Episode Transcript
[00:00:00] Speaker A: Any examples used are for illustrative purposes only and do not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to predict the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.
Welcome to Reyna Retirement. Reyna Reyes has dedicated her career to helping people make small, smarter financial decisions. Raina retirement is all about breaking down complex financial concepts into language you can actually understand.
Now here's the co founder of American Federal Benefits Consultants, Reyna Reyes.
[00:00:40] Speaker B: So when you hear that Intro left a good job in the city, what are you thinking about? What are you thinking about? You're thinking, Tina, you're thinking of the big boat. You're not thinking of rolling over your money. But if you're rolling on a river, you may make that connotation about rolling over money from wherever, from whatever source, from a 401k, from TSB, from a 4.3b. You can even move money from a bank, from CDs, from wherever. Technically it's not a rollover, but it's rolling from one location to another. So if you're rolling on a river, you might want to consider what that means, what the ramifications are, what are the tax qualifications, what are the taxes ramifications, what's happening and how does TSP consider it? And how does Uncle Sam consider it as well? Well, first let's talk about the definition. To roll money over means to relocate from one source over your head to another source and whatever that other source is. Ideally, if you were going to do it, you're thinking it's better for you somehow. That could be in terms of beneficiary planning or legacy planning or a better inheritance program or, or a place to get a better interest rate or to be safer, to know not ever have any losses or to have lower fees or to have more fees for the higher opportunity of growth. Who knows why, but that's the definition. A rollover goes from one source that's never been taxed in general over your head to another source that has also never been taxed. Rollover different than if it went from that pre tax place to your bank account or to your purse. Only then do you actually pay the tax. Only then is the piper paid. So a rollover is easy in concept, but what does TSP think about it? Well, first let's go to their little documents sometimes that, you know, people forget exist and this is kind of what they define it as. So not everything is able to be rolled over. But there's tax treatments. So they. First of all, they're always giving you their. Their concerns or their. Their advice to protect yourself. So before you move money, obviously they're going to say, does the place that you're trying to put it accept the rollovers? Well, of course, many of y' all have advisors or people who recommend things, myself included, who have said, hey, this might be a good place to roll a portion of your money to, for the purpose of xyz, pdq, all the different reasons. So you want to be sure that it's going to go either like to like, and that you don't have tax surprises. So that's a very big thing that you want to be sure of when you're being shown something. And that's something that. When we're making recommendations to do a rollover, we're trying to be sure that we're very clear this is not going to cause a tax event.
Or if it is, we're going to do this in small pieces, whatever it is. And remember, okay. Also, there can be tax treatment rules. So, for example, spouses are a big concern. TSP treats spouses a certain way where outside IRAs teach. Treat spouses a very similar way. Because first of all, there's IRS rules.
TSP has their own rules that kind of preclude the IRS rules where different IRAs, they have different rules as well for not only spouses, but for the next generation.
So a direct rollover is different than an indirect rollover. So direct means it went directly from, say, TSP to that other institution to the other source. TSP sent the money direct to them.
You were not an intermediary, so they did that. There's a special process. TSP likes to kind of know things in advance. And so there's a couple of varieties of ways to do it. I prefer the direct rollover myself. For me and mine. For me and my house, we will do a direct rollover. And that's a couple of reasons. Number one, one check gets mailed. TSP doesn't do like an eft. There's not like an electronic deal. So I'd rather have a check mailed once rather than twice.
But that direct rollover goes directly from, say, your TSP to this other source. And there is no tax withheld.
None. It's not a taxable event. Remember my image of the coffee in the water? Water being Roth, coffee being traditional, it stays coffee. You're just putting it into a different coffee mug. You have not taken a drink yet.
Neither has Uncle Sam. So they're waiting for that.
And then the bottom part, as you can see, if you're doing a rollover from traditional into an outside Roth, that is a taxable event.
So I'm not in love with using the word rollover. It would be more of a transfer or like a, you know, we're moving that money into a Roth. But we want to be very clear that is a taxable event. You do pay tax to go from coffee to water. And I'm referencing an image that I've used often that you may have seen before. But essentially, coffee's never been taxed. Water already has been. So if you move from traditional into Roth, you do have to pay the piper to get it there, but they don't withhold the taxes. And that's where a lot of conversation gets sparked, because people want to understand, what does it mean? Am I getting taxed twice? No, you're just not getting the withholding, so you owe it later at tax time.
Now, an indirect rollover, very different. So this is where some people get a little bit confused, because TSP, they're saying, hey, we have to withhold 20%, but that's not necessarily the case.
Sometimes they'll send you a check and then you send it onto the company. I'm not in love with that personally, just because of the extra effort. But they're talking about different withholdings and things like that.
But if they send you the check and they've not done the withholding, you've only got a certain amount of time to get it over to the other company, which is added stress, and I'm not a big fan of it.
But if they're making the payment to you. So, for example, if you think, oh, I'm going to take a withdrawal, $10,000, they're going to do the withholding. They're going to. They do a direct deposit to you. They absolutely will do the withholding, but it just makes a whole tax nonsense.
Not a big fan. If you're reading all this stuff, they've got to. They've got to act as if it was a taxable distribution, and then you're going to have to try to figure it out to get it to where it's not a taxable distribution.
Not a big fan.
But when they send you the check, you've got a certain time period to get it into the hands of the receiving institution. That's why I'm a big fan of direct rollovers rather than indirect, although we can work with both.
So I want to Talk here in layman's terms, and that's why I'm saying this. When you've got somebody telling you or encouraging you to do some of these rollovers, TSP has some guidance on what could and couldn't happen. Which is a good place to go to if you're not sure what questions to even ask the person giving you this recommendation. Again, myself included. We are TSP and IRA specialists. We have many that we offer, right? Different options, different purposes. Different IRAs have a different purpose. Just like, like if an IRA is a financial vehicle, you may have different regular vehicles for different purposes. You've got the sedan for the daily driver, you've got the van to haul the family and the truck to pull your boat or your trailer or whatever. Different purposes, same thing with financial vehicles. You may have one financial vehicle for the purpose of nest egg long term savings and then another financial vehicle for the goal of that monthly lifetime income.
The purpose is different. And that's why when I'm having my meetings with people, sometimes we have multiple talks because we first want to talk in terms of purpose and high level, like Lehman's terms and what are we trying to achieve? Looks like we have a problem here. Here's how we can potentially fix it. But then we get into the granular. There is no tax on this rollover. You only pay tax when you take money out. And here's the provisions of the plans and things like that.
And also the goods and the bads, right? Everything has a pro and a conversation. Just like tsp. It has a lot of beneficial factors, but it has some limitations as well. And we go over those. We say, okay, maybe this other IRA may have some, may fix some of the problems TSP has, but then it has some things that are kind of a give and a take as well. That's why a lot of times we like the best of both worlds and different things. So if you're looking at TSP and you're wondering what should I do? What do I do with this? The first question is going to be what's up with your income? Just do we have to fix that problem or not? And if so, we use TSP accordingly.
Inversely, if we don't have an income issue and TSP needs to be a nest egg crock pot inheritance plan, we've got plans for those as well. But we want to first see what are we trying to achieve, what's the goal and how can we best serve you and help you to fix the problem you have without creating more reach out. Let's get scheduled and go over some of these options. We can definitely help and be as efficient as possible, but also we want to tell you in ways that you can understand.
We're not here to try to posture you or make you feel like you don't understand things. The goal is to take a complex idea and let you understand it, and then we can get as detailed as you want to in those plans. So reach out, let's get scheduled and make sure your income's looking good, not just for now, but forever. And that your money will be working for you for the longest time. Maybe not just for you, maybe for your next, next next generations. Because one day they may also be rolling on the same river as you. We'll talk to you soon.
[00:10:31] Speaker A: Thanks for listening to Reyna Retirement With a strong commitment to ethical standards, Reyna works hard to find the right solution for each individual or family who reaches out for advice. To contact Rena directly, call call 850-450-6500 that's 850-450-6500 or to reach the team at American Federal Benefits Consultants, call 1-800-872-8857 that's 1-800-872- 8857. You can also go online to americanfederal.org not affiliated with the United States Government. Opinions expressed are subject to change without notice. These opinions are not intended as investment advice, nor do they predict future performance of any product. All information provided is believed to be from reliable sources. However, we make no representation or warranty as to the accuracy of any statement. The information is intended to be educational in nature and does not provide a guarantee or specific result. All copyrights and trademarks are the property of their respective owners. American Federal Benefits Consultants is an independent organization, not a government agency or affiliated with the Federal Government or any state government. The terms csrs, fers, fetch, gli, and FEHB are all registered trademarks of the UL Management, American Federal Benefits Consultants, agents, consultants, or any independent contractors. Do not provide tax, legal or investment advice and do not engage in the solicitation or sale of securities. Consult with your tax advisor or attorney regarding specific situations.
