TSP Modernization Act Webinar


 

 

 

Please see the transcript of the webinar below:

Ryan:

All right, hello and welcome. My name is Ryan Dunn, I'm going to be one of your hosts this afternoon along with one of my partners, John Stohlman. We're going to be walking you through some of the changes to the TSP via the TSP Modernization Act and how that affects your retirement planning, the various options that are available to you.

At the end of the presentation, we'll give you our phone number and if you have any questions or want to follow up with us in more detail, you're more than welcome to give us a call. You can speak to John or myself personally or shoot us an email as well. But we want to be respectful of your time so we're going to jump right into the presentation.

Ryan:

Really fast, just a couple of key things that separate Federal Navigators from some our competitors. One, we are chartered federal employee benefit consultants. That just means that we've gone through training specific to federal benefits. We've taught courses, we've even developed our own software specifically for federal employees. John is a certified financial planner. He also wrote a book called, Navigating Your Federal Retirement Benefits, which I believe you can find on Amazon. It's called, Navigating Your Federal Retirement Benefits by John Stohlman. We're an independent firm, that means we don't have any quotas, we're not pigeon holed into selling specific products. Bottom line, our clients are the boss and we are fiduciaries. We have experience. We've been in business now for ... What is it now?

John:

31 years.

Ryan:

Yeah. 31 years. Currently we manage-

John:

Just under half a billion in assets.

Ryan:

Yeah, under advisement. We have experience, we have knowledge, we've been doing this for a long time and that really comes into play when things aren't going right. And finally, we've been at the same location for all these years, so we're consistent.

Ryan:

Let's get into and talk about the Modernization Act. I'm going to kick it over to John and have him take you through some of these changes.

John:

Thank you, Ryan. The TSP Modernization Act was signed back on November 17 of 2007, but it just went online a couple of months ago, actually on September 15, these new rules are in effect. It's really a huge step forward in terms of flexibility to federal employees that are both currently working and retired. It just made it, really, a more functional tool. This was really the first overhaul of the TSP since 1986, so it's been way overdue. They pretty much brought it up to a more useful, modern tool today than it had been before.

John:

We could go onto the next one.

John:

The first thing we want to talk about is has made more flexible age-based withdrawals while you are in service. Under the old rules, you could only do one withdrawal if you were over 59 and a half while you are employed. The whole you are employed, you could only just do that one withdrawal.

Ryan:

Let's stop just for clarification so you can really understand the impact of the new law, what that meant. So if you think about it, think about you have two cards, two TSP withdrawal cards in your hand. One is a partial withdrawal and the other is a full withdrawal. Prior to the Modernization Act, those were your only options. Once you played that partial withdrawal card, let's just say you wanted $50,000 out of your TSP, the only way to get that $50,000, even if you were rolling it over to an IRA, would be to play that partial withdrawal card, and that card is no longer in your hand. You can never take a partial withdrawal after that under the old rules. The only option from that point forward is to cash out and close the TSP. you can see how this limited flexibility was very problematic for a lot of people, causing them to just say, "Heck with it", and roll out their entire TSP.

John:

Right. Now it's a more flexible tool. With the updates, it will allow you to do up to four in-service withdrawals once you're age 59 and a half, per year. So it's not just one ever, it's four per year. And also, once you have made this withdrawal or series of withdrawals, it doesn't prevent you from taking withdrawals after you separate. A much more reasonable way to run a 401k.

Ryan:

Yeah. In fact, that actually might be more flexible now than a lot of the 401k out there. The ability to, while you're working you can do rollovers from the TSP up to four times per year and then after you separate, you can continue to take money out. Every year you're getting a reset and you're able to take more out of the TSP. that's a huge step forward and offers you a lot more flexibility.

John:

The next thing are partial withdrawals after you retire, once you've separated from service. Under the old rules, you could only do one partial withdrawal and none if you had used that card that Ryan was talking about after you withdrawal. You're only option after you used that one card would have been to roll the whole thing out after you leave service. Now with this new update, TSP owners can do multiple withdrawals as long as you just don't do more one every 30 days. Really flexible and if you are doing installment payments, let's say you're retired and you're taking, I'm just picking a number, $1000 a month, out of your TSP, you're not prevented from reaching in and pulling $5000 out on a one-time basis, whereas before you would have been limited.

Ryan:

Just to recap. While you're working, every year after you turn 59 and a half, you're able to dip into your TSP and take some money, but not all the money out of your TSP even while you're still working. You can do that four times every single year. And after you separate, you're able to do that every single month. Once a month you can dip in and take whatever you need out. It's important to understand that it doesn't have to be a withdrawal to your bank account, because remember, this is money that you haven't paid taxes on, so when you take the money out of the TSP, from the traditional side, you're going to now have to pay taxes on that money if you take it out, but you can also do IRA rollovers. That's really important to understand as well.

Ryan:

If you need access to some of this money and you want to roll it over into an IRA, you're able to do that once every 30 days, so a lot more flexibility.

John:

Drilling down on a couple of things Ryan just said. This is kind of fundamental, but you really need to realize that the TSP is a tax deferred instrument. Some people don't have a full understanding that these withdrawals that you pull out of the TSP are fully taxable. These withdrawals that you pull out of the TSP are fully taxable. If you have a sizeable amount, let's just $500,000 in your TSP, and you reach in and pull out a large amount, that could be a large taxable hit right away.

Ryan:

And the other important thing to look at before you make a large withdrawal is how is that going to impact your tax bracket because remember, this is considered income, just like working income. So if you're working, let's say you are working that year that you want to dip into the TSP and you made $70,000 that year and then you took another $200,000 out of the TSP, you just made $270,000 that year. You're going to be in that $270,000 tax bracket for income tax purposes and you're going to have a pretty big bill if you weren't prepared for that. That's going to be a nasty surprise.

John:

And it's also state taxable too. It's always good to sit down and do the tax ramifications either ... any lump sum withdrawal that take from the TSP.

Ryan:

Yeah, don't go into this blind. Take the time, especially if you're taking a large amount out, and preferably work with a professional to make sure that there's not going to be unintended consequences if you decide to take advantage of this flexibility.

John:

Periodic payments. In the past, the TSP rules permitted periodic payments to be elected on only monthly intervals and you could only make one change per year. It was really limited in terms of how you would pull your money out on a periodic basis, but under the new rules, you have more flexibility, you can take payments monthly, quarterly, annually and you can start and stop these anytime during the year whereas before, you started, let's just say a monthly payment of $1000, you could only start or stop that one time a year. So you were waiting for your one year period to elapse so that you could make any sort of adjustment on that monthly amount or whether you were going to start it or stop it. Now much more flexible. It's more like a traditional 401k now in terms of how you're going to pull money out.

Ryan:

Perfect.

John:

Also within the TSP, you may or may not know that you have both a traditional tax deferred option or a Roth option in that TSP. If you have been pulling money out on the Roth basis to accumulate, the money that you're contributing from your check going into that Roth side is not tax deductible when the money is coming in but it's tax free when you pull the money out. You have two different types of buckets in the 401k. You have the traditional, which is tax deferred. It's tax deductible and grows tax free until withdrawal or the Roth side that is not tax deductible going in, but is tax free coming out. And both are tax deferred, but under the old rules, when it came time to make a withdrawal or a systematic payment from your balances you had to do them in tandem.

John:

Let's say you had $100,000 in both your Roth and traditional buckets in the TSP and you wanted to start $1000 payment coming out. You would have had to say, I'm going to pull out $500 from the traditional side and $500 from the Roth side so you couldn't make adjustments in that pro rata basis. Also, if you just wanted to reach in and pull out $5000, you would have had to do it from both sides of the equation simultaneously, both buckets so to speak.

Ryan:

Where this really became a problem is when it came time to take required minimum distributions, because with Roth, generally because you've already paid the taxes, you don't have to take the retired minimum distribution. From traditional, you do have to take required minimum distributions so by these being linked, it was forcing a required minimum distribution from the Roth even though maybe you didn't want to. The good thing is that now that it's unlinked, you don't have to take that required minimum distribution from the Roth, you can just take it out of the traditional side.

John:

Right. And you could do rollovers now. Let's say you separated from service, you could do independent rollovers from the Roth side or the traditional side and go to two different areas at two different times. Under the new rules, the options for withdrawals from only your Roth balance or only your traditional balance can be done but they don't have to be on a pro rata basis.

Ryan:

The Roth and the traditional are now unlinked. That's a good thing.

John:

Right. The withdrawal election deadline has been modified. Prior to the new rules, once you have left service you had to file an election by April 1st of the following year after you turned 70 and a half, which is saying you have to tell the TSP how you're going to take your money. You have to declare, these are under the old rules, you would have had to declare, I'm going to take X dollars per month on a continuing basis. That would be an example of an election. If you failed to do that, it was pretty severe the way they treated this. They would have made you abandon your account, believe it or not. Let's say you've retired from service and it's time to start required minimum distributions. You go past that April 1st date and don't give the TSP any information, they assume that this account have been abandoned. The first step is they would have moved all the assets into the G fund and after a given period of time, they would have said the account is now in the general fund of the federal government.

John:

Good news is, is that's all in the past. The new rule eliminates this election deadline so once you're over 70 and a half, you don't necessarily have to choose a withdrawal election, but of course, you are still required to do the required minimum distributions. Now, the account is more like a traditional 401k at that point.

Ryan:

You can set those required minimum distributions to come out monthly, if you want. You can have them, if you set monthly distributions, when you look at your form it will give you an option to do it based on your life expectancy, IRS life expectancy table, that effectively is your required minimum distribution. They would just automatically send it to you monthly based on your required minimum distribution amount if that's all you're looking to take out. But you also now have the option to just take a lump sum out at some point in the year to satisfy that required minimum distribution. Because of that, you don't have to meet this deadline anymore because it used to be that you could only change your monthly election during the annual change period, which is a window that opened up every year, which was a huge pain in the butt, especially if you're taking required minimum distributions because if you miss that window, there is nothing you can do until the next window opens up. But now you don't have to worry about that window. You can make changes every single month so you can decide how you want to take your required minimum distributions.

Ryan:

Maybe you have something that you want to do early in the year and you just want to take it out in a lump sum to do that. A lot of people wait until the end of the year to let their account grow a little bit more before they take the required minimum distribution out. What your plan will be will depend on the specifics of your situation, but the good news is, is now you have a choice and you can have some control over that.

John:

It bears mentioning that the required minimum distributions turning 70 and a half, you are not required to take required minimum distributions if you are still employed with the federal government. Say for example you're 71, 72, 73, still working for the federal government, you are not required to do required minimum distributions from the TSP portion. However, under the same situation, if you are 71, once you hit 70 and a half, you still have to make required minimum distributions from any IRAs that you have outside of the federal government.

Ryan:

And unfortunately you can't combine those two together. You have to do the IRA calculation and it's going to always be separate from any 401k or TSP calculation.

John:

Right.

Ryan:

What does that mean to your retirement?

John:

I'd say, generally this is good news to participants because you have more of a working tool both while you're in the government and once you leave the government. It's more flexible. It's more like a traditional 401k. A lot of the old onerous rules about mandating withdrawals and withdrawal limitations are gone. It's a more effective tool than it used to be. The TSP, remember, as far as it relates to your retirement is just one of the legs of the stool so to speak, it's an important one, but you always have to look at the whole picture of your retirement plan. The TSP, being an important part of the tool, but also social security, your pension, outside assets and also your spouse's situation, whether they are a federal employee or never worked, you have to incorporate the whole picture into your retirement plan. The TSP part has gotten more flexible, which is a good thing.

Ryan:

Yeah, it's definitely gotten more flexible, but the other thing that you didn't mention here is taxes. You want to think about taxes and coordinating this with your taxes. Once it's time to take income from the TSP, you may have multiple places to take income from. You have the decision, should I start my social security now or should I wait, and if you ask the people around the office, you'll find that there is a lot of opinions on the subject, but which is the right decision for you really depends on projected life expectancy and that's a hard one to gauge, but that's one of the things, if there's a piece of information that you have, maybe that shortens your life expectancy, that might be a consideration.

Ryan:

The other big one that I think is commonly overlooked is taxes, because you're going to have to take money out of these for required minimum distributions at some point. But the social security, it's not all taxable income, but some of it is taxable income so starting it early could raise your tax bracket. And then do you have other money that's in non-IRA accounts that's going to have capital gains tax? Do you have Roth money? How do we coordinate all of this in a way that's going to be the most efficient for you from a tax standpoint? That's one of the things, I'll enter a shameless plug here, because of course, why wouldn't we introduce a shameless plug, that's one of the things that we do with our clients is we help them take all these various different puzzle pieces and put them together to develop a strategy. And whether you work with us or somebody else is beside the point or even just put this together yourself if you know what you're doing. That's okay, too. But you need to have a strategy. You need to think these different puzzle pieces through and hope and crossing your fingers is not a strategy, that doesn't count. You need to have a plan.

John:

And no two financial plans are exactly the same. There are variations in income, assets. We don't use rules of thumb around here. We want to see what the actual situation is for you. And taxes, as Ryan was pointing out is one very dynamic part of that.

Ryan:

There's one other change with the new rules and that's the paperwork.

John:

In the old days, for many, many years you could just go online and print off the forms, the TSP 70 and there's a lot of the old forms have been discontinued. Nowadays, if you want to do a withdrawal or start a systematic income, you log in and you do it all online. You may need to get some signatures notarized, particularly if you have a spouse, but a lot of the old forms have been superseded and discontinued. A lot of this, their goal in terms making it more automated is to eliminate delays and errors. So far, it seems to be working. You have to get used to the new process and logging on and things like that, but it seems to be working. Also, the withdrawal process is more friendly for beneficiaries. In the event that one of the TSP owners deceased, a lot of these withdrawal options have been passed on to the beneficiary so they have more flexibility in terms of their withdrawals from a spousal account after somebody dies.

Ryan:

It actually brings up another question, since we have a little bit of time. One of the things that I talked to people about before is, should they name a beneficiary on their TSP. it's a little bit off topic, but we're talking about it right now, we have a little bit of time so let's discuss that briefly. For those of you who aren't aware, you have the ability to specifically name who you want to be your beneficiaries for the TSP and the form to do is the TSP-3, unless that form has changed. I actually don't know, but I'm pretty sure it's the TSP-3. What that allows you to do is say, if I die, here's specifically who I want to get my money and what portion they should get. For example, if you're married, you maybe your spouse you want to get 100% of the TSP if you pass away. And if you have kids, maybe they are your contingent beneficiary. So if something happens to both of us at the same time, then the money goes to the kids.

Ryan:

I usually recommend that you fill this form out, otherwise it goes to the state's predetermined order of precedent, which means that it has to go through a probate process. Am I correct in that understanding, John? Is that your understanding as well?

John:

Yeah, we always have to look at your estate plan in terms of when you're naming beneficiaries, contingent beneficiaries and what's your plan in the event that both you and your spouse die simultaneously. We want to drill down on that in terms of your overall situation.

Ryan:

I've had people tell me, I looked at the form and the predetermined order of precedence says it goes to my spouse and I want it to go to my spouse anyways so then I really don't need to fill out the form. Would you agree with that?

John:

No, I think you always want to have the spouse entered on there physically so that there's no confusion and it doesn't incidentally go into your state and go through probate just like you said.

Ryan:

And I agree. That's what I always recommend. Name the person, I think it's going to be cleaner, smoother, more of a guarantee that that person is going to get it and they are going to be able to get it quicker if they are named. The one thing that you have to understand is that if you name somebody, that's who it's going to. That's the catch. When naming specific beneficiaries, is let's say you have a spouse named and then you get divorced. You want to make sure that you have some kind of a task to be sweeping through and making sure you're updating beneficiaries any time that you've named beneficiaries. I recommend every three years just going through, checking your beneficiaries. You want to sweep through all of your accounts with beneficiaries, your life insurance, your other 401k, your TSP and then updating those beneficiaries. And then if you have a divorce or an extreme life event like that, that is the perfect time to make sure you go through and update your beneficiaries because if somebody is left on that account and you die, whoever is named is getting the money.

John:

I agree. You always want to make sure you did get around to naming somebody as your beneficiary. I think we have encountered that where people didn't name their spouse on there, they thought they had. Or as Ryan had alluded to, there had been a divorce, a separation over time, they just forgot to update it.

Ryan:

It just occurred to me that we're throwing around the term probate. Some people might not know what that means. What does it mean to go through probate?

John:

It means that the state is going to determine whose going to get those assets and the first place they will look is your will. If you didn't name a beneficiary, the account pays into your estate and we're going through the probate process so then the court's involved and the first place the court is going to look is your will, which is a probate document and say, okay, who did you name in this will to be the beneficiary of this account. If you don't have a will, if it goes into your estate, it's going through probate, you don't have a will, then it's going through the intestate process and whatever state you're residing in will name who the beneficiary is at that point and it's by state law.

Ryan:

The obvious downside to that is time. It just takes a long time to go through that process and it's more time consuming and tedious to go through that process because now you're going through the legal system rather than just having a check cut and sent to someone. We're a little bit off topic, but I thought that that might be an interesting thing and I think that's definitely something that you should be aware of when it comes to your TSP for sure.

Ryan:

One of the questions that came in, and if you have questions, like I said, feel free. If we don't get them answered, feel free to shoot us an email or call us afterwards. We're not ignoring you, we want to answer your questions. We also just want to be respectful of people's time as well. One of the questions that came in is, does our firm serve as a fiduciary role and the very simple answer to that is yes. We do.

Ryan:

To summarize.

John:

Day to day, Ryan and I spend a lot of our time helping federal employees look at their overall retirement situation and certainly the TSP is a big part of that, but also as we mentioned today, your social security or your pension plan, how that will integrate, there is something called FERS supplement, if you're retiring between the age of 55 and 62 and you're a FERS employee, there's a FERS supplement that we take into consideration, but we want to help our clients look at their overall situation to make sure they can retire comfortably the way they had envisioned.

John:

One of the things we wanted to offer today is a one hour free consultation with one of our either, Ryan, myself or one of our specialists to kind of go over and just see if you're on track. At that hour consultation we will offer a free copy of our book, Navigating Your Federal Retirement Benefits, and we can either give that to you at the meeting or send that to you if the meeting is by phone.

Ryan:

Great. Thank you all so much for making the time out. Hopefully this was good information that you can take and act upon and feel free to use us as a resource. If you don't take us up on the one hour consultation, know that we're here and know that we want to help you navigate through these different challenges. Our website is federalnavigators.com. Our phone number is 3019909704. You can ask for John, you can ask for myself, my name is Ryan Dunn or you can send us an email. Mine is Ryan@medalliongroup.com and John's is John@medalliongroup.com. Pretty easy. We're happy to answer any questions that you have as you navigate your way through this. Thanks again and we'll see you on the next webinar.

John:

Thanks for joining us.

 

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