The Good The Bad and The Ugly of the TSP by DAVID FIELDER
There couldn’t be a better title for this article. There are aspects of the TSP that are Good, Bad and downright Ugly. As the President of Postal Benefits Group our goal today, as it is every day, is to educate you on these issues so you can draw your own conclusions and do what’s best for you and your family as you look to maximize your Postal Benefits.
TSP – THE GOOD
TSP has Low Fees: The .29% you are charged is the lowest of any employer sponsored plan in the US.
TSP Withdrawals after separation but before age 59.5: This is somewhat unknown by but it is a very large postal benefit if you are retiring before age 59.5. If you are retiring at an age over 55, you can pull money from your TSP without a 10% penalty. If you have already rolled your TSP money over, you will have to wait until age 59.5 to avoid the penalty. Only withdrawals from the TSP after age 55 and after separation are exempt from the 10% penalty.
TSP – THE BAD
TSP has Limited Access: Once you retire, you have a total of two opportunities to withdraw anything but a monthly payment. To reiterate, once you retire you have two opportunities (over your entire retirement) to draw any sum of money not a set monthly payment. The TSP has millions of “customers,” and in order to keep the cost low, they have to limit your access. If you establish a monthly payment, those are permanent for one year. Again, they don’t want to give you too many options because of the number of “customers” they have.
TSP Annuities: Many postal employees know this is an undesirable option. This option involves converting your TSP into a second pension that is paid by Met Life. The downside of taking the TSP annuity is that you lose access to your cash, your money no longer grows, and in most cases you disinherit your children. I’ve been advising postal employees for over eight years and I’ve never found a situation where the TSP annuity made sense.
TSP – THE UGLY
In every retirement seminar, I always make the comment: “The good news is that you work for the government, the bad news is that you work for the government.” The government is in the tax business and that’s the “bad” of the TSP.
Let’s take a look at an example to make the point: Joe who is a retired postal employee, is married to Sally and has $200,000.00 in his TSP. Both Joe and Sally take a vacation together and tragically die in a car crash. Joe and Sally had two kids, Scott and Lisa. Under the TSP rules, Scott and Lisa get their money but not before the entire amount is taxed as if Scott and Lisa had made all the money this year. Scott and Lisa will see 20-39.6% of the money taken in federal taxes.
Now let’s look at the same example but if the money was outside the TSP and with a private company in an IRA. The money would transfer to the children, but, the money would be spread out or “stretched” over their life expectancy. This would result in only $2,000.00 or $3,000.00 of the $100,000.00 being taxable for each child. People ask me all the time why the TSP would have such a rule. Again, remember the government is in the tax business. This one rule makes them hundreds of millions in tax revenue each year.
There are a lot of moving parts when it comes to your retirement and benefits. Deciding where to move your TSP is a big decision. Your local financial advisor probably does not know how the TSP works. Even worse, financial planners can be incapable of putting their clients into programs that are safe. If you would like assistance in finding a plan that is guaranteed, and at the same time provide you the access you need please don’t hesitate to contact us.
Postal Benefits Group
Other David Fielder Articles
About David Fielder of Postal Benefits Group
The figures mentioned in the article are hypothetical and for illustrative purposes only. The formula and calculations have not been verified or reviewed for accuracy by PSRetirement.com or any of its affiliates. Please contact your financial professional with any questions. The opinions in this article do not necessarily represent those of PSRetirement.com.