LINDA JENSEN- When it comes to the TSP and IRA for retirement, it’s imperative to keep a few things in mind. After all, what you do or don’t do can affect how much money you’ll have in your retirement years.
The first thing to bear in mind – you are not eligible to use a bucket strategy for TSP withdrawals but you can for the majority of IRA accounts. What is a bucket strategy? It’s known as a time-based segmentation approach, which allocates money intotwo or more accounts. Based on information from Investopedia, nearly 40 percent of financial advisors advise clients to follow the bucket strategy.
For the first bucket, money would be placedinto safe investments – lower yielding investments – that allows you to make monthly income withdrawals when you’re retired. This income bucket should have enough money in it to last for many years.
For the second bucket, money would be putinto riskier, higher-yielding investments that don’t need tobe usedfor years to come. Bucket two can be used to fund bucket one.
You don’t have to stick with just two buckets either. You could put together a third and fourth bucket to be used later on.
With a bucket strategy, you won’t have to make withdrawals from a volatile investment when the market is not going in your favor and gives time for the money to regain their value.
The TSP states withdrawals can be respectively divided between TSP investments based on how you set up the allocation. So, if you’re withdrawing $1,000 every month with the account being divided between five key funds, it means $200 would come from the C, F, G, I and S Funds. This means you can’t use a bucket strategy if money is left in the TSP.
It’s important also to understand how your monthly payments can be set up using any of the IRS’ life expectancy table. The TSP, however, only lets people use the Uniform table, which works well for people who spouses are close to them in age.
If your spouse is 10years older or younger than you, the IRS has another table to be used for the TSP. It’s called the Joint and Survivor life expectancy table. The table permits smaller withdrawals, as a younger spouse is determined to need money for a longer period of timeafter your death than a spouse who is close to you in age.
This strategy can also be usedwith an IRA account.
What if you decide to use the Joint and Survivor life expectancy table or bucket strategy for your retirement? It means you’ll need to withdraw money from the TSP into another account that offers some flexibility.
When the TSP Modernization Act is put into action (come November 2019), the restrictions noted above is liable to stay in place. The fact also remains that employer plans, which also includes the TSP, tends to be more stringent than individual plans such as IRAs.
Linda Jensen is the principal and owner of Asset Care & Preservation Services with offices in Olympia, WA. Linda began her career with Prudential Preferred in 1994 where she was an agency leader. She earned the credentials of a financial planner and has been in practice as an investment and insurance professional since that time. Linda started her own company in 1997.
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