smart tsp strategies to build a strong financial future

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


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$7,800

$15,000 $15,600

$4,400 $5,000

$20,000

Tax Liability (22%) Tax liability (25%)

$10,000


$75,000

$0

$15,600 =

$15,600

Contribution

After-tax balance


Traditional IRA Roth IRA

Return = 7.2%

<

Traditional TSP Versus Roth TSP Traditional vs. Roth TSP: Increasing Tax Rates


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$15,600

$7,800

$17,600

$4,400 $2,400

$20,000

Tax Liability (22%) Tax liability (12%)

$10,000


$75,000

$0

$15,600 =

$15,600

Contribution

After-tax balance


Traditional IRA Roth IRA

Return = 7.2%

>

Traditional TSP Versus Roth TSP Traditional vs. Roth TSP: Decreasing Tax Rates


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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

2/27/2020 14

*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

2/27/2020 15

22%

$168,400

–

$78,951

12%

$78,950

–

$19,401

Tax Brackets Ed & Judy’s Income

$90,600

Less

Standard Deduction

$24,400




• Standard deduction = $24,400



• 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




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• Standard deduction = $24,400


22%

$168,400

–

$78,951

12%

$78,950

–

$19,401

Tax Brackets

Tax Effect •Traditional TSP contribution: $25,000


• Income deferred @ 12% $0

Ed & Judy’s Income

$90,600

Less

Standard Deduction

$24,400

$11,650 @ 22%


$78,950

$13,350 @ 12%

$65,600

• Roth = $13,350



2/27/2020 17

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

2/27/2020 21

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.


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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https://www.tsp.gov/sitehelp/glossary/glossary.html?term=RiskVolatility


L Income L 2020

L 2030

L 2040

L 2050

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Which L Fund is right for you?

TSP’s recommendation:

2/27/2020 24

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

2/27/2020 25

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

2/27/2020 26

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

2/27/2020 27

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

2/27/2020 30

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*

2/27/2020 31

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

2/27/2020 32


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

2/27/2020 33


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

2/27/2020 34

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

2/27/2020 35

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

Securities offered through The Strategic Financial Alliance, Inc. (SFA), Member FINRA/SIPC. Advisory Services offered through Strategic Blueprint, LLC. SFA and Strategic Blueprint are affiliated through common ownership but otherwise unaffiliated with Keen & Pocock. Neither Strategic Blueprint nor SFA provide tax or legal advice.

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