tsp roth
The Roth TSP by Todd Carmack
Todd Carmack talks about the Roth TSP
Todd Carmack discusses TSP options.Having the privilege of helping so many federal employees, it amazes me just how few people are taking advantage of the Roth Thrift Savings Plan, a simply fantastic opportunity.
The Roth Thrift Savings Plan was made available to federal employees in 2012. It differs from the Traditional TSP in that contributions to the Roth TSP are made with after-tax dollars instead of pre-tax dollars. The money grows tax-deferred, similar to a Traditional TSP; however, withdrawals from the Roth TSP come out tax-free. Distributions from a Traditional TSP are taxed as income.
We are currently in a low tax rate era based on tax rates over the last one hundred years. In my opinion, the low-tax era is unlikely to last. In the 1970’s, the highest marginal tax bracket was 70%. In 2013, the highest marginal tax bracket was 39.6%.
As a result of the staggering U.S. debt and increases to the budget for Medicare, Social Security taxes may have to increase to keep pace. In the United States, someone is turning 65 years old every seven minutes, the expenses that Medicare and Social Security must absorb will increase dramatically.
Some Tax experts like Ed Slott (CPA and author) and David Walker (former Comptroller General of the United States) predict that the tax rates will have to double or our country will go bankrupt.
What does all this mean? It means that saving now, in a Roth IRA or Roth TSP, along with using other instruments like Indexed Universal Life Insurance, which could provide for tax-free loans and withdrawals in the future, is probably a financially intelligent way to produce a tax-free income for the future. You will need to wait five years from the start date of your Roth TSP to qualify for the tax-free status for distributions but considering these are your retirement dollars it would be inappropriate to use these types of accounts for short-term liquidity needs.
There are always risks (taxes are a risk, as well as the risk of putting money away in an account that has a long-term objective) but if you are interested in having a more comfortable retirement you may want to do what you can to lower your future tax bill. You may want to consider a Roth TSP as part of that equation.
*Source: Kitchen, B. & Kap, E. (2015), Wealth Beyond Wall Street.
Other Todd Carmack Articles
Social Security for FERS Employees by Todd Carmack
Understanding The Thrift Savings Plan, By Todd Carmack
Is The Pension ‘Survivor Benefit’ Best For You? by Todd Carmack
Understanding Your FEGLI Coverage, by Todd Carmack
Disclosure: BWM Advisory, LLC reserves the right to edit blog entries and delete those that contain offensive or inappropriate language. Content will also be deleted that potentially violates securities laws and regulations. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor’s portfolio. All investment strategies have the potential for profit or loss. Hyperlinks on this website are provided as a convenience. We cannot be held responsible for information, services or products found on websites linked to ours. BWM Advisory, LLC is registered as an investment adviser with the SEC and only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.
TSP Bill Equals Christmas in July for Federal Employees
Eliminating TSP Withdrawal Penalties for Certain Federal Employee Participants
On June 29, 2015, the President of the United States, Barack Obama, signed a bill that would prevent the penalization of public safety employees who must retire under mandatory age guidelines, many as young as age 50 or before. Federal firefighters, law enforcement officers (LEOs), air traffic controllers and border protection officers most of who leave the public sector or their job classification by the time they turn 50 or shortly thereafter suffered a 10% early withdrawal penalty from the Thrift Saving Plan (TSP) before enactment of the law.
The bill, Defending Public Safety Employees’ Retirement Act, amends the Internal Revenue Service Code and allows those employees falling into the above category to make early withdrawals from the TSP without incurring the 10% penalty when a TSP participant is 50 years old or less.
The Thrift is still reviewing the law and its impact on TSP accounts. The Thirft Savings Plan intends to publish information on the TSP website before the law’s effective date set for December 31, 2015. Roll-out of the bill is a great after Christmas gift for these public safety employees who put their lives on the line to protect the federal workforce everyday.
P. S. Always Remember to Share What You Know.
Dianna Tafazoli
Other Federal Retirement Articles
IMPORTANT UPDATE…FEGLI Open Enrollment Season! by Gary Fouts
No COLA Increases in Social Security Benefits
Are You Thinking About a “Deferred” Retirement? by Gary Fouts
SCOTUS Ruling Impact on Federal Employee and Retirement Benefits
Federal Retirement Comfort and Financial Security
The journey to federal employee retirement promises to be everything that human nature is: complicated, a little bit frightening, exciting, anticipative, wonderful and riddled with the strong emotion of change and what to do with it. When you think about retiring from Federal Service, there is so much to do. There are hundreds of things that could be added to the list of things we have to do to get ready for your federal retirement.
Federal Retirement Financial Plan
However, it is apparent that there are two travel companions we must carry with us into our retirement future – a solid financial plan and an action plan tailored to our own individual needs and desires. There is no perfect time to retire and there is no perfect set of goals by which to reach for. There is, however, a best time to retire and there are SMART Goals that are realistic and attainable. There are logical steps to making decisions. We can only reach a place where we can even discuss retirement through hard work and self-reliance; and we know that plans will often fail even under the best of circumstances, if we make them without the commitment and wherewithal to stick with them, stay the course and know when to modify our plans.
From 2007 to 2009, the country faced a temporary slow-down in the economy. A slow-down in the economy is technically called a recession. Foreclosures and job losses were at an all-time high. 2010 to present have still not normalized the economy for many Americans, but it is getting better.
Given the brutal economic melt-down of the past years, should we prepare differently for retirement? The answer is NO. It is not that we should prepare differently for retirement, but that we should prepare always early and consistently for retirement. The two key words – Early and Consistent are not dependent on the state of the economy, but rather on proactive individual determination to enter retirement in relative comfort and security.
Barriers must always be included in the plan. These are things that might prevent us from accomplishing our retirement goals. A good plan must be flexible and evolve over time as events in our lives change.
Retirement is a methodical process of carefully orchestrated steps culminating in an individual action plan and a very well laid-out financial plan. What is perhaps the most critical thing that any of us can do to protect our retirement future, irrespective of the sway of the economy, is to consider the words of an ancient proverb: Cut Your Coat According to Your Own Size. In essence, it means you must measure your coat (your resources) to fit your budget (your expenses) in good times, so that in bad times, it will still fit. Be careful with spending and saving in hard economic times. Be fanatical about spending and saving in good economic times.
P. S. Always Remember to Share What You Know.
RELATED TSP ARTICLES
Thrift Savings Plan (TSP) Withdrawal Options
For Postal Employees – LiteBlue and the TSP
Federal and Postal Employees – Choosing a Financial Professional
Is All ‘Your’ TSP Money Actually Yours?
Which Retirement Account Do I Withdrawal From First?
Federal Employees and Retirement Account Withdrawal Options
What account to withdraw from first in retirement to give us the greatest benefit.
Your tax-deferred status has allowed you to protect some of your money from taxes and allowing it to grow tax-free in your pension plan or other savings vehicles. Once you start receiving distributions, you will have to pay taxes on the money. Therefore, we need to be educated and wise in deciding which accounts to draw from first.
When you deposit money into your regular bank account it is likely that the money has already been subject to taxes. Therefore, when you withdraw the money you don’t have to pay taxes on it again. You also do not owe taxes on any of the interest earned. You declared the interest earned when you filed your yearly income tax return.
If you must make withdrawals in retirement, the money should come from your savings account first because it is not subject to taxes. Using the savings withdrawal method first also allows you to postpone paying taxes on those accounts that are tax-advantaged.
Roth IRAs with after-tax contributions and tax-free growth have the added advantage of exemption from required minimum distributions that may apply to other retirement accounts. After age 70.5 when you must begin to take distributions from other accounts, your Roth account can continue to grow tax-free. Monies in the Roth account after your death can be used by your beneficiaries tax-free. Given these circumstances, the Roth IRA is the account you should consider withdrawing from last or as far down the road as feasible.
How you plan to handle your accounts is very personal and depends on unique factors in your life such as the kind of account and assets you have and how long you have had the assets. It also depends on the level at which the account has already been taxed and the expected rate of return. Your estate plans must also be evaluated before you make decisions. If at any time you have questions or are not certain about what steps to take, always consider speaking to someone who has expertise in financial management and handling taxes in retirement. It should also be noted that under most circumstances, if you do not take the required minimum distribution after age 70.5, you will suffer a 50% penalty on withdrawal shortfall. The Internal Revenue determines the formula to calculate the penalty.
Otherwise it is estimated that most of your retirement account withdrawals will be subject to approximately 20% required federal tax withholdings. If you have tax liabilities in one year the Internal Revenue might require you to pay an estimated tax. Visit the Internal Revenue Service to find out more about estimated taxes in publications 590 and 554 or online at www.irs.gov.
Many retirees think about selling their homes to get a tax break in retirement. Things to consider:
- If you are single selling your house for a profit of up $250,000 that amount may be exempt from taxes.
- If you are married with joint ownership up to $500,000 may be exempt from taxes.
- The caveat is that you must own the home and it has been your primary residence for two of the last five years.
- You have not used the exclusion in the last two years.
Other retirees think about paying off their mortgage if it has not been paid off prior to retirement. Things to consider:
- Mortgage debt has a tax advantage if most of the payment is going towards interest.
- If the payments are basically going towards principal then you may not have a tax advantage.
- If your balance remains high enough to generate a tax break, you may still want to consider paying off the mortgage if you meet the following criteria.
• You are already clearly and without doubt maximizing your retirement savings.
• You have already paid off other debt that has a higher interest rate and does not have a tax-deductible advantage for you.
• Your emergency fund is robust and will sustain you according to your financial plan and individual action plan.
Being debt-free is certainly appealing. However, any financial decisions you make
concerning you retirement future requires much thought in addition to being educated about your options and the consequences of your actions. Remember every decision we make carries an associated cost.
P. S. Always Remember to Share What You Know.
RELATED TSP ARTICLES
Thrift Savings Plan (TSP) Withdrawal Options
For Postal Employees – LiteBlue and the TSP
Federal and Postal Employees – Choosing a Financial Professional
Is All ‘Your’ TSP Money Actually Yours?
TSP Withdrawals and using IRAs correctly in TSP Rollovers
TSP, IRA Rollovers and other Options
There are three common types of IRAs – Traditional, Roth and Rollover. Finding the right IRA for you requires being educated about what each one offers. All IRAs are designed to help you for retirement but each has its unique features.
An IRA is an Individual Retirement Account (IRA) that provides either a tax-free or tax- deferred way for you to save for retirement. IRAs allow you to invest in just about any investment and these investments can grow tax deferred. Each IRA has unique eligibility requirements and benefits.
IRAs rely primarily on the power of long term, tax-deferred compounding to provide your retirement savings the opportunity to grow faster than in an account that is taxable. When you earn interest, receive dividends or sell an investment for gain, you are not obligated to pay taxes that year on the earnings. All taxes are deferred until you withdraw those earnings in retirement. Your money continues working for you while building your nest egg for year after year.
Roth IRA
Unique Benefits, Eligibility Requirements
- Any earnings are tax-free if withdrawn after age 59.5 and the account has been open five years or more
- Contributions (not earnings) can be withdrawn tax and penalty free at any time
- Contributions are not tax-deductible
- There is a single 5 year holding period when determining whether earnings can be withdrawn federally tax-free. The period begins January 1 of the first contribution to any Roth IRA account.
- Regular contributions are allowed up to age 50
- Catch-up contributions are allowed age 50 +
- Up to age 50 – 2009 contribution limit $5,000
- Over age 50 – 2009 contribution limit $6,000
- Modified adjusted gross income and tax filing status determine how much you can contribute
- For 2009, single tax-filers with $120,000 or less in annual income and joint-tax filers with $176,000 or less are eligible. For 2010, single tax-filers with $120,000 or less in annual income and joint tax-filers with $177,000 or less are eligible.
Traditional IRA
Unique Benefits, Eligibility Requirements
- Any earnings grow tax-deferred until withdrawn after 59.5 at which time they are taxed at your current rate
- Contributions and earnings can be withdrawn penalty free after age 59.5
- Contributions may be tax-deductible
- Allows investment earnings the opportunity to grow tax deferred until withdrawn
- Your age and tax filing status (joint or single) determine how much you can contribute annually
- Contributions may be tax-deferred depending on your tax filing status, modified adjusted gross income, and participation in employer-sponsored plans.
- Maybe opened by anyone with taxable compensation or a spouse (if you file jointly) with earned income and who was not 70.5 years old by the end of the current year
- Up to age 50 2009 contribution limit $5,000
- Age 50 – 70.5 contribution limit $6,000
- Over age 70.5 2009 contribution limit (not allowed)
Rollover IRAs (TSP 70 and TSP Withdrawal)
Rollover IRAs allow you to consolidate your TSP, possible 401(k) and 403(b) accounts along with any other employer-sponsored retirement accounts into one account maintaining the assets’ tax deferred status. Using form TSP 70, a TSP withdrawal can be a good decision because of the limited TSP investment options that exist and the much larger array of options available through Rollover IRAs.
There are a few outside companies that specialize in helping Federal employees with their TSP funds after retirement or once an employee has reached 59 1/2. Two of those companies that you may want to consider can be found at TSP-70.com and TSP-withdrawal.com.
P. S. Always Remember to Share What You Know.
RELATED TSP ARTICLES
Thrift Savings Plan (TSP) Withdrawal Options
For Postal Employees – LiteBlue and the TSP
Federal and Postal Employees – Choosing a Financial Professional
Is All ‘Your’ TSP Money Actually Yours?
Federal Retirement Benefit Analysis
How Much Money Do You Need In Retirement
Whether you are ten years, five years or just 1 year from retirement, you need to have a way of estimating how much money you are going to need to retire. Financial experts say we will have to replace about 70 to 80 even 90 percent of our annual salary in retirement in order to maintain the lifestyle we have become accustomed to. Decisions – decisions.
Let’s examine Four Steps that will help to estimate how much money you will need to retire comfortably. This is where tracking our weekly, monthly and yearly spending comes in. We need to always know what is coming in, what is going out and how much we can afford to spend. Planning for our comfort and security in retirement requires grit, tenacity and sheer will power to make a plan and follow it.
How Much Money You Will Need In Retirement:
- Estimate your retirement expenses, including taxes and even one-time major purchases. Make a list and revisit it often. These are not items you think about in your head, they need to be put on paper and then they become real.
If you need help determining how much you need seek out the help of a qualified Federal Retirement Expert.
- Determine how much retirement income will come from your known resources. Compare income from TSP and other savings and your Federal Annuity with estimated retirement expenses.
You could also be eligible for Social Security of a Military Pension.
- Compute the gap between how much money you need to retire and the amount you will receive from your known resources. Evaluate the gap and measure its size with financial and economic scrutiny.
- When doing a retirement analysis and assessment, factor in inflation and life expectancy. Look at your assessment from both ends of the spectrum – the best scenario and the worst.
Formula for Estimating Your Federal Retirement Income:
The majority of Americans will rely basically on two sources of consistent retirement income – Social Security and Employee Pensions. The other component should be savings and investments (Thrift Savings Plan (TSP) and outside investments like IRAs). Let’s be practical, we don’t all have that category separate and apart from vehicles provided through employment. However, it is never too late if you put your plan in place and stick to it.
P. S. Always Remember to Share What You Know.
RELATED TSP ARTICLES
Thrift Savings Plan (TSP) Withdrawal Options
For Postal Employees – LiteBlue and the TSP
Federal and Postal Employees – Choosing a Financial Professional
Is All ‘Your’ TSP Money Actually Yours?
What Is Effective Retirement Decision-Making
For Federal Employees, when it comes to Retirement Planning, effective decision-making involves flexibility in thought and actions. One must be prepared to make sacrifices now to achieve something better later. We must also understand the value of trade-offs. Decisions you make today will inevitably impact future retirement decisions. All decisions made carry associated consequences that affect us, our families, and the society we live in.
We can all improve our skills in effective decision-making through consistent practice and application. But, there is no financial plan nor individual action plan (IAP), no matter how well designed or thought out that works if you don’t follow it. We must develop strategies that will motivate us to stay the course. No financial plan is set in concrete, rather plans are designed to be flexible, changeable and evolve over time as our lives evolve. We need to monitor plans and know when important changes need to be made. Updating your financial plan is critical to your plan’s success.
A financial plan will assist you in identifying, determining, and directing what you want to have and achieve in retirement. A financial plan helps to target the outcome desired, map out how to get there and how to stay on track.
Start our with a conversation with your spouse, a friend or someone you trust. Talk about what is important to you and your well-being in your retirement future. After the conversation, begin to put your plans to work by putting them in writing. Nobody can take what you have in your head if you are not there to tell the story. Prepare soon. Prepare wisely. Prepare to live in comfort and security.
P. S. Always Remember to Share What You Know.
Access your TSP.gov Account HERE
RELATED FINANCIAL PLANNING ARTICLES
Thrift Savings Plan (TSP) Withdrawal Options
For Postal Employees – LiteBlue and the TSP
Federal and Postal Employees – Choosing a Financial Professional
Is All ‘Your’ TSP Money Actually Yours?
Who Is Watching the Market?
As a federal retirement specialist and educator, I am most intimately concerned about how federal employees view retirement and how they make ready for perhaps the most difficult transition in their lives. I recently heard that Market Watch did a survey of employees to decipher whether they were most attached to large salaries or means to support their future retirement. I was very pleased with the overwhelming response.
Six Figures or Comfortable Retirement?
A majority of those surveyed said they would much rather forgo a six-figured salary for greater contributions to their retirement fund. If they could get a 25% match in a 401K for the private sector and the Thrift Savings Plan (TSP) for the federal force, that would be the scenario most sought. It is good to know that workers are thinking about how to fund their future given Americans are living on average, 30 years past retirement. That is a significantly long time to make certain your resources outlast you. What you save today and the plans you put in place today will determine how well you are able to live in retirement.
Getting prepared financially is a big piece of the puzzle, but we do know that financial preparation hinges upon the ability to accept the emotional and psychological paradigm that comes with making such a transition. If we are emotionally and psychologically prepared, then it stands to reason that we will be much more inclined to manage our money. It is sometimes a denial of realty that steers us away from putting very critical and necessary plans in place.
The best education any of us can receive is to fully embrace the inevitability of seasons. In most parts of the country, Winter appears after the joy of Fall. Spring alerts us to the notion that Summer is coming. Just as the seasons of the year come and go, so do seasons in our lives. Work and hopefully a stable job is a part of the season of our adulthood into the age of maturity. For the senior sect, I think the age of maturity is more fitting than saying old age. That term ill fits the new generation of seniors because they are living active, meaningful, productive lives and doing things their parents and grandparents never dreamed of.
While I don’t believe in traditional retirement as long as you are physically and mentally able to chase your passion, choices and options should certainly be on your vision board. If you choose to work or travel or play then you should have the financial means to do so. If you decide that working full-time or part-time or going back to school fit you best, then the plans you put in place during your earlier years should allow you to do that.
Another caveat and a teachable moment here is the definition of true compensation. Salary and benefits make up true compensation. If you are making a salary of $80,000 annually and your benefits package is worth $25,000 – your true compensation is $105,000. You might say, I can’t spend my benefits. Wrong – because if you didn’t have them you would have to take care of your medical concerns out of your $80,000. Can you feel the number sinking quickly to $50,000 and you haven’t even paid taxes. What about the contributions made to your retirement fund from your employer? Let’s ratchet the remaining $50,000 down to about $45,000. What if you have no sick leave provisions or vacation? You might be able to take a weekendcation or a homecation, but when you are sick, you are sick. Now since illness cannot be avoided, let move the $45,000 down to about $40,000 and we are being generous. Get the picture?
Total compensation is something that should never be dismissed in planning for your future. Having a plan that is flexible and SMART (Specific, Measurable, Attainable, Realistic and Time Sensitive) should be at the center of your vision board.
P.S. Always Remember to Share What You Know.
Dianna Tafazoli
Can I Name Any Beneficiary To My TSP
Beneficiary Differences for TSP
There are a number of rules that exist when naming a beneficiary for your Federal Employees’ Group Life Insurance (FEGLI) and your Civil Service Retirement System (CSRS) and your Federal Employees Retirement System (FERS) survivor annuity. In most cases, the spouse a spouse is named as the beneficiary. However, the same rules do not apply for the Thrift Savings Plan (TSP). You may name anyone you choose, it does not have to be a spouse. The TSP also allows for the naming of contingent beneficiaries.
TSP Contingent Beneficiaries
Contingent beneficiaries is always a good posture to take under any circumstances because there is always that possibility that something might happen to the person you have named. The TSP also allows for the TSP account holder to name beneficiaries and designate the percentage intended for each beneficiary.
The TSP, like the Federal Government, does not honor Wills. The TSP uses the Order of Precedence in the case where no beneficiary is named. It is important to always update your beneficiary designation forms. Visit your eOPF (electronic Official Personnel Folder) and your TSP folder to review the contents and to make sure you are updating your files and keeping things in place. Updating your files means getting to determine how your assets and resources will be distributed.
The TSP-3 (Designation of Beneficiary) is the form used to select your beneficiary or beneficiaries.
P. S. Always Remember to Share What You Know.
RELATED TSP ARTICLES
Thrift Savings Plan (TSP) Withdrawal Options
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Federal and Postal Employees – Choosing a Financial Professional
Is All ‘Your’ TSP Money Actually Yours?
An Affordable Luxury – The TSP
Affording the TSP
People who don’t consider themselves wealthy often live vicariously by watching the rich and famous on television and reading about them in magazines. They never imagine themselves having the same advantages as ‘the beautiful’ people. How wealth is measured is relative. There are people who are billionaires and millionaires. Then there are people who are thousandaires. The term doesn’t sound too bad to me. If I had $400,000 or $600,000 I wouldn’t consider it a negative thing to have in my possession. While those figures might not qualify you to be in the million dollar or billion dollar club, they qualify you to be in a club that is doing just fine – a club that will allow you to retire on your own terms.
Maximize the TSP Opportunity
The idea is not to think as a minimalist when it comes to possibilities for your life and that of your family. Think of yourself as a maximumlist – willing to maximize every opportunity that comes your way and the TSP is no exception. After all, you are a big investor with a whole team of financial experts keeping watch over your massive portfolio. If you participate in the TSP, then you are an investor with a portfolio housing some of the most sought after stocks, bonds and government securities in the world. Although, your TSP does not necessarily fall into the category of active management – it is taking care of the business of your retirement by managing your federal wealth as directed.
Automatic TSP Enrollment
For a few years now, the TSP has begun to participate in automatic enrollment for new employees coming into the federal service. Each new employee is automatically enrolled in the TSP with the 1% agency contribution going into the G Fund or the Government Securities Investment Fund. The Fund is safe guaranteeing minimal or no loss. The G Fund by statutory law via the authority of the Secretary of Treasury granted by the Congress can determine when the G Fund is unable to be fully invested without exceeding the debit limit. However, this Fund action has no impact on active workers or retirees.
Although the automatic 1% is invested in the G Fund, the new employee can select not to participate in the TSP or they can decide they want their money put into one of the other TSP Funds. Not participating in the Thrift Savings Plan (TSP) is tantamount to putting your money in a bucket and setting fire to it – throwing money away. Putting your money in the TSP is an affordable luxury you don’t have to dream about.
P.S. Always Remember to Share What You Know.
Recommended Articles
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