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. 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, Reyna Reyes.
[00:00:39] Speaker B: Well, many of us have seen that movie Office Base and they're all concerned about their TPS reports and that's not what we're concerned about today. We're worried about our TSP reports and statements and money and contributions and all the good stuff.
And a lot of people say, hey listen, I got a lot of questions about tpt. I almost said it. TPS got a lot of questions about TSP and I want you to answer them. So let's go ahead and answer some of these high level basic questions. Number one, what does TSP stand for? That is Thrift Savings Plan.
That is the words, that's what it stands for. Okay, well what is it? Well it's the government's version of a 401k, 401k, 403b 457. You know, all of these, these are buckets of money into which you contribute, commonly pre tax.
So then they get a match, right? And you put money in and then it, it mirrors or, or uses the market for stocks, bonds, mutual funds, all those to grow in addition. So you put money in, it earns interest is the goal.
And then at the end of your career or toward the end of it, you've got a bucket of money you can pull from for a variety of purposes. Which is, which is really good. So that's what it is, you're putting money in. Some people get the benefit of that tax deferral where it reduces their taxable income for that year. Some put money into the Roth and that's fine as well.
What are the two segments? That's just it. There's traditional and Roth. There is what I call coffee, which is the money you're contributing, you're putting in the coffee and then they get a match. Go government puts a match in, there's your creamer and then you earn interest. As time goes by, there's your sugar and it all goes in. Stir it all up, it's all yours. Or as my grandma from Arkansas would Say it's all Y, honey. Honey, it's all Y. And you have choices for this as time goes by, and we'll go over some of that. But none of this has ever been taxed if it's in the coffee, if it's in the traditional. So you're waiting to take a sip, but who gets the first sip of your dog on coffee? And that's not you, it's Uncle Sam. Now, inversely, there is what I would call the water. And I don't have a water cup. I've got hand sanitizer. Don't drink it. But you put the water in the Roth and it's already been taxed. As time goes by, you earn what would have been sugar over there, you earn oil in here. Water and oil never mix, so the oil or the interest, rather, will never be taxed. Never ever. Never ever. And that's where you know, if you have time on your side, you can definitely start contributing to Roth, especially to gain the interest. So you'll never pay tax on that. So the two segments are traditional and raw.
And how much can you put into it? Quite a bit. I've had a lot of people say to me, oh, I'm at the max. And they mean 5% or 10% or something. And that is not the case. There is no percentage maximum unless the percentage of your salary reaches the dollar maximum. The dollar maximum. This year, if you are under 50, it's 24, 500. If you're over 50, you can add another eight grand. If you are between the magical ages of 60 and 63, you can add in not only 8,000 extra, but you can add in $11,250, bringing the maximum to 35, 750 bucks. So that is clearly not 10% or 5% of your salary. Let's say you make 50 grand, you make 70 grand, and ain't no 10%. Right.
So if you are wanting to max out, we would rather use a dollar amount for contributions because then you can.
You'll know exactly what the dollar amount's going to be after, say, 26 pay periods, or if you've got 11 left. You know what I mean? We can do some of the math, but depending on what you're trying to do, but if you're trying to max out in terms of your ability, not.
Not what you're able to do, as in what they allow you to. Yeah. Not what you're allowed to do, but what you're able to do in terms of how much money can I put in? And still live and pay my bills and eat, then that's going to be subject to your own percentage and ratio and things like that.
So I'm a big fan of increasing your contributions every year when you get a raise.
So just don't take the raise. Right. You increase your income, let's say they raise you 2%. Don't take it. You were living off it before. Just redirected into TSP, that extra 2%. And that is commonly how I see TSP millionaires made. They were disciplined and they continued and they lived at or under their means. How much can I put in? We already did that. How much can you take out? Ah, interesting.
So the direct answer is as much as you want to. It just depends on how old you are, whether you're working or not and what you're trying to achieve and how you want to take it out. So you can take money out alone. If you're under 59 and a half while working and their maximum usually is about fifty grand, you can do it in a general purpose or a hardship or a residential. And word on the street is that you can take two general purpose loans now at the same time, which is kind of interesting.
But again, why would I take a loan? Well, first of all, their interest rates are so low.
Pretty, pretty good gig. And the cost is pretty low as well. So you can go to pick a, pick a financial institution somewhere to go get a loan and you say, what's my interest rate if I wanted to take a loan from you? And they say oh, 7%, 10%. You call tsp or you look it up and you say, what's my loan percentage? And they say what, four and a half or something like that, which is around what it is here, 20, 26, four and a quarter, four and a half. It's been kind of fluctuate. It'll always fluctuate, but commonly less than your run of the mill financial loan vendor.
So that's one way to do it. Let's say you're over 59 and a half and you're working. You can take as much as you want to. You know, that's that. That was the TSP Modernization act passed back in 20, September 15th of 2019, where they said, hey, if you're over 59 and a half, you can grab money four times a year if you want to while you're working.
Now fast forward, if you retire, that four times a year goes away and you can grab cash pretty much whenever, whether that's in a withdrawal or a rollover or Whatever. Now, after retirement, there is no loan. There is no, I'm going to take money out and put it back in pre tax because you can. There's no way to put it back in pre tax if you're retired.
However, if you had a loan when you retired, of course you can keep some of those payments going. But that's a story for another day. So the direct answer to how much can I take out of TSP is you could take all of it. But in the world of TSP distributions, and that's why you call us, we would make a plan for that. Because, number one, what do you got to think about? Taxes, taxes, taxes, Taggity, Taggity taxes.
And that is a big, huge, massive factor in how you're taking money out from tsp because it counts as income. And there are thresholds now that we have to be aware of not only your tax rate or your tax bracket or what will ultimately be your effective tax rate, but also you have to remember that you are retiring. And what's the next thing you got to call rain about? And that's Medicare. And your income determines how much you pay for Medicare two years after you made it. So those are some things we want to be aware of in taking money out.
Not to mention the fact that does money need to stay in tsp?
Maybe some, maybe not all. So what's the question here? What does the government put into my tsp? Well, it's a match. How much is a match? 5%. And that's where a lot of people wrap their head around this 5% like it's the holy grail of tsp.
And you never, never, never, never, never, never want to go under 5%. You do not want to contribute less than 5%. If you're doing a dollar amount and it was 5% last year, it probably is no longer 5%, because if you got a raise and you're getting a percent of a bigger number and that dollar amount didn't stay a percentage because it was a dollar amount. So if you're going to do 5%, just type it in as 5% rather than an actual dollar amount.
Yes, this is sign language for percent. I know a few. That's what it is because that's what it looks like.
So you want to contribute that 5% if you're doing a minimum, but people say, oh, 5% is the maximum. No, no, no, no, no. Whatever amount you put in, the government will match you up to five. They're not going to put more in just because you did 5% is the government's maximum. And they're going to put that in as long as you put in five or more. Where do they put it? They put it in the traditional side. They are only going to contribute their 5% into your coffee because they will not tax themselves.
The Roth doth not get a match.
When you put into the Roth, it doth get a match, but it goes into the traditional side. So if you're putting in your 5% only into the Roth, they're going to match it, but it's only going to be in the coffee.
They're going to match it, but it's not matcha mod coffee or not tea, it's going to be coffee.
Goes right into the deferred section. How much does it cost to have a tsp? The fees are pretty doggone low.
Depending on what fund you're in, that is CS, CSI or G, or the F, it ranges between 34 to 48 to 55 cents per thousand.
So very, very, very inexpensive.
But a lot of people argue that you get what you pay for because there are only really five funds, with a few exceptions, but essentially five funds. And then the L funds just mix up those five.
So cost is incredibly low. And that's why a lot of people argue that, hey, I might use TSP for my aggression, I might use TSP for my CS&I stuff. But, but my safe stuff, I might consider putting it elsewhere. Can I leave the tsp and if so, when can I do so while you're working? If you're going to keep contributing, which you are, then you would not be able to leave it or exit it or close it. Let me, let me clarify that. You can leave it, you can empty the balance. You can say, hey, tsb, I'm moving my whole hundo to somewhere else and I'm going to have a zero balance. And they're like, okay, sounds good. See you next pay period. When you put money in and then you get a match. So while you're working, there is no closing the TSP because you're contributing it to it and it just doesn't stop. But you can absolutely empty the balance if you want to to put it somewhere else or cash it or whatever. Obviously we watch taxes. We don't want to do that. But these are just what you're able to do. These are Joe Friday. Just the facts, man. Just the fact. And so can you leave it? Yeah, for sure. You can also do a portion. You can take a withdrawal of a portion of, grab some, roll some, a lot of people will do a rollover, portion portion proportionately or a portion for different purposes, delegate different plans. Now, after retirement, you are able absolutely to close the account because you're no longer contributing into it.
Is that beneficial? It depends on what you have going on. And I had somebody the other day said me, why don't you talk about this, these IRAs that you do. Because there's no one IRA for everyone.
Just like there's no one car that everyone should drive. There's no one medicine everyone should take. We've got to take, you know, got to take your height, weight, blood pressure, family history, what's going on with you before you get prescribed a medicine. We can't say, hey, this Lisinopril works for everyone. Hey, everyone take Metformin and Janumet. No, it doesn't make sense. So we have to kind of figure out what each person is trying to achieve to determine what makes the most sense for each person.
Why would I leave tsp? Why would I go somewhere else? Well, some of the biggest reasons are the inheritance issue. TSP has some limitations on the way they tax your heirs. Not the spouse. Spouse is treated really well, but it's non spouse beneficiaries that have some significant limitations and sometimes surprises.
Another reason is that you've got limited choices in tsp, right? Let's face it, there are five funds and it's extremes either way. I've got safety with limited growth or growth with limited safety. Now, granted the aggression, not bad. But a lot of people do look elsewhere for their safe stuff because they think they may be able to do better, potentially earn a higher average return, maybe take income in a different way elsewhere. And that's what me, my team do. We are the queen and kings of IRAs and TSPs and making plans for this. So we absolutely do manage outside IRAs. That's one of the crux of the matter.
But I do want to be incredibly clear that there's times we're not making the recommendation. Sometimes even our IRAs are great for a portion, sometimes they're not. Sometimes they're great for the majority, sometimes they're not. This is just a fact. With anything, there is no one place that's perfect for everything. Just like if you go to a car dealership, they're not going to say everybody's going to get this suburban.
No, that doesn't make sense. Some people needed smart car for their leg to drive because that's all they can fit in a smart car.
So you see what I'm getting at TSP is a bucket of money that you can use for all kinds of reasons. Some people are taking money out to pay bills. Some people are taking money out to pay their ex. Some people are taking money out to build a house, build a dream house. Some people are taking money out to start a business.
Some people aren't taking money out. Some people are saying, I don't need it. And a lot of times if you're that person who says, my money is just going to sit there, it needs to just sit somewhere. That's where you may call us here to say, where should it sit? Is it best to leave it here? Do I need to diversify further?
I never want all my eggs in one basket. And TSP is one basket. So that's a big reason many people do reach out to us for the diversification option to say, hey, Raina, I think I might want to hear what you've got, what you guys have going on, because I understand, I can, that you'll have places where we can be 100% safe and potentially, you know, have a higher ceiling, higher, higher ability to earn interest than maybe what I currently have. And that's a big reason people contact us. But again, these are just facts of the tsp and this is scratching the proverbial surface for you to understand kind of how it works and what your options are.
As you know, there are details and documents and PDFs that have all the. All these little tiny font rules from tsp. We just have the privilege to study them. And this is our life to where we understand it and are able to share that with you and get the information to you. And when I'm sharing this information, this is not. I know all these things. Look at how smart I am. This is. I've read this. I know it. Let me show you in the document where it is. This is not a. You don't have to take my word for it. I mean, it is that you don't have to take my word for it. Reading Rainbow So we'll show you the book. You can read the book your dog on self and see what is in the PDF, what they're saying. Because this is not about being right or wrong. This is about making the right decisions to plan. Because there will come a day that these decisions will help you or potentially hurt you. And we want to make them right the first time and know why we did them. Some people say no because they don't k n o w why they're doing something.
We want to know why. Why? Why do you want to Roth? Why do you want to contribute? Why do you want to distribute? Why do you want to take money out? Why are you willing to pay this huge tax? Why? And is there a better way to do it? Reach out. Let's have the conversations to go over what you want to do, what you can do, and how we can help you do it.
[00:16:39] 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 Reyna directly, call 850-450-6500. That's 850-450-6500. Or to reach the team at American Federal Benefits consultants, call 1-800-87- 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, 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 advice and do not engage in the solicitation or sale of securities. Consult with your tax advisor or attorney regarding specific situations.
