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 smarter financial decisions. Reyna 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, Rena Reyes, Matt McClure. Here it's another edition of Reyna Retirement. And got to bring in Raina because, you know, it's been a busy, busy time in the federal space. You're getting a lot of questions about a lot of different things right, Right about now. But I know TSPs are something that people often have questions about. Secure act has changed a couple of times. We had the original Secure ACT, Secure Act 2.0. So a lot of the different rules and regulations have changed. Talk about what it means for people who may want to take withdrawals from a TSP or if they want to leave an inheritance. A lot of different issues that go into it. And I think there's a lot of good that you can do in your very good way of just breaking stuff down in plain English for people.
[00:01:21] Speaker B: Well, thank you, Matt. That's exactly right. And the Secure act sure, sure did make some changes. So it was interesting at the Secure act giveth and the Secure act taketh away. So essentially what they started doing is they changed the age where people who have these buckets of money that have never been taxed, they can wait longer to actually take their money out. So remember Uncle Sam's kind of big bad wolf waiting outside the door wanting to tax us because he allowed us to defer taxes in our tsp. 401, 457, 403B. But we gotta pay the piper some time. And it used to be, if you remember that age of 70 and a half, everybody thinks 70 and a half, I gotta start taking money out because Uncle Sam's gonna make me. And if I don't, he's gonna penalize me 50% of what I didn't take out when I was supposed to. Well, the Secure act, the first one changed that. And they actually changed the age from 70 to 72. Yay. You have more time to take your money out, more time to wait. And then that a year barely later, they said, no, we're going to make further changes and make that age now age 73 again. Yeah, I can wait longer before Uncle Sam makes me tax myself. And all that means is you got to just take money out and put it in your bank. Because the action or the transaction from your TSP or your 401 into your bank is a distribution which is then taxable as income for that year. Well, as I said, it giveth and it taketh away. Used to be, whether I was taking required minimum distributions or not, if I passed away, my spouse usually would be my first beneficiary. And almost everywhere in Money TSB and other places included, my spouse is that very special person who has as many freedoms as I do with my money. However, my adult children, usually if I'm retired, I want them to take their money. Used to be they could take a stretch ira. What that means is that is taking my inheritance slowly in a trickle form over a time period over my entire life, but no more. The Secure act says nope, your heirs have to be taxed fully. Not over their lifetime, but now they've got 10 years where they've got to take that money out and be taxed fully by the end of the 10th year. There's some exclusions to that, things like disabled children and a few other things like that. But in general, most of your adult children do not get the option of a stretch IRA. They've got 10 years. And that's all she wrote.
So the TSP itself has long since had even further restrictions on heirs on the inheritance of the non spouse beneficiaries. So clearly that will be anybody that's not your spouse. So who is that? Your brother, your sister, they're not your spouse. Your adult children, clearly parents, next of kin, things like that. So I want to kind of show you what that means if you're a TSP participant and you wanted to make sure that if something happens to you that your spouse gets to choose, that your spouse gets the money first and then that your children do as well. Here's how it operates. So these are some of the options with tsp. You can leave it cash to take, installments, annuitized transfer. All we're talking about today is leaving money in TSP temporarily or any money that currently sits in the thrift savings plan. Here's how the inheritance works. If you pass away.
So pretend this employee has a 400000 tsp. This person is married and he has two adult children and they're making good money at their own job. The one's making 50,000 at his job and the other one's making a hundred at her job. That just a scenario, right? Well, if he passes away, does the money go to the spouse? Absolutely. They call this a TSP Beneficiary Participant account. All that means is the honey bunches gets to act like him. After he passes away, they will change it and now it'll be in her name, and then she can slowly take distribution. Why does it matter that she can take it slow? Because whoever gets this money is going to pay what taxes? The Piper, Uncle Sam. He's waiting, Big brother. Okay, so anybody's gonna pay no matter when they get it. So she's gonna probably want to take it pretty slowly because what did she just also get life insurance from fegli? My. My federal employees understand what this means. FEGLI is federal employee group life insurance. But in general, there's some type of benefit that they've already received. Usually life insurance comes immediate in the form of a lump sum tax free benefit. And then she's also receiving a survivor benefit if there was one left. Also, the higher Social Security of the two will continue if that was on. And then any outside banks, IRA money, blah, blah, blah. So my point is, she's probably not too stressed about grabbing this money. So let's say she does nothing with it, okay? It's just there. It's in her name now. Great. But we all want our money to sort of pass to our roots, pass to our legacy. Generational wealth is a real thing. And you can have it, we can help you do it. But the way TSP operates in this example, if she then passes away, does it go to the kids? Yes. But the way it goes to them can be painful. Because if a TSP beneficiary, that beneficiary, participant, account holder passes away, the money goes to the kids, but they don't give them a choice. When it goes from a beneficiary TSP account, it immediately gets distributed all in one lump sum, all taxable, all at one time. And the piper gets paid to the nth degree because what does it mean when you make more money? It means you pay more tax. Now, taxes are tiered. Yes. However, when's the last time a person making $50,000 a year saw the tax rate for someone who makes $250,000 a year? So what does that mean, folks? It means they are not in the same tax bracket that they ever were before. It means they only receive, what, 65, 70% of the money when me, you know, the parents are rolling over in their grave saying, oh my goodness, near half of it's gone because of the way this was structured.
Any other place outside of TSP, outside IRAs and things like that, Yes, I manage tons of them. For one of the reasons is this purpose. This does not happen. Outside IRAs. Give the adult children that 10 year inherited IRA option regardless of the order of people passing away. Now, again, in this example, sure, they got the money, but notice they're not smiling anymore. You see, they were smiling. Yay. Oh, I got my money, but doggone, I'm paying so much tax. Let's make it even worse because I'm just here to bring the happy news for you. Okay, so let's pretend these adult children. Let's say I was the employee and I was so old when I got 99 years old and my kids are already on what, Medicare.
Well, what happens then if I went from a $50,000 a year salary to a $250,000 salary, what happens with Medicare Part B premiums? Through the roof. Because your income determines your part B salary. Correction premium. Your income determines your Part B premium. So then Irmaa just smacked them around a little bit and they got to pay him more for their Medicare Part B premiums than they'd ever seen before.
So a lot of this trickle down stuff can absolutely happen, and they did it because they can't. TSP has a lot of redeeming factors, but they were also created and administered by the government. How does the government get paid taxes? So let's create another scenario here. What if I have no spouse? What if I have all of my kids? Because I've had people tell me, well, I'll fix that problem and I'll get the spouse out of there or I'll give the spouse 50% and my kids a quarter each. You could. But in that example, what happens? Okay, if I. If the employee or the participant passes away, there's no spouse in the middle, so it does not become a TSP beneficiary. Provide participant camp. The kids have how long to make a decision? First of all, 90 days.
90 days. I deal with a lot of claims, My friends. 90 days feels like a lot when you say 90 days, which is like three months. But when you're in the midst of grief of a parent, that is a snap of the finger. And I have had the phone call, I can tell you probably three times just in this past, you know, year, well, you know, 12 month year, where, hey, Raina, mom passed. I've only got a couple of weeks left or a week Left before this 90 day ticker. Is over. I need an inherited IRA. Like yesterday we were able to make it happen. But you understand this extra stress that may not need to be imposed upon you. What happens after the 90 days? Sh bam. Same thing. They get a all of the money all in one lump sum, all taxable, right on the jaw. So the point here is to understand TSP has a lot of great redeeming factors. However, whatever that nest egg portion is might be served in other types of financial vehicles. Do I manage tons of them? Absolutely. Give me a call, we can talk about it. Any kind I'm going to recommend is 100% risk free. I don't do risk, I don't do loss. I'm not into it because I work with retirees whose biggest concern is losing their nest egg that they took 30 years to, to accrue and but we do look to the market for growth. So I like fixed slashed indexed accounts so you can earn, you can't lose money. But that's neither here nor there. You need to understand what TSP does and doesn't do. It has a lot of great factors, but it has some limitations as well. So in this example, they had 90 days, but if they did nothing on the 91st day, shabam, they get all of that dollar amount to them as well. Again, outside IRAs, they have the choice where if they wanted to take this distribution in a lump sum, they could. But most people don't want to be forced into anything. They want to be able to have the ability to make the decision so they know what they did and why they did it. That's one of the biggest things you're going to hear me say over and over again. Why, why? Why? I know that's the shocker in Hawaii, but why is also that sign language for why also? So why would you do something? A friend of mine used to live in Hawaii and she's a very aggressive driver, right? And so I'm on the phone with her and she's, you know, hollering at people driving, which is totally normal. But then she says no, you can't just give me the shaka and say it's all okay. Which apparently you can. You just. But that's like it's all good in Hawaii. Like that's all good. So I'll tell you, it's not all good with TSP if the, if this happens in the inheritance because they'll be like, it's all right, you got your money, didn't you? And that was the agreement, that was the contract that's what they agreed to do. It just is what it is. Now, if you maybe don't trust my little stick figure pictures, let me show you the truth, the fact. The document from TSP, it is 100% real. This is the document. They call this publication number 31, which is for, let me pull up the title. They have a couple of different versions. This is, imagine that, death benefits information for participants and beneficiaries. So as the barber Burton would say, you don't have to take my word for it. This is straight from the horse's mouth. This is the TSP publication. If a beneficiary participant dies, the new beneficiaries cannot maintain the TSP and the death benefit cannot be rolled over. So what does that mean? They get it all, all taxable, all at one time. Pardon my passion, but this is a big deal. Taxes can change your life. Not just for the year you take them, not just for the following year when you pay them. But remember Medicare, it's a two year look back for irmaa. So there's some significant things happening for seniors, for retirees, and it all, it all counts. So then you see here in 90 day time period, non spouse beneficiaries have 90 days. If they don't do it within the 90 days, they're just gonna send it, they're just gonna distribute it, they're just gonna tax it. Spouse beneficiaries can keep their balance in the tsp. That's spouses, not anyone else. Not anyone else. So kind of recapping, I know you don't want to look at that anymore kind of recapping. If you are the owner or participant of a TSP account and you're looking at your bucket of money that you've amassed over the duration of time that you've earned it, you've got 200,000, you've got a million, you've got 2 million, you've got 20,000. The balance is irrelevant. That there's a portion of that that is your nest egg and you don't want to lose it. Maybe you want to secure that not only for yourself, but maybe for your adult children. Maybe you have children who are in need and can't sort of handle things. You're trying to secure things, maybe not. It doesn't matter. There's a portion that is that nest egg and you're trying to protect them from that taxation kind of scenario. The other portion might be best served if you're taking distributions either way. If you haven't spoken with someone about your Own issues, your own world, your own TSP scenario especially. It's definitely worth it to go into it with somebody who clearly understands it. And am I offering myself up for an appointment? Absolutely. But I have an entire team across the nation as well. If you needed assistance and you wanted someone local, I'm the queen of the zoom call. We can schedule whenever you're ready. Whenever you want to have a conversation, it's ideal when you do have appointments like that or meetings like that. Don't withhold information in terms of debts, concerns, things that you thought you wanted to spend money on, and also what you want to do for your heirs. It's a big thing. I've had meetings with people where it's like the second or third time that I meet with them that they finally disclose to me something about maybe one of their adult children, you know, will need something specific. And they've got this certain dollar amount set aside and earmarked for this one purpose. And I'm think, and I even tell them like, well, we would have been good to kind of start there because we made this one plan down this one road and it doesn't throw a wrench in the system, but it just requires some tweaking. So these kind of things are really good to go over, simulate the plan. This is not to scare or be a bummer, but they say when ignorance is bliss, tis folly to be wise. It's not. It's not folly to be wise. In this, it makes sense to learn what the potentials are, learn how the situation is, learn what will happen if you were to pass away. So I hope this helps. If you have a TSP reach out, you can get scheduled with me and my team. Easy. Not a problem. And we do not charge for our meetings. Look forward to talking with you again soon. We'll retire you then.
[00:17:54] 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 850-450-6500. That's 850450 6500. Or to reach the team at American Federal Benefits consultants, call 1-800-872, 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 is 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, FELI, and FEHB are all registered trademarks of the U.S. office of Personnel Management. American Federal Benefits Consultants, agents, consultants, or any independent contractors do not provide tax, legal, or investment advice and do not not engage in the solicitation or sale of securities. Consult with your tax advisor or attorney regarding specific situations.
