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, Reyna Reyes.
[00:00:41] Speaker B: So you know how you look in the mirror and some things you know you know, and then some things you know you don't know. Like for example, I know that I don't know how to change an alternator in a car, right? But I do know that I know how to put the gas in the car, right? But there's some things that you don't even know that you don't know because you don't know there's an issue. Like for example, I would not have known that there was such a thing as a butterfly valve in my 5 speed transmission SUV until the day that I had to go to the mechanic and there was a problem with my butterfly valve. So now that I know that, I don't know how to fix it still, but I know that it exists. I'm telling you this because in this world of tsp, there are things that you know, as in I know I need to contribute 5% to the TSP, I don't need to go below 5. I know that they're going to match me 5% as long as I put in 5%.
But then maybe you know that you don't know how the details of all the funds work. Like maybe I don't know exactly how the C fund operates, maybe I don't know that the F funds are bond indexes, right? And you know that you don't know that because that's not your thing.
But maybe you don't know that you don't know that there's things within TSP that you can do that, that not only did you know you didn't know them, but you didn't know that you didn't know them. And I want to share with you what you may not have known that you didn't know. So we're ready for this. So TSB within it has two different sides and you don't have to take advantage of both sides. You've always had access to the side on the left of this image, the traditional side Right. As you know, I drink a heck of a lot of coffee. And so I. This is. I wanted to make this image so you could see inside my mind or in my mind's eye. Now that's a song. Who sang at D.C. talk? Maybe. I don't know. In my mind's eye, I see the coffee. So let me first explain what you know you already have access to, which is the traditional side of tsp.
So when you drink coffee, you go to the IHOP or the diner or wherever it is you go. My. My. My grandpa in Stafford, Virginia, every day was at the Bob Evans right there by Acquire Harbor. They knew him. They knew exactly what coffee he was going to have and exactly what creamer he was going to use.
And. And they. They knew him by name. Every time we went in there, you know, they say, hey, Andy. So he since passed away, but it's a good memory of. Of this coffee and probably why I drink so much. So when you are contributing into your traditional tsp, you are adding the coffee. You are the carafe. You are the waitress at Bob Evans. Thank you. And you're putting in that coffee into your coffee cup. The match automatically happens. Let's call that the creamer. In addition to the interest you can make from whatever fund you have chosen, whether that's CSI or the G and the F. So the goal is to increase the amount of coffee and creamer that you have in your coffee cup. So the craft is if you were to log into, say, the GRP platform or MyPay or Postalease, and you say, hey, HR I want to put this much coffee into my TSP bucket. That's your 5% minimum. And then, of course, they're matching. Now, remember, none of this has yet been taxed. Uncle Sam is waiting to take a sip of your coffee before you do.
Some of y' all have heard of the dad tax, right? Dad always gets a chicken nugget before you can eat yours. And that's what Uncle Sam is ready to do. He says, dad tax, you have not paid tax on this yet, and you have to when you take it out. All right? So it's all waiting to be taxed. So Uncle Sam's so benevolent, you get to wait to pay taxes until later, but you are just kicking the proverbial can down the road and delaying the inevitable.
Now, if we look to the other side, back in 2012, they opened this up, and they said, hey, we're going to let you have a Roth. Why is it called a Roth? Well, the. The. The. I Think it was a senator, his last name was Roth, who wanted this to be a thing, and so it was named after him. He said we should let people put in money that's already been taxed and give it time to cook and sizzle and simmer and grow interest. And we just won't tax them on the growth, only the interest earned, only the additional money. So I said, how can I illustrate this? Well, I see it like water and oil because they don't really mix because you, you can, you can use it all, you can empty out the cup, but you've already paid tax on the water. You see this? So this water in this cup on the right hand side, you've already paid tax on the growth, or what they call the basis. You've put in your own basis and it's already been taxed. Uncle Sam's happy, you already paid the dad tax. We're done here.
As time goes by and you're in the G, C, S, I or F fund in the TSP and you're growing interest, the oil is the illustration of the growth, the additional money.
So you see here, that is earning, it's growing, it's filling up your cup.
But Uncle Sam never gets a taste of the oil, which, I know it's gross and you wouldn't eat that, but he never gets a portion of that.
He never gets a portion of that. Actually, a better illustration, if you're making brownies ain't got no oil. That's a bummer. So Uncle Sam has some really bummer brownies with the Roth, and they really limit it if it's a Roth ira. But in TSP you can contribute the same amount into the Roth as you're allowed to in the traditional. What I mean by that is the maximum is the same for either bucket. It's a total maximum. So let's say it's 23,000 and some change if you're under 50, 31,000 if you're over 50 with ketchup. So that 31,000 could all go into the coffee or it could all go into the water, or you could equally distribute between the two, it doesn't matter. But wherever you contribute your money, the match is going to go on the traditional side. So if I only put in 5% and I only contribute into the Roth, I still get a match, but it goes onto the coffee side, not the water and oil side. So some people have said, I ain't going to do the Roth because I didn't get a match. Yes, you did. It just didn't go into the bucket you were putting it in. It went over into the traditional side. And so that's the difference. Why is this exciting? Number one, if you're a youngin, if you're a whippersnapper, if you got a long time to work, preferably over five years.
I am a huge advocate for the Roth because you can use time to your advantage. They call it the time value of money.
And let when you got a lot of time, you don't need a lot of money. And so you can start contributing your little guy into the Roth slowly over time and as interest continues to grow like it would have anyway on the traditional side, you have more time to earn more oil and Uncle Sam can't touch it. So you do yourself, that is your 60, 70 year old self, a huge favor by offering up yourself a bucket that you can take out of and Uncle Sam doesn't get to touch it. So why are we excited about this? Because Uncle Sam doesn't touch the body. That's huge. It's a massive, massive thing. Because the traditional side, you're just delaying the inevitable. Yes, you got a benefit if you were a high income earner. Sometimes it's nice to defer that and potentially reduce it. But in general $31,000 per year helps if you are maxing it, but it doesn't always reduces back to a lower tax rate. It can, but what I'm getting at is down the road you're still going to have the need for money. And sometimes pulling taxable money out can affect us in terms of things like obviously income tax taxes, something called IRMAA for Medicare. The cost of Medicare Part B can be higher.
So let me not digress. What are we excited about right now? TSP does not let you take coffee and put it into water.
We'll turn coffee into water. That sounds very biblical. But no, you're not allowed to do it right now.
Come 2026 January, the proposal is that TSB will open it up so you can do what they call an NTSB Roth conversion. You can convert your coffee into water, meaning you can take money out of the coffee, out of the traditional side, pay the tax and then it becomes already tax money over on the water or the Roth side. And then as time goes by, the same interest you would have earned in the coffee or the traditional side is now going to earn tax free interest as time goes by.
We know why this is good. I don't think I need the answer to that. But the older I am, the more I'm going to review if I need to do this. So if this is something you're questioning or wondering about, Reina, should I start a Roth? I ain't got a Roth right now. Should I start one? Well, the answer could be yes, but a couple of questions will be, does it need to be in TSP or does it need to be outside tsp?
Does it need to be contributions or conversions? They're very different. The contribution is the money you put in a conversion is from traditional to the Roth.
So these are some things we definitely want to have meanings about. For example, if I'm talking to and you can even answer this question without meaning, if you're under the age of 55, I think you should be at least thinking about starting a Roth if you don't have one already. That's a very easy, universal, nice way to look at it. You should probably consider it whether it's NTSB or not. Because if you're 55, unless you're retiring in two years at MRA, then you may have another five years to work. Why five years? Because the rules of the Roth are hands off for five years from the first dollar in order to take the oil or that growth out with no tax and wait till after you're 59 and a half. So at age 55, you've got a great four and a half years, obviously till 59 and a half, but then that fifth year, it's not a big deal. So you are a good time period away if you're 75. I'm not sure that we would start a Roth other than for a few reasons. Right. Some people say, oh, I'm going to go ahead and pay the tax on this money slowly so my heirs don't have to pay the tax and that's fine. Or there's not much really a 75 because you're already paying RMDs at age 75. So I'm digressing a little bit, getting into the weeds. But what I want you to know is that I'm available to reach out to, to go over some of these choices, right?
There's no one size fits all. As you're hearing, even as I stream of consciousness, this idea of should I start one if I'm this young or this old? Well, maybe no for this reason. Maybe yes for this reason. And then that's when you can come in and say, well, that's not a reason I like. For example, right? If I'm saying, oh, you could do it because of this, and you say, well, I don't care about that. Well, then that wouldn't be a reason to do it. I've even had people say to me, I want a rock because Sally has a rock. I'm like, well, that's. That's great. Why does Sally have a rock? Well, she's had one for 15 years. That's also great. Why do you want one? Well, Sally Sutton was great and so these are, you know, keeping up with the Joneses and things like that. So we need a true, true reason. And it's very common that sometimes I'll ask you why more than three or four times to get to the heart of the matter. The real why are we doing something? The real give me the true reason. So it's nice to know TSB is opening that up for, for internal conversions. But there's some stipulations. You got to be over 59 and a half or separated or request a hardship, which I don't think we're going to really be doing. That's not a great reason for a Roth. If you can think of a good reason, let me know.
Specific to a hardship, but the usual reasons that you can take a withdrawal over 59 and a half or separated, reach out to me, my number here, 850-450-6500. You can text me. That's the fastest way to get a hold of me. I'm a very quick texter backer and we can get some answers to you on whether a Roth should be in your life sooner or later. We'll talk to you soon.
[00:12:30] Speaker A: Thanks for listening to Reyna. Retirement. With a strong commitment to ethical standards, Rena 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 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 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, license, 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.
