically well-to-do private sector lawyers who had turned into federal judges. People who joined the government after long and lucrative careers in the private sectors were also among first few of the thrift savings plan investors.

The Reasons Behind Attracting to TSP

Some people might wonder about why smart and rich people opted to switch their retirement savings accounts to the federal TSP. Well, there are a lot of reasons for that, number one being safety. All these reasons are explained below.

The Monitoring

It is a fact that as an investment, TSP is the most monitored Qualified plan available. Participants range from retired and active letter carriers to FBI agents, CIA officers to NASA agents and even the members of the Senate and House.

Unique Treasury-Securities

People also love investing in the thrift savings plan as they get unique treasury-securities, G-fund which is not available to any other retail investors.

Lowest Administrative Fees

Most Americans also like investing in the thrift savings plan because it has some of the lowest administrative fees in the business.

Recent Performance

It is expected that the number of federal employees who have more than $1 million in their TSP will continue to grow in the future as well because thrift savings plan has ended 2016 on a positive note and because of the age of the average employee being in some of their prime savings years.

Conclusion:

It can be concluded that the report which says more federal employees with more than $1 million in their TSP is good news for all the investors.  It clearly indicates that investors who opt for consistent savings efforts can also earn a lot of money over time if they stick to a plan. It is also quite clear that the recent performance of the TSP funds will lure more investors to it in 2017 which will probably increase the number of millionaire investors in the Federal government.

Fed Interest Rate Hike and TSP Growth

Economic growth has triggered a Fed Interest Rate Hike and TSP Growth coincides.  Since the start of 2017, the US economic data has steadily improved, and the Federal Reserve is raising rates as a result. A steady increase in the financial data is demonstrating a sound reason for higher rates. The increased economic activity is also helping the government pave the way for continued increases in the interest rates. The Federal Reserve rates had been predominantly stagnant over the past decade, and this rate hike may be something that suggests more ‘Interest Rate Normalization.’

Fed Interest Rate Hike and TSP Growth

Since the November election, there have been a solid number of new jobs and an overt acceptance by much of corporate America that the future under Trump looks rather bright. Corporate America’s excitement about prospects may prove to be a great sign for the federal government.

This increase in jobs and economic data has caused the Federal Reserve to raise rates in recognition that the economy needs less help under Trump to achieve the desired 2% target growth. Federal employees who are investing in their Thrift Savings Plan have likely seen a rather sharp increase in their account values due to the market’s run-up since the election. Wednesday’s rate hike, which in decades past has typically been seen as a negative to the potential of the market were met with near record-high closes for the DOW, S&P, and NASDAQ.

To be able to see a higher rate bias from the Fed finally is something that has brought smiles on the faces of many people – especially fixed income savers. Here’s hoping that the rate increases lead to a more normal interest rate market and that that market brings about ongoing economic expansion.

What Are the Fastest Growing Retirement Plans?

A recent report has highlighted some of the fastest growing retirement plans and how the assets of the top 1000 retirement plans in the US are growing. The topper in the list is the popular TSP or Thrift Savings Plan. Other plans have also performed well recently, and according to the Pensions & Investments’ annual survey, corporate sponsored 401(k) plans outperformed the TSP during this most recent period. This information will come in handy to people who are planning to invest in a retirement fund or are considering switching from their existing plan.

Retirement Benefits

The Assets of The Fastest Growing Retirement Plans

The Pensions & Investments’ annual survey that was released recently stated that assets of all 1,000 largest retirement benefits plans of the US grew to USD 9.39 trillion as on September 30, 2016. It is 6.2 percent more than the figures of 12 months earlier. It is even the highest level in the history of the Pensions & Investments’ annual survey.

Defined Benefit Pension Plan Assets vs. Defined Contribution Plan Assets

During the survey period, of 12 months, the assets of defined benefit pension plans in the top 1000 grew by 4.9 percent to a total of $6.12 trillion. In contrast, the assets of defined contribution like the TSP or 401(k)s rose by 8.6 percent and reached the level of $3.28 trillion.

Expert Opinion

Jeff Boettcher, Principal of BWM Advisory, LLC of Scottsdale, Arizona stated that every year this survey illustrates how important these resources are to individuals as well as the economy in general.  Mr. Boettcher went on to say that these investments represent the largest pool of investable assets anywhere in the world.

Defined Contribution vs. Defined Benefit Plans

Among the 200 retirement plans listed as the largest, the worth of assets was USD 6.79 trillion on September 30, 2016. It is 6.2 percent higher than a year earlier. Of this, about USD 1.96 trillion belongs to the DC plans; it is up by around 8 percent. In contrast, approximately USD 4.83 trillion belonged to DB plans. It is up by about 5.5 percent.

The Gap

The survey revealed that there was a gap between the number of public and corporate funds reporting a double-digit asset growth. About 25 of the top 100 corporations in the top 200 saw the assets grow by 10 percent or more. In contrast, only four of 77 public plans saw the assets grow by 10 percent or more.

Key Reason

Consultants think that the reason behind the gap mentioned above is the longer duration of corporate pension funds’ propensity to invest in fixed-income assets.

Top 5 Largest Retirement Benefits Plans

The survey results stated that all five of the largest retirement plans in the country are public plans and their rankings have been the same as last year. As expected, the federal retirement thrift savings plan that is based in Washington DC is the largest retirement plan of the country and had $485.58 billion in assets on September 30, 2016. It has increased by about 9.5 percent a year before.

The second position, the California Public Employees’ Retirement System, in Sacramento, had $306.63 billion in assets and saw an increase of 7.3 percent from the last year. Three others in the top 5 ranking were California State Teachers’ Retirement System, West Sacramento, New York State Common Retirement Fund, Albany and New York City Retirement Systems. They were worth $193.87 billion, $184.46 billion and $171.57 billion respectively. They saw an increase of 6.6 percent, 6.3 percent, and 10.6 percent in that order.

Corporate vs. Union Plans

Chicago-based, The Boeing Co, was the largest corporate retirement plan. It has assets worth $107.38 billion, and it has increased by 5.3 percent. Western Conference of Teamsters Pension Trust, Seattle is the largest union plan with $37.24 billion in assets. It has been holding steady from its $36.91 billion in assets a year before. Its overall rank is 45.

Survey Details

Pensions & Investments has compiled a survey of 1,000 largest retirement benefits plans since the year 1979. The process of the survey includes reporting, data gathering and verification that is done by the entire U.S. editorial team of the news organization.

The questionnaires are sent to over 1,300 fund sponsors available in the organization’s database. Then the largest 1000 were identified based on the completed surveys, database searches, and follow-up phone calls & emails.

Conclusion:

Based on the asset growth of the Defined Contribution plans listed, it is clear that people continue to trust the value of their retirement plans. The survey also suggests that althought the Thrift Savings Plan is the largest in terms of assets, it is not the plan that is increasing in size the fastest. Whether the comparison is because Federal Employees are aggressively seeking alternatives to their TSP or because the performance of the underlying funds has been impacted for one reason or another is difficult to ascertain but worth considering if you are faced with the question about what to do with your retirement funds.

How are Federal Employees’ Benefits Expected to Change Under the New Administration?

Whenever the administration of the country is changed, one of the key issues that pop up in the minds of the federal employees is that how will the new government reform the federal employees’ benefits. Would FERS retirement or Federal Employee Health Benefits remain the same? Would feds be able to get a pay raise? Here we try to get answers for all these questions.

federal employees

Which Federal Employees’ Benefits are Expected to Change as per Indications?

If the indications offered by the new government are of any value, there are a lot of changes that will be related to the federal employees’ benefits. Let’s begin by having a look at whether feds can expect a salary increase in 2018 or not. Many people in the congress believe that federal employees’ benefits are too high and way beyond what’s offered in the private sector.

White House Press Secretary Sean Spicer has already stated that federal workforce has expanded by a significant number in the last two administrations as it went from 1.8 million to 2.1 million. He also said that the federal employee health benefits and retirement benefits are even now based on antiquated assumptions. The level of generosity of these benefits has long since abandoned in the private sector. The costs of the federal employees’ benefits are unsustainable for the federal government.

It is believed that if there is a pay rise in 2018 at all, it would be very small and the amount of the raise could also be tied to the performance ratings.

Making it Easy to Fire a Federal Worker

The Merit Act of 2017 that’s got 12 co-sponsors and is in the House of Representatives aims to ensure that a federal employee could be easily fired for a misconduct or lack of performance. This bill is referred to the House Committee on Oversight and Government Reform.

FERS Retirement System

The likelihood of changing the core one among federal employees’ benefits, the FERS retirement system is very high. Many of the Congress members believe that the federal retirement system is too generous. A report had recently noted that the federal government contributed up to 18 percent of federal employees’ retirement which includes the thrift savings plan contributions. The same report mentioned that the private sector companies contribute just three of five percent to the pension programs.

One recent proposal says that the federal government contribution should be reduced to eight percent instead of 18 percent. This proposal would be harmful to the new feds who have yet to join or those who have less than five years of service.

Federal Health Benefits

A proposal has also been made to eliminate the federal subsidy for retiree health benefits of the new hires. As the federal government continues to offer FEHB plans to federal employees who retire, a way to cut down on the expenses of federal government would be to eliminate FEHB subsidized health insurance coverage after a person retires.

Another proposal says that the federal subsidy for retiree health benefits for new feds should be eliminated. As per this proposal, the federal government would continue to provide access to FEHB benefits in retirement. The employee would be responsible for paying the total cost of the premiums. It is a fact that the government subsidizes a large percentage of the cost of FEHB health insurance, the result would probably include shifting many of the new retirees to Medicare.

Federal Labor Relations Program

When all the federal employees’ benefits are under scanner, it is also likely that the federal labor relations program will also be changed. One of the most likely changes would be to place restrictions on how a person uses the official time. A GAO report, released recently stated that there was no accurate recording and reporting of the official time in Department of Veterans Affairs. It is highly unlikely that the Department of Veterans Affairs is the only one department where the time is not reported or recorded.

So, Congress may pass restrictions on federal employees using the official hours to work for any union. In all probability, there will also be restrictions on using government facilities for union activities. The appeal options available to federal workers may also be restricted in the future.

Conclusion:

Well, after reading the aforementioned information it would be right to assume that many federal employees’ benefits are really in danger of being removed or changed drastically. But before a federal worker starts worrying about the salary hike, FERS retirement changes or Federal Employee Health Benefits, one should realize that changes always occur with any new administration. Sometimes, the fear of change can turn out to be worse than the change itself. Hence, one should not fear the change. One should remember that there are people out there who have the best interests of the federal workers in their hearts and they will work towards making these changes more acceptable.

Avoid Thrift Savings Plan Withdrawal Penalties

Federal Employees can be subject to a 10 percent Thrift Savings Plan withdrawal penalties if they wish to access their funds prior to 59 1/2 years old can be subject to a 10 percent penalty. To avoid TSP withdrawal penalties you can exercise various thrift savings plan withdrawal provisions.  The date of implementation of the removal of penalty is December 31, 2015 and it was decided post the passage of H.R. 2146.

tsp

Feds Can Avoid Paying Thrift Savings Plan Withdrawal Penalties

There are eight key positions that can be used by feds to save themselves from paying a 10 percent penalty on their thrift savings plan withdrawals. The first one includes all the law enforcement officers. Second on the list includes firefighters and the third include border protection officers as well as customs officers. The fourth category includes the air traffic controllers, the fifth includes nuclear materials couriers while the sixth are U.S. Capitol Police. The seventh category includes all the members of supreme court police and finally the DSS Agents of the Department of State. No single person who is not in the aforementioned categories is eligible for the exemption. Even the special category employees who are not serving among the aforementioned positions do not benefit from the H.R. 2146.

The Surprise

When the TSP issued Forms 1099 for the year 2016 tax year, numerous retirees in the aforementioned eight positions got a surprise on the TSP Form 1099 as the 1999s display a distribution code of “1” in the seventh box which indicates early withdrawal with no exception.

This code signifies to the IRS that the withdrawal that was made is subject to 10 percent penalty and the correct distribution codes for the aforementioned eight positions is code “2” which is an early withdrawal – exception applies and indicates that 10 percent penalty is not applicable.

This issue has arisen because the TSP does not possess information in its files regarding whether the participants qualify for one of the eight positions. TSP is now directing the agencies to mark the participants who fall under the eight categories to a designator code “P” while transmitting the employee information to the thrift savings plan.

The Responsibility

As thrift savings plan didn’t ask the agencies to designate the code P sooner, it’s the responsibility of a person to ensure that the issue is fixed for the 2016 tax year. It can be done by following any of the two methods listed below.

The Agency Route

In the first option, a person will need to connect with his or her agency to correct the underlying records. The person must request your agency to transmit the “P” code on the thrift savings plan. When it’s done, the person needs to request a new form 1099 that is corrected from the TSP. This method might not be expedient as the tax deadline is April 18th, 2017 and a person might not complete the process via an agency that quickly.

Use Form 5329

The other option and the best one is to file a form 5329 along with the federal tax return. Let us explain this with an example to make things easier. Let’s assume that a person received a Form 1099 from the thrift savings plan for USD 12,000 with the distribution code “1” and the person is serving under one of the eight positions listed above. The person will need to complete Form 5329 by listing the USD 12,000 on line 1 of the form and enter reason code “01” and USD 12,000 on line 2 of the form 5329.

The Form 5329 has different codes that are not similar to the Form 1099 codes. Hence, one should not assume that distribution code “01” on the Form 5329 is same as code”1” on the Form 1099. Form 5239 will tell the IRS that a person’s thrift savings plan contribution was a qualified plan distribution post a separation in service in or after the year that a person turned 50 and was a qualified public safety officer.

As a PSO annuitant, a person’s federal tax return would already contain a statement that a person is a PSO and the letters PSO would already appear on the line 16b of Form 1040 if a person is paying the FEHB premiums via OPM because there is an exclusion of up to USD 3,000 for the premiums paid for FEHB.

In case a person is using TurboTax to prepare the tax return and has provided all the proper information to the software during the interview, TurboTax will prepare a Form 5329 for the person’s return automatically.

Conclusion:

It is quite clear that federal employees can save themselves from paying a 10 percent penalty on their thrift savings plan withdrawals by choosing option 2 mentioned in this article. If a person wants to save the penalty on all thrift savings plan withdrawal options, the Form 5329 will be handy as compared to approaching the TSP via one’s agency.

Limits of Thrift Savings Plan in 2017

The limits of thrift savings plans in 2017, one of the most popular programs in the U.S. are mentioned here. It will help people to increase or decrease their contributions for the said year.  This information is vital for about 5 million U.S. civil service employees and retirees who are free to make use of this popular retirement program.

tsp

What are the Limits of Thrift Savings Plan in 2017?

The simple answer to the question of what are the limits of thrift savings plan in 2017 is USD 18,000. This amount is applicable for all the Roth and TSP traditional contributions. For people who are over 50 years of age, a catch-up contribution of $6,000 is allowed. The limits refer to the money people choose to withhold from the paycheck and deposit in the TSP.

Annual Addition Limit

The annual limits of thrift savings plan in 2017 is $54,000 for 2017 tax year. It includes all the elective deferrals mentioned above as well as the employer matching contributions and agency automatic contributions. It does not include the catch-up allowance which means the actual overall contribution limit to a TSP is $60,000 in 2017.

Some Facts

It is a fact that due to the TSP matching structure, the overall limit is rarely reached. As of now, the FERS agency automatic contribution rate is 1 percent of the annual salary and the matching contributions rate is dollar-for-dollar which can go up to 3% of the salary. It is 50 cents in the dollar beyond the said percentage and up to 5 percent of the salary altogether. Regardless of the salary of a person, the catch-up contributions are not matched.

It translated to a maximum contribution rate that is 4 percent of the salary. Since the highest matching contribution rate is 100 percent of the contributions, even the top paid government employees who are more than 50 years of age can theoretically contribute $24,000 via elective deferrals, get a 1 percent automatic contribution and receive an $18,000 match. Since the first and the last figures add up to $42,000, it would need a pretty big salary for the automatic contribution of the agency to produce a total which is close to the limit.

The Special Rule

While knowing the Postal Benefits: The Good The Bad and the Ugly of the TSP, one must remember the special rule that s offered to the members of uniformed services who are serving in a combat zone. This rule can push their contributions to the limit as the tax-exempt pay that is earned in a combat zone is not counted towards the deferral limit if contributed to a TSP but it is counted toward the overall limit.

Learning about L Funds by Todd Carmack

Todd Carmack discusses L funds and retirement 

The L Funds (Lifecycle funds) became part of the TSP allocation options in August 2005.   The objective of L funds is to provide a balance between risk and return combined with an employee’s future retirement year. The L Funds are designed to make life a little easier for federal employees by taking the guesswork out of trying to diversify and rebalance TSP allocations for retirement planning.

The L-funds are comprised of the six basic allocations of the Thrift Savings Plan:

G fund – government securities

F fund – government, corporate and mortgage-backed bonds

C fund – S&P 500 index fund (large cap companies of the US)

S fund – small to medium cap US companies

I fund – international stocks of more than 20 developed countries

These lifecycle funds offer both risk (exposure to stock market losses) and reward (exposure to stock market gains). The funds are designed to have greater risk in the portfolio the farther out your expected retirement date will be and a more conservative stance the closer you are to retirement. The idea is to pick the fund closest to your goal retirement date. Utilizing L funds and retirement planning can be helpful in preparing you for retirement. The funds will be rebalanced over time, going from containing higher percentages of risk (C, S, and I funds) to greater percentages of G fund as time gets closer to retirement.

Here is the current breakdown composition of the L funds:

L income – designed for those retiring in the next year or two.

G fund – 74%

F fund – 6%

C fund – 11.2%

S fund – 2.8%

I fund – 6%

L-2020 fund – retiring between 2017-2024

G fund – 50.28%

F fund – 5.72%

C fund – 24.32%

S fund – 6.48%

I fund – 13.2%

L-2030 fund – retiring between 2025-2034

G fund – 30.78%

F fund – 5.72%

C fund – 34.53%

S fund – 9.92%

I fund – 19.05%

L-2040 fund – retiring between 2035-2044

G fund – 20.43%

F fund – 5.57%

C fund – 39.8%

S fund – 12.35%

I fund – 22.20%

L-2050 fund – retiring between 2045-2054

G fund – 12.13%

F fund – 3.87%

C fund – 44.14%

S fund – 14.66%

I fund – 25.20%

These funds are rebalanced each quarter moving to a less risky mix of investment allocations with a greater percentage going into the G fund.

Source: www.opm.gov

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.

Taxes and Your TSP by David Fielder

tsp by david fielder

You’ve heard the old saying “The Devil is in the details”, well the TSP is a great example of that.   If you go to the TSP.gov website there are thousands of pages of information they expect you to know and understand.   Even if you had the time, who would want to read that stuff?   Well part of my job is to read the stuff that no to read and determine what parts of the information are useful to postal employees.  One of the most disturbing parts I found pertains to taxation of a non-spouses beneficiary when a current or former employee passes on. I think it is very important and wanted to shed some light on the situation here.

1.) Taxes on your heirs:   I always say in my seminars, “the good news is you work for the government, the bad news is you work for the government.”.   What does that mean? Well you have a great paying job and benefits but you have to also remember that your employer is in the tax business and will create rules that benefit them as a result.

Let’s take John a postal employee who passes away and has $200,000 in his TSP. He has listed his only son as beneficiary.   The money will pass to John but before he receives the money John will be taxed on the entire $200,000.    If his son already has a job making $75,000 a year the $200,000 TSP inheritance will make John pay taxes as if he made $275k that year!   Obviously, would this result in a higher tax bracket and in some cases reduces the amount heirs will receive by nearly 40% plus a reduction of whatever the son’s State Income taxes happen to be.

Now let’s look at this same situation if John had (at 59.5 or older or at retirement) rolled his TSP into a traditional IRA.   Now when John passes his son can use what is called a “STRETCH IRA” to reduce the taxes he might owe.   Using the Stretch IRA concept would allow a beneficiary to elect to receive either the full amount in the IRA or it allows them to “stretch” the payments out over their life expectancy. For example if John’s son is 45 the IRS will allow him to spread that $200,000 out over 45 years.   In this example John’s son would only have to pay taxes on roughly $4,000 each year versus paying taxes on the lump sum like he would from the TSP.

Taxes by David Fielder

The obvious question is why can’t the TSP stretch those payments like everyone else?     In my opinion there are two primary reasons they won’t do it. First, they are in the tax business.   Think about how many postal employees pass away every year. Think about how much TSP money is passing to heirs.   That’s a huge stream of revenue for the government.   Second, the TSP always brags about their low fees.   Well along with low fees come fewer services and options.   Because they collect very few fees, they are not willing to service the stretch payments to your beneficiaries.

If you are 59.5 or older or retired you can roll your TSP into a traditional IRA and offer your heirs the opportunity to take advantage of Stretch IRAs and other option the TSP does not offer that a Postal Benefits expert may be able to help you with. If you would like to learn more or have any questions please feel free to give me a call.

More from David Fielder

David Fielder Author Page

Postal Benefits Group: Delaying Social Security

Solving the FERS Retirement Puzzle by David Fielder

Getting the FERS Flu before Retirement? by David Fielder

Postal Benefits: The Good, The Bad, and The Ugly of the TSP by David Fielder

David Fielder
Tuesday 4 April 2017

David Fielder

President

Postal Benefits Group

www.postalbenefitsgroup.net

Office: 636-875-5306

Cell:     314-540-2802

[email protected]

 

State Employees to Contribute More towards Retirement Benefits

The financial leaders of South Carolina have directed the state employees to increase their contribution towards retirement benefits from July 1, 2016. This step was taken as a part of state’s efforts to reduce the unfunded liabilities related to the pension system of the state. The decision makers understand that the employees would not be happy with the move but they think that this step was essential.

retirement benefitsThe Amount of Increased Contributions towards Retirement Benefits

All the state employees will now be required to contribute 0.5 percent more of their salaries towards retirement benefits from July 1, 2016. The hike was made formal by the State Fiscal Accountability Authority this Wednesday. Apart from the state employee, the cities, counties and employees of other public institutions are also required to contribute more.

The Aim

One of the aims of the S.C. leaders behind this increase was to ensure that the amount of unfunded liabilities regarding the state’s pension system was reduced. It currently stands at $16.75 billion. The experts also know that increasing the contribution towards retirement benefits is not a long-term solution. Nikki Haley who serves as the S.C. Gov. and chairs the five-member board called the situation was urgent and she also said that solving this problem would not be easy.

The Reaction

Haley also admitted that most people would be upset with the decision to increase the contribution and it’s going to make it hard for them. It is important to add here that the high amount of pension costs would impact over 200,000 S.C. employees who are currently serving local governments, state agencies, and public schools. The police officers, legislators, and judges will not be impacted by this change as they have separate and comparatively smaller retirement programs.

The Opposition

Some people representing the state employees and the teachers have raised their voice against the increase in contributions. Carlton Washington who is currently serving as the Executive Director of the S.C. State Employees Association recently admitted that the state workers are already paying too much towards benefits and he also added that the state agencies suffer as a result.

Washington also pointed out that the agencies are facing enough trouble in recruiting and retaining good employees as the benefits package has eroded.

The Current System

Currently, the state employees pay 8.2 percent of their salaries towards the retirement benefits and soon they will be paying 8.7 percent of their salaries. The employers contribute about 11.1 percent.

Getting Started Early for a Successful Retirement by Kevin Wirth

Kevin Wirth Explains How to Get Started Early for a Successful Retirement

Nearly everyone dreams about the day they can retire. Regardless of whether you plan to hike in the mountains, relax on the beach, or volunteer in a faraway place, one thing is for certain, and that is in order to have a successful retirement, a good plan should ideally be in place.

Unfortunately, though, not everyone has the opportunity to do an ample amount of long-term planning. That may be due to an unexpected health situation, an offer of early retirement, or some other event that has moved up the clock on your leaving the world of employment.

In any case, the good news is that you still have some options on your side for making the most of your finances, as well as your insurance benefits, for your retirement years. The best way that you can ensure success beforehand, then, is to start by taking a good inventory of what you’ve got.

Getting All of Your Retirement Ducks in a Row

As you plan for this next phase of your life, the most important aspects from a planning standpoint will include the following:

  • Insurance – Because health care can be a retiree’s biggest expense, you will want to make sure that you have good coverage here. If you won’t be eligible for Medicare yet, and if being added to a spouse or partner’s employer-sponsored health plan also isn’t an option, then there are ways that you can take your FEHB (Federal Employees’ Health Benefits) with you – provided that you meet certain criteria. You will also want to ensure that you don’t leave your loved ones vulnerable to financial hardship when it comes to life insurance. So, be sure that you check into either an individual plan of coverage, or consider taking your FEGLI (Federal Employees’ Group Life Insurance) coverage with you in retirement.
  • Financial – A good, solid financial plan is also an essential aspect of a successful retirement. This is because in order to live the lifestyle that you desire, you will need a way to replace your current income. Therefore, you should start by obtaining an approximation of how much you will be receiving from your retirement annuity when that time comes. If you’re covered by FERS, inquire as to how much income you’ll get from Social Security benefits, too. Because this income won’t likely be enough to completely replace your employer’s salary, you will also want to give yourself a boost by maxing your contributions while you still can to the TSP (Thrift Savings Plan). This will help you to obtain a larger amount of payout when the time comes to convert your savings into income down the road.

Once you have actually decided when the big day will be, you will want to get your retirement paperwork filled out in plenty of time. Typically, you should do so approximately two months prior to your actual date of retiring. This will help to ensure that all goes well – and just in case there are any glitches, you will have some time to get things straightened out and back on track.

More from the Author: Kevin Wirth

Kevin Wirth Author Page

Kevin D. Wirth and Associates – Federal Retirement Experts

Federal Employees Eligible Retirement by Kevin Wirth

Higher FEGLI Rates in 2016 by Kevin Wirth

Investment Fees Cutting Down on Retirement benefits of the Millennials

The Millennial Generation is often encouraged to invest more towards retirement benefits in order to get higher benefits when they retire. But things don’t seem to be as simple as that. A recent analysis has revealed that a lot of money invested by the millennials towards retirement savings often ends up towards investment fee.

Retirement benefits Fee too High?

retirement benefits

The analysis of retirement investments was done by NerdWallet. The analysis revealed that if millennials pay just 1% towards the investment fee, they would end up losing more than $590,000 as it will be counted as lost returns. The figure is based on the entire course of their savings lifetime.

The Benefits and The Loss

Time seems to give a big benefit to the generation Y. They have the advantage of at least three or four decades to create their own nest egg as compared to their precursors. This time is also an enemy because the investment fees grow with time. The analysis has exposed that the impact of constantly rising investment fees can cut down the retirement benefits of a millennial by over 25%.

The Instances

The analysis was done on a subject who was a 25-year-old person  depositing $10,000 in the retirement savings fund every year. The savings account already had $25,000. The subject earned an average annual return of 7%. The person planned to retire after reaching the age of 40 years. Only 1% investment fee snowballed over time as the portfolio of the subject grew.

In one scenario it was seen that a mid-cap mutual fund that had the ratio of just over 1% was to earn $1.77 million after a time span of 40 years. The ETF also grows at a rapid pace. The index-based exchange-traded fund that had the fee of 0.09 percent was to grow to $2.3 million in the span of 40 years.

Fees in Other Vital Plans

A very similar analysis has revealed that a target date fund which is commonly used in the 401(k) plans that had a 0.75% fee were to grow to $1.9 million within the time span of 40 years. A robo-advisor portfolio was to grow to $2.2 million in the same time span.

Impact on Overall Reduction

The analysis also found out that every dollar deducted in the form of investment fee would be one dollar less left to invest in the retirement benefits.

Federal Employees Need Retirement Help: Survey

A recent survey has revealed that most of the government employees need a lot of help in learning about their retirement benefits. They need someone to guide them on their finances so that they can have a peaceful retirement. The survey also exposed the fact that most federal workers would prefer to retire at the minimum retirement age if they were to be financially secure. They would also invest in the TSP more if they could get the benefit of retiring early.

Federal employees are Least Informed

The survey was conducted on 557 federal employees. About 33 percent of them admitted that they were well informed about their retirement benefits. Only around 6 percent said that they were fully informed. The survey was conducted by Silver Light Financial and Federal News Radio.

Feds Need Training

In the same survey 74 percent of the respondents admitted that they need training on retirement benefits related topics and they don’t need any incentive to attend that training.

Financial Confidence

About 66 percent of the respondents admitted that they would prefer to retire as soon as they cross the minimum retirement age if they think they were financially confident. About 36 percent of respondents said that they expect to retire at their MRA. About 53 percent of those who were not expecting their MRA said that they won’t retire because they believe they won’t be able to financially sustain their lifestyles.

TSP and Early Retirement

Federal employees also said that they were willing to invest more to their Thrift Savings Plan if it could help make a meaningful impact on their retirement. About 93 percent retirees admitted it. They also wanted to reduce their retirement age and about 60 percent of the respondents said that they would add at least 5 percent more to the Thrift Savings Plan if they have a better understanding of it.

The Gap

It now remains to be seen whether the results of the survey would motivate the government agencies and the retirement investment service providers to better educate the federal employees. It is clear that if federal workers could get free training on retirement benefits, they would feel more secure about retirement and would not worry about their financial stability after retirement. Their situation is a lot similar to a person who has got a vehicle and a destination but doesn’t know driving.

Democrats push for more Retirement Benefits Coverage

Many democrats are asking the Obama government to ensure that more government contractors are covered under the retirement benefits plans. Those workers who do not have employer-sponsored retirement savings plans must be given the opportunity to invest in government-backed plans.

Retirement BenefitsWho Wants More Retirement Benefits Coverage?

About 65 Democrat leaders want more retirement benefits coverage according to a letter sent to the White House. This group is led by Joe Crowley, who serves as the Democratic caucus Vice Chair. This group wants Obama to ensure that all federal contractors enroll employees working for them in the retirement plans of the company.

The Demands

The Democrats want Obama to create a requirement according to which the full and part-time workers who are not covered under 401(k) options should get access to a new government-run retirement savings plan that was started by the administration recently.

The Unsuitable Trend

Crowley recently made a statement in which he said that about half of the American workers don’t have access to a retirement benefits plan through their respective employers. He added that many more people don’t know about these plans or are ineligible for it. This has led to an unsuitable trend, which shows that less than 10 percent of such workers make a steady contribution to a savings account on their own. Crowley wants steps to be taken to reverse this trend.

The Government’s Role

The Democrats want the government to take some vital steps to solve the problem of retirement plans coverage offered to fewer workers. They want Obama to start with his own employees and capitalize on his executive branch power so that other companies could follow his lead.

The Employers’ Role

The Democrats also want the government to make it mandatory for employers to auto-enroll their employees in the new government-run savings plan if they don’t have any retirement benefits of their own. The new government-run savings plan was started by White House recently and it is known as “my Retirement Account.” It is a platform to invest money for the workers who don’t have access to any other retirement savings option.

The Main Goal

The main goal of all these steps required by the democrats is to ensure that all the U.S. citizens have some savings stored up that can serve them and offer them retirement benefits when they are too old to work.

TSP Numbers Are Better Again

When the Thrift Savings Plan (TSP) numbers were in a bad shape in the beginning of 2016, most people did not expect them to improve too soon. The numbers were positive in the month of March and now the latest data reveals that they are positive again. Most of the funds are still in negative figures but there have been slight improvements in the funds when compared to the March data.

The Biggest Gainer of the TSP Data

Some good news for the TSP investors is that many funds had posted best monthly funds of the year. So their investment is yielding some results. The I Fund has got the biggest monthly return in the month of April. The fund which invests in international stocks got a return of 1.89 percent. However, the fund remains in the negative when its 12 months performance is analyzed. It stands at -9.94 percent.

The Poor Performer

The S Fund was 1.73 percent in the month of April. It has seen a downslide as it was 8.24 percent in March. The S Fund invests in small-cap stocks and it is also in the negative. It is at -8.53 percent in the last 12 months.

The Unaffected Performer

G Funds hardly showed any change. The fund that invests in U.S. government bonds was 0.15 in March. It is now 0.14 percent in April. The slight change of the fund is not a new thing. It is the only fund that has been the lease affected in the last 12 months. Its 12-month figure is 2.05 percent.

The Biggest Loser

The C Fund which invests in common stocks of the 500 companies in the Standard & Poor’s 500 had a sizeable difference. It was 6.69 percent in the month of March. It is now 0.39 percent in April. It’s currently at 1.29 percent for the past 12 months.

The Improved Fund

The fixed income index investment fund, known as the F Fund is at 0.41 in the month of April when compared to the 0.93 percent in the month of March. It has improved in the last 12 months. It went from 2.35 percent to 3.05 percent.

The Overall Performance

The overall performance of all the TSP funds, when compared on a 12-month period has been negative with the exception of the L Fund. It is the only fund that has seen some improvement during that timeframe.

Are you a TSP user? Here is everything you need to know

The Thrift Savings Plan, more commonly known as TSP is one of the most used and probably the greatest investment programs available to the federal employees and retirees. In this article, we intend to cover all the details regarding it that employees should ideally be aware of.

ALL YOU NEED TO KNOW ABOUT TSP:

The Thrift Savings Plan (TSP) is available to all of the FERS members along with the members of the Military Retirement system (MRS) and CSRS or the Civil Service Retirement system.

Just like any other private sector 401(k) or an IRA, you can make the choice between a Roth or a traditional tax treatment regarding your TSP account. If you choose the traditional option you will have to pay your taxes on the contributions and earnings only when you withdraw at retirement.
Most of the federal officers can become recipients of automatic contributions of around 1 percent and 5 percent of base pay of agency-matching contributions. Once we reach 2018, military personnel will also have this luxury.
If you are a member of the FERS, then after three years you will be able to vest in automatic contributions.

The cost of doing TSP business is really low. During 2015, per every grand invested, the cost would come out to be a meager .029 percent. Yes, a mere 29 cents. It’s safe to say that there isn’t a cheaper investment program out there.

The Thrift Savings Plan has enticed many federal officers to start investing over the years and it’s expected to constantly draw attention from employees who intend to make their retirement lives a lot easier and financially securer. We tried really hard to find any substantial downsides but failed. If you can think of any, let’s know in the comments!

TSP Board May Need More Funding

The Thrift Savings Plan, or TSP Board may need more funding for the fiscal year 2016. The main reasons behind it are the cyber security upgrades and the external audits. Another reason is due to the increasing membership. The board is not sure about the extra money needed for the budget, but plans to lay it out soon.

Thrift Savings Plan TSP TSP

TSP Board Budget Data

The Federal Retirement Thrift Investment Board (FRTIB) was assigned $220 million in 2016. The board is predicting that it could spend $151 million even before the beginning of third quarter. The main reason behind such spending is the need to have resources that help in cyber security upgrades and external audits.

The Announcement

The announcement regarding the need for more funding was made by the FRTIB executive director, Greg Long. He made this announcement during the monthly meeting of the board that was held on April 25. He said that though the agency needs to do a bit of work regarding the budget allocation, it seems almost certain that they will need more money from the board. The estimate regarding the amount of extra money required would be clarified next month.

The Cost of Cyber Security

The main reason behind the agency running ahead of schedule on the budget is that it is putting a lot of money in to boost its cyber security. The agency is working with external auditors to finish a study of best practices with regard to cyber security in the private sector firms.

More Data and Better Service

The agency is also focused on using more data to take better decisions and offering better communication and services to the TSP participants. The TSP enrollment is higher than it has been before, and it is expected to continue to grow until 2018.

About 89% of people who have opted for Federal Employment Retirement System (FERS) have enrolled in TSP. The number of active duty military members who are enrolled in the TSP is about 44%.

Call Centre Service

In order to provide better service to the growing TSP members, the agency is aiming to create a better consolidated call service center as a part of the Expanding Participant Retirement Engagement Services and Solutions (ExPRESS) contract. The draft related to the RFP of ExPRESS participant call center services is scheduled to be released during the first week of May according to the board.

Know the actual value of a FERS and TSP annuity

When we say that the majority of the federal officers will not have a million dollars (or more) in their TSP Accounts when they retire, we back our statement with facts. Researchers have revealed that only .5 percent of all the officers have over a million dollars in their TSP accounts.

TSP thrift savings plan
Image Credits

KNOW MORE ABOUT YOUR TSP AND FERS ANNUITY:

When we talk about retirement income though, there is a huge possibility for the federal officers to generate the income that would absolutely have a requirement of possessing an investment portfolio of at-least, if not more than a million dollars. Let’s take an example. An employee that is a member of the FERS has around 30 years of service under his belt. His high three salary is 90 grand on average. If this person undergoes retirement at 62, then he would be receiving an annuity of around 29,700 dollars every year.
Now, the question here is this: How much will this person have to invest if he intends to generate 29 thousand and 700 in investment income? If we assume that the withdrawal of the account has a value of 4 percent, then the investment portfolio would have a value of around 742, 500 dollars.
Now if we consider that the person has collected around $400 thousand dollars in their TSP after spending 30 years in service. If he takes a 4 percent withdrawal every year during retirement, this would present him with a surplus 16 thousand dollars.
Now, between the FERS and the TSP annuity, the person would receive 45,700 every year, and if you are wondering, it would take around $1,142,500 dollars to generate that type of investment income.
All of this needs to be kept in mind along with the realization that the following deductions will no longer be there once you retire:
1. Medicare Tax
2. FERS Retirement
3. TSP
4. Social security taxes