Smart TSP Strategies to Build a Strong Financial Future
A NARFE Federal Benefits Institute Webinar Presented by Mark Keen, CFP® Federal Retirement Benefits Expert
2/27/2020 1
Agenda
• The basics
• How much should you contribute?
• Traditional TSP vs. Roth TSP
• Investment Options
• Which investment options should you choose?
• When and how you can access your money
• NEW! SECURE Act important highlights
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TSP Basics
Defined Contribution Plan
• You define the contributions
• You manage the account
• Your retirement value is based on the performance of investments
Maximum salary deferral contribution
• $19,500
Plus additional $6,500 if over age 50
• No AGI limit
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TSP Basics
May direct contributions to • Traditional
• Roth
• Both
Agency contributions • 1 percent is automatic
• $1 for $1 up to first 3 percent of salary, and $0.50 for $1 on next 2 percent of salary
• Agency contributions always go to traditional TSP
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How Much Should You Contribute?
Don’t miss out on the agency match
• Contributing too little
Less than 5 percent of salary
• Contributing too much
Maxing contribution before the 26th pay period
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Example: Contributing Too Much
Salary = $125,000
TSP contribution = 25 percent vs. 16 percent
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Contribution Rate 25%
Lost agency match = $1,748
Salary p/p
TSP Contribution p/p
Agency Match p/p
Pay periods to reach $19,500
Total Agency Match
$4,808
$1,202
$192
16.2
$3,110
$4,808
$769
$192
25.3
$4,858
16%
How Much Should You Contribute?
Build a strong financial house • Cash reserves = safety net
• You need liquidity Taxable accounts
Roth IRA
• If possible, max your TSP AND a Roth IRA
• If your savings are more limited Contribute enough to max out your match, then
Contribute to a Roth IRA, then
Contribute additional to TSP
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Traditional TSP vs. Roth TSP
Traditional TSP
• Funded with pretax contributions
• Pretax contributions grow tax-deferred
• Distributions are taxed as ordinary income
Roth TSP
• Funded with after-tax contributions
• Distribution of contributions are always tax-free
• Distribution of earnings are tax-free when distribution is qualified
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Qualified Roth Distributions
Must meet two requirements
• Taken at least five years after creation of the account* AND
• Distribution meets one of the following IRA owner is at least 59½
IRA owner is disabled
Distribution made to beneficiary/estate upon owner’s death**
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*5-year rule must be satisfied separately for Roth TSP and Roth IRA **5-year rule for beneficiary is based on deceased participant’s first contribution
Roth TSP is not a Roth IRA
Roth TSP Roth IRA
Contribution limit $19,500 (under age 50) $26,000 (above 50)
$6,000 (under age 50) $7,000 (above 50)
Distributions Come proportionately from contributions and earnings
IRS Ordering Rules: 1. Contributions 2. Conversions 3. Earnings
Income limit None Yes Phaseout Ranges: • Single: $124k - $139k • MFJ: $196k - $206k
Required Minimum Distributions
Yes No
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$10,000
$2,200 Tax liability (22%)
After-tax balance $7,800
$0
$7,800
$20,000
$4,400
$15,600
$0
$15,600 =
$15,600
Contribution
Tax liability (22%)
After-tax balance
Balance after 10 years
Traditional TSP Roth TSP
Return = 7.2%
Traditional TSP Versus Roth TSP Traditional vs. Roth TSP: Constant Tax Rates
All things equal. No economic difference!
$7,800
Traditional TSP vs. Roth TSP
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$7,800
$15,000 $15,600
$4,400 $5,000
$20,000
Tax Liability (22%) Tax liability (25%)
$10,000
$25,000 Tax liability (22%)
$75,000
$0
$15,600 =
$15,600
Contribution
After-tax balance
Balance after 10 years
Traditional IRA Roth IRA
Return = 7.2%
<
Traditional TSP Versus Roth TSP Traditional vs. Roth TSP: Increasing Tax Rates
Traditional TSP vs. Roth TSP
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$15,600
$7,800
$17,600
$4,400 $2,400
$20,000
Tax Liability (22%) Tax liability (12%)
$10,000
$25,000 Tax liability (22%)
$75,000
$0
$15,600 =
$15,600
Contribution
After-tax balance
Balance after 10 years
Traditional IRA Roth IRA
Return = 7.2%
>
Traditional TSP Versus Roth TSP Traditional vs. Roth TSP: Decreasing Tax Rates
Traditional TSP vs. Roth TSP
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Why Worry if No Economic Difference?
Things are rarely equal (not a one-time decision)
• Contribution limit is same for both traditional and Roth
• Tax Cuts and Jobs Act rates are temporary
• Stealth taxes
• Required minimum distributions*
• Change in tax filing status
• Estate planning objectives
• Heirs’ tax rates
• Changes to the rules
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*Roth TSP is subject to RMDs; Roth IRAs are not for the original owner
$115,000
Ed & Judy’s Income
$90,600
Less
Standard Deduction
$24,400
$65,600
Less
TSP Contribution
$25,000
Assumptions: Ed and Judy • 55 years old
• Married filing jointly
• Income before TSP contribution = $115,000
• TSP contribution = $25,000
• Traditional = $25,000
• Roth = $0
Effect on taxable income •Income before deductions: $115,000
• Less standard deduction: $24,400
• Less TSP Contribution: $25,000
•Taxable income: $65,600
It’s Never All or Nothing
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22%
$168,400
–
$78,951
12%
$78,950
–
$19,401
Tax Brackets Ed & Judy’s Income
$90,600
Less
Standard Deduction
$24,400
Assumptions: Ed and Judy • 55 years old
• Married filing jointly
• Income before TSP contribution = $115,000
• Standard deduction = $24,400
• TSP contribution = $25,000
• Traditional = $25,000
• Roth = $0
$65,600
Less
TSP Contribution
$25,000
$11,650 @ 22%
$13,350 @ 12%
Tax Effect •Traditional TSP contribution: $25,000
• Income deferred @ 22% $11,650
• Income deferred @ 12% $13,350
•Taxable income: $65,600
It’s Never All or Nothing
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Assumptions: Ed and Judy • 55 years old
• Married filing jointly
• Income before TSP contribution = $115,000
• Standard deduction = $24,400
• TSP contribution = $25,000
22%
$168,400
–
$78,951
12%
$78,950
–
$19,401
Tax Brackets
Tax Effect •Traditional TSP contribution: $25,000
• Income deferred @ 22% $11,650
• Income deferred @ 12% $0
Ed & Judy’s Income
$90,600
Less
Standard Deduction
$24,400
$11,650 @ 22%
•Taxable income: $78,950
$78,950
$13,350 @ 12%
$65,600
• Roth = $13,350
• Traditional = $11,650
It’s Never All or Nothing
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TSP Investment Choices
Five individual funds
• C, S, I, F and G
• All but G Fund track broad indexes
• Provide exposure to specific asset classes
Five lifecycle funds
• L Income, L 2020, L 2030, L 2040, L 2050
• Consist of a target allocation to 5 individual funds
• Provide diversified exposure to multiple asset classes
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Fund Investment objective Investments
C Fund To match the performance of the S&P 500 Index
Stocks of large- and medium-sized U.S. companies
S Fund To match the performance of the Dow Jones U.S. Completion TSM Index
Stocks of small- to medium-sized U.S. companies not included in the C Fund
I Fund To match the performance of the MSCI EAFE (Europe, Australasia, Far East) Index
International stocks of more than 20 developed countries
F Fund To match the performance of the Bloomberg Barclays U.S. Aggregate Bond Index
Government, corporate and mortgage-backed bonds
G Fund Interest income without risk of loss of principal
Government securities (specially issued to the TSP)
TSP Investment Funds
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In
ve
sti
ng
|
DIVIDE AND CONQUER
Aligning your investment strategy by goal can help you take different levels of risk based on varying time horizons and make sure you are saving enough to accomplish all of your goals—not just the ones that occur first.
Goals-Based Investing
Short - term goals Includes emergency reserve
fund of total spending needs
for 3 - 6 months
Medium - term goals 5 - 10 years, e.g., college, home
Long - term goals 15+ years, e.g., retirement
Cash and
cash
equivalents
Equities
Bonds
Equities
Bonds
Range of stock, bond and blended total returns Annual total returns, 1950 - 2018
Stocks Bonds 50/50
1 year 5 - year
rolling
10 - year
rolling
20 - year
rolling
- 39%
- 8% - 15%
47% 43%
33%
– 3%
28%
– 2%
23%
1%
21%
- 1%
19%
1%
16%
2%
16%
6 %
17%
1%
12%
5%
14%
Source (top chart): J.P. Morgan Asset Management.
Source (bottom chart): Barclays Capital, FactSet, Federal Reserve, Robert Shiller, Strategas/Ibbotson, J.P. Morgan Asset Management. Returns shown are based on calendar year returns from 1950 to 2018. Stocks represent the S&P 500 Shiller Composite and Bonds represent Stategas/Ibbotson for periods from 1950 to 2010 and Barclays Aggregate thereafter.
Note: Portfolio allocations are hypothetical and are for illustrative purposes only. They were created to illustrate different risk/return profiles and are not meant to represent actual asset allocation.
Diversification and the Average Investor
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Portfolio returns: Equities vs. equity and fixed income blend
20-year annualized returns by asset class (1998 – 2018)
$30,000
$60,000
$90,000
$120,000
$150,000
$180,000
$210,000
$240,000
$270,000
$300,000
Oct '07 Oct '08 Oct '09 Oct '10 Oct '11 Oct '12 Oct '13 Oct '14 Oct '15 Oct '16 Oct '17 Oct '18 Oct '19
40/60 stocks & bonds
60/40 stocks & bonds
S&P 500
Mar. 2009: S&P 500 portfolio loses over $50,000
Nov. 2009: 40/60
portf olio recov ers
Oct. 2010:60/40 portf olio
recov ers
Mar. 2012: S&P 500
recov ers
Oct. 2007: S&P 500 peak
9.9%
7.7%7.0%
5.6%5.2% 5.0%
4.5%4.0%
3.4%
2.2% 1.9%
0%
2%
4%
6%
8%
10%
12%
REITs Gold Oil S&P 500 60/40 40/60 Bonds EAFE Homes Inflation AverageInvestor
Source: J.P. Morgan Asset Management; (Top) Barclays, Bloomberg, FactSet, Standard & Poor’s; (Bottom) Dalbar Inc.
Indices used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Bloomberg Barclays U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Gold: USD/troy oz., Inflation: CPI. 60/40: A balanced portfolio with 60% invested in S&P 500 Index and 40% invested in high-quality U.S. fixed income, represented by the Bloomberg Barclays U.S. Aggregate Index. The portfolio is rebalanced annually. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/18 to match Dalbar’s most recent analysis. Guide to the Markets – U.S. Data are as of January 31, 2020.
TSP Investment Funds
Lifecyle funds
Invest in an appropriate mix of the G, F, C, S and I Funds • Based on a particular time horizon or target retirement date
Becomes more conservative as target date approaches
Strategy assumes • The greater the number of years you have until retirement, the more willing
and able you are to tolerate risk (fluctuation) to pursue higher rates of return • For a given risk level and time horizon, there is an optimal mix of the G, F, C, S
and I Funds that provides the highest expected return
L Funds are designed to • Simplify investment selection • Provide broadly diversified portfolio
L Funds are not designed to prevent losses
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TSP Investment Funds
L Income L 2020
L 2030
L 2040
L 2050
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TSP Investment Funds
Which L Fund is right for you?
TSP’s recommendation:
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Choose If your target date is
L 2050 2045 or later
L 2040 2035 through 2044
L 2030 2025 through 2034
L 2020 2020 through 2024
L Income If you are already withdrawing your account in monthly payments or expect to begin withdrawing before 2020
Accessing Your Money
In-service options
• Before age 59½
Loan
Hardship withdrawal
• After age 59½
Loan
In-service withdrawal
Post-Federal service options
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In-Service Options
Loan • General purpose: 1-5 year repayment plan
• Residential loan: 1-15 year repayment plan
• Maximum loan amount is smaller of Your contributions and earnings on those
contributions
50 percent of vested account balance, or $10,000 if greater
$50,000 minus your highest outstanding loan balance within past 12 months
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In-Service Options
Hardship withdrawal • Recurring negative monthly cash flow • Medical expenses not yet paid and not covered by insurance • Personal casualty loss(es) you have not yet paid and are not
covered by insurance • Legal expenses you have not yet paid for separation or divorce
from your spouse • May incur 10 percent early distribution penalty
In-service withdrawal • Attained age 59½ • Unlimited, up to four per year
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Post-Separation Options
Single withdrawals • Unlimited, up to 1 every 30 days
Installment payments • Monthly, quarterly or annually
• May change anytime* or even stop altogether Including participants who elected monthly payments
under old rules
• May take partial withdrawal while receiving periodic payments
Annuity
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*Limited for life expectancy payments
Proportional Withdrawals
Traditional, Roth or both • May specify 100 percent Traditional, or 100 percent Roth
• Unless specified otherwise, withdrawals are taken proportionally between Traditional and Roth
Withdrawal example • TSP = $150,000
Traditional = $120,000 (80%)
Roth = $30,000 (20%)
• Withdrawal = $10,000 Traditional = $8,000
Roth = $2,000
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Proportional Withdrawals
Why this is significant
• Avoid tax trap
Five-year rule and 59 ½ for tax-free earnings
• May coordinate traditional and Roth distributions for tax efficient withdrawals
• May delay drawing down Roth money (until RMD)
• Avoid Roth RMD by selectively transferring Roth TSP to Roth IRA prior to year turning 70½
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Distributions prior to age 59½ • 10 percent early withdrawal penalty applies, with the
following exceptions: Death – beneficiaries can always withdraw penalty free
Disability
Medical expenses
Series of substantially equal periodic payments
Age 55+ and retired**
Education*
First-time homebuyer*
Unemployment/health insurance*
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Early Distribution Penalty
*IRAs Only **Employer Plans only
TSP Beneficiary Rules
Two types of TSP participants
TSP participant
• Federal employee who contributed to TSP account
TSP beneficiary participant • Spouse who inherited TSP from TSP participant
• Only a spouse may maintain a beneficiary participant account
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TSP Beneficiary Rules
TSP participants dies
Spousal beneficiary • Spouse may maintain a beneficiary participant account
Subject to TSP distributions rules
Subject to beneficiary required minimum distribution rules
• Spouse may take a distribution Payable to an IRA of his or her own
Payable to self
Non-spouse beneficiary • Must take a full distribution
Payable to an inherited IRA
Payable to self
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TSP Beneficiary Rules
TSP beneficiary participant dies
Spouse beneficiary (if remarried)
• Must take full distribution Payable to self
Non-spouse beneficiary
• Must take full distribution Payable to self
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SECURE Act
Increases required minimum distribution (RMD) to age 72 (up from 70½) Parents may withdraw up to $5,000 penalty-free within a year of birth or adoption Inherited IRA distributions generally must be taken within 10 years
• Exceptions to the 10-year rule Spouses Minor child of the owner Disabled or chronically ill Beneficiaries less than 10 years younger than original owner
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Thank You!
A NARFE Federal Benefits Institute Webinar
Presented by Mark Keen, CFP®
2/27/2020 36 FEDERAL BENEFITS EXPERTS
Still have questions? [email protected]
1-800-456-8410, option 2
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