Tax planning and financial planning shouldn't be once-a-year activities. It's important to make them a year-round priority to ensure a secure financial future. So, in this episode, we're talking about how to kick off the new year with a focus on setting and achieving new financial goals.
Listen in as Michael, Tommy, and John share the importance of taking control of your finances in the new year and the benefits of making financial planning a part of your routine. You'll learn why it's important to celebrate your wins and regularly review your financial plan, as well as why it's crucial to stay informed and make adjustments to your plan as needed.
Listen to the full episode here:
What you will learn:
- Why tax planning should be something you do all year round. (6:30)
- Why you should not wait until tomorrow to get your finances in order. (8:35)
- The importance of celebrating your wins. (11:50)
- Why it is important to review and receive feedback frequently on your finaincial plan. (15:45)
- Several SECURE 2.0 changes that are coming. (20:45)
- How to plan for your yearly contributions. (28:00)
- The importance of looking ahead at your financial goals. (35:00)
Ideas worth sharing:
“Financial planning is a year-round sport.” - Mason & Associates, LLC
“If your financial plan is not right, let’s not wait for tomorrow. Let’s make the changes now.” - Mason & Associates, LLC
“Financial planning is about so much more than having a financial plan.” - Mason & Associates, LLC
Resources from this episode:
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Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
Michael Mason: Welcome to the Federal Employee Financial Planning Podcast, hosted by Michael Mason, certified financial planner; John Mason, certified financial planner, and Tommy Blackburn, certified financial planner and certified public accountant.
Mason & Associates have over three decades of experience helping federal employees with their financial plans.
John Mason: Thank you to all of our audience. Thank you for supporting us for all of 2022, and now, into 2023. The podcast is gaining tremendous momentum and we couldn't be more excited to see where it continues to go. So, thank you for all of your support and your five-star ratings.
If you're new here, Mason & Associates is a financial planning firm that specializes with federal employees. Not only do we produce this content so that you have actionable advice and you get a different spin, a take on your benefits, a take on your tax plan, a take on your financial plan, layering in that federal employee expertise that you probably can't get many other places.
We feel very passionate about putting out that content, and we're also hoping to continue to grow our client base at Mason & Associates with qualified clients who are looking to have a trusted team of professionals helping all aspects of their financial plan.
If that interests you, we have an episode posted on our website, masonllc.net. You can also find it right here. it's called The New Client Process and Experience. Take a listen to that.
If you feel like you'd be a good fit for our firm, we can kickstart that process at masonllc.net or 223-9898. That's area code 757-223-9898.
And I also want to throw out that right now this podcast is not sponsored by anybody. So, there's no ad revenue, there's no marketing budget behind the scenes. This is just Mason & Associates putting out this content that we believe is going to be good for a lot of folks, and then hopefully, good for us too in the long run.
So, it's exciting now that we're in year two, and I think that's a big milestone in the podcasting world, is to make it this far and maintain this kind of cadence and recording schedule. It's a lot of work. I think we have a lot to be proud of.
Tommy Blackburn: I think it's many things in life are that way. How long does a business usually lasts? I think they go bankrupt within the first two years. And so much of it is just getting into a routine, being disciplined about what you do.
So, I agree. I think it is a milestone, and maybe even part of the theme as we think about a new year, part of it is a reflection of our successes. So, we never want to forget that as we think about what are our goals for the coming year, but let's also reflect back on all the good things we have done.
Michael Mason: So, as we think new year, new goals, we're coming off the holidays. We don't know when you might download this podcast. So, your new year can start any time. It can run June to June, it can run January to January.
But because we are coming off the holidays and we want to draw some comparisons to how quickly things happen in life, I’ve got a three-year-old grandson, which John, that means you have a three-year-old son and Tommy, Zoe's right at three-years-old as well.
Tommy Blackburn: Not quite. Every month seems to be a huge difference at this age. So, she's about two and a half but not far from three.
Michael Mason: So, how was your holidays? And then how quickly have they gone from things you feel like you might break to little people?
John Mason: The holiday was amazing. My favorite part, I think Sarah's too this year was, Carter was singing Christmas songs. We're driving around looking at Christmas lights and we hear him in the back singing Jingle Bells. We're like, “Where did that come from?”
It wasn't that long ago that he couldn't talk at all. And now, he's singing Christmas carols and Jingle Bells in the backseat. It's awesome. And his number one present this year was a fishing pole. So, that was what he was most excited about which was pretty cool.
Tommy Blackburn: It's amazing. I was thinking about their favorite presents. There are two that are coming to my mind and there’s ones I wouldn't have thought about.
One is, Just got Zoe this like the little Pez dispensers but it's got an elf and like a fan on the top of it, this one, and the fan lights up. So, it's very Christmassy spirited.
That couldn't have been a more simple gift and that's easily one of her favorites, is pressing the button, watching the fan go round and round and seeing it light up.
And then the other was at our family Christmas, she got this little kitty cat that she can walk on a leash, and she hasn't stopped pushing that thing around. So, that's been amazing.
The singing thing made me think she was singing to her Elmo last night before we went to bed. Singing to Elmo and rocking him back and forth before putting him to bed. So, it is incredible to see how much of little people they are becoming, really exiting that infant type stage of really little humans at this point.
Just thinking back to when you brought them home to where they are now, I mean, it is incredible development.
John Mason: Life happens fast, three years, that fast. Mike, my dad, you're three years closer to retirement. Ken's three years closer to retirement. Federal employees out there listening to this are three years into retirement, three years closer, whatever it is, that three years went fast.
And in this episode, New Year, New Goals, is not going to be the typical go to the gym more, New Year's resolution. But I think we're going to talk about a lot of things.
How a financial plan is a year-round sport, and let me give some examples. So, for example tax planning. Tax planning happens all year. It doesn't happen in December. And what do I mean by that, guys?
Tommy Blackburn: Well, we should start that tax plan in January. I mean, we've got estimated payments that may need to be made. We should be thinking about funding our different investment accounts and what the tax attributes are to them, what type of charitable giving, let's start planning for those required minimum distributions. Are we going to do any giving from those.
This is definitely a year-round as we would come into the beginning of the year and we're exiting last year, make sure we tidied it up, and we started planning for this year.
We've got some April 15th deadlines that aren't just filing a tax return, that could be contributing to accounts. And then just as we go through the rest of the year doing tax projections and wrapping it up by the end of the year. So, it's absolutely a year-round sport.
Michael Mason: If April 15th is a surprise to you, if you go and pick up your tax return from your CPA, your accountant, and you're opening it very slowly and one of your eyes is closed usually, and you're wondering what's going to be there, well, then you haven't been planning.
It's not just you haven't been planning for a year, you haven't been planning for the last 18 months because you should have seen this coming.
Guys, I wanted to make a very important point as we talked about your young children. Imagine, and we hear this, tomorrow never comes … imagine if you guys, you and your brides said we'll start teaching Carter and Zoe to count tomorrow or we'll start reading books to him tomorrow or to them tomorrow — tomorrow just doesn't get here.
So, the things we're going to talk about today, we can't emphasize enough gentlemen to whoever's downloading this. The importance of if your plan's not right and there's a high likelihood that it's not, let's not wait for tomorrow. Let's make the changes now.
Just as quickly as our grandchild became three-years-old, we'll be seeing him off to high school, and that's how quickly you can wake up at 59 and a half-years-old and not have a retirement plan that you're proud of.
John Mason: And Mike, I think that's where we've been able to add a lot of value with clients, is not only being a source of information but being a sense of motivation.
Being able to not only educate clients on why doing things like estate planning documents are important, but being somewhat forceful and encouraging and motivating.
It's like we need to get this done and this is the year we're going to do it, when should we schedule that appointment? So, that sense, that forcing mechanism, that motivating factor in our clients' lives. Financial planning is so much more than having a good idea.
Financial plans that never get implemented are about as useless as a financial plan that was never created. So, if we're not implementing your plan, we haven't done anything meaningful.
Tommy Blackburn: We need to be executing on items. I was thinking back to that year-round tax sport, John, and I was thinking back to a statement you like to make which is “Not only are we planning for this year's taxes and next year's taxes, but we should be sketching out every year a lifetime tax plan.”
And it's going to change as life throws us curve balls and as circumstances and laws change. But we should be planning far out, and we should be taking action as well, not just drawing it up in our head. We need to actually be taking affirmative actions.
John Mason: And as we think about these goals and planning for the future, we've listened and tried to educate ourselves on ways to run a better business. And we've looked at the EOS system and a variety of other systems.
And one of the things that they talk about, is assigning yourself three to five goals or maybe even as many as seven, but capping your goals for the year so that it's something that's achievable. Once you start assigning too many goals, it becomes this monstrosity that you just fail. You're just failing and you're failing and you're failing.
So, one thing that we're talking about in this episode, is there's a thousand things you could work on in your financial plan. Let's pick out three, four, maybe five tops that you want to accomplish. And we're going to do that with our clients during strategic planning meeting season.
We know that when we meet with all of our clients, there's going to be 3, 5, 10, 15 things that can get accomplished. We have to help our clients prioritize, help set reasonable goals. That's what we're talking about new year, new goals.
And Mike, you said something that was so … what did you say? “Tomorrow never comes.” What I thought about there is we keep moving the goal post. And as entrepreneurs, one of the things I think all three of us are guilty on, is we set a goal for our business, we set a goal for our personal life and we hit it.
Well, actually, we don't. Because before we hit it, we set a new goal, and that goal post just moved 10 yards further. And then we get closer and closer and closer and then we move it again.
So, what's important about this, as much as tomorrow never comes, staying motivated and doing things today, it's important to celebrate your wins too. And I know that's something I want to work on personally this year is celebrating where we are at Mason & Associates, celebrating where Sarah and I are and our life with our family, celebrating my friends and taking time to give that space to live.
Because this is going to go back to middle school baseball, and I think you have a little bit to do with this, my mentality of not celebrating wins.
So, quick side story you probably remember this but 13, 14-year-old baseball, we almost made the Junior League World Series. You were the coach. You remember this story?
Michael Mason: Yeah, yeah.
John Mason: And we got to districts, and we got to districts. And I may be getting this a little wrong, and you were like, “Guys, this is not time to celebrate. This was expected.”
And then we won states, and it was like “Not time to celebrate, this was expected.” Now, that celebration did increase at each level, and we almost made it through regionals to the Junior League World Series.
And I think two things as I reflect on that. One, expect greatness from yourself, but two, give yourself the ability to also celebrate those wins and celebrate those milestones.
So, I'm not saying you did anything bad, but that sticks with me as like how do you celebrate your wins but also, expect them to happen at the same time? And sometimes, when things are expected, they're not as fun.
Michael Mason: Yeah. So, it's a really good analogy and I'm not going to steer it away from that because I think when you talked about your goals, if all we ever look at is what we need to accomplish, and we never look at what we've accomplished, it's kind of hard to stay motivated. You have to have those wins.
So, I was thinking as you were saying that, if you don't know the score of your game (another one of our favorite analogies) you'll never know that you won.
So, if you're a federal employee and you're listening to this right now and you've got 20 to 25 years federal, and you don't know that between your FERS annuity and social security, you're going to replace 65 to 70% of your income — if you don't already know that, and now you know that the goal of replacing a hundred percent is as simple as looking at the new maximum contributions you can put into your TSP; looking at how much I can increase that, now your goal is a whole lot more doable.
But when you're thinking I'm making a hundred thousand dollars, how the heck am I going to get there from here because you don't know what social security's doing and you don't know what the FERS annuity is doing, the goal is too daunting.
Tommy Blackburn: It's too daunting, and you're going to probably plot inappropriate courses of action. It's like if you really knew where your success was right now, maybe you would be taking different courses of action.
So, it's really good to celebrate those wins and know the score of the game as we continue to motivate ourselves for greater things to come.
John Mason: And I know personally, I helped a couple clients last year drop their TSP contributions from maximum to 5%.
Tommy Blackburn: And that's hard man, because you've been hardwired all along to, once you hit certain savings goals to never go back, and flip that switch, it's a difficult thing to mentally get through.
John Mason: Difficult thing. And that was because they're working with us, because they know the score of their game. They have that financial plan, we're able to illustrate — well, why don't we celebrate your wins now? Like why do we have to wait two years into retirement to get your brand-new floors?
Just because your one to one and a half million becomes liquid, like let's just reduce that TSP contribution, have that extra disposable income. Now, that's a version of celebrating your win.
And I think of sports analogies frequently, if I'm bowling, as soon as I roll that ball down the alley, immediately on the board, I have how many pens I knocked down. And if I have a goal of rolling 300, I know I need all strikes. If I have a goal of rolling 200, I know I need a certain amount. I can only have very few empty frames.
But you get feedback every single ball where you are. On a golf course, you get feedback after every single shot on where you stand. Are you getting that feedback in your financial plan?
And I would argue that if you don't have a financial planner, you're not getting that feedback. And if you're not getting the feedback, how do you know what you're changing? You can't hire Hank Haney as a golf instructor to fix your financial plan. You have to have a financial planner.
Michael Mason: Yeah, and the first nine holes of your 18-hole round that day didn't go the way you wanted. You don't close your eyes and go into the clubhouse, you work through the other nine holes.
But how many people quit looking at everything when the market January, February, March is down 10 to 15%. Now, we just close our eyes and curl up in a ball, and we don't look at the plan that tells us we're going to be okay, regardless of what happens.
We just curl up and close things out. Not good.
John Mason: So, please if you're the audience, I know he can be a controversial figure, but please don't get mad at me. But if you're a federal employee, you're Tiger Woods, okay? You’re Tiger Woods, and what do we mean by that?
Tiger Woods made more cuts in a row than everybody. He was the greatest golfer probably that's ever existed in the peak of his career. But what also makes Tiger Woods very interesting, is he very rarely ever gave up a lead.
I think all of his major victories, he was in the lead except for one going into the final round. Not necessarily the expert at coming from behind, but never gave up the lead. And why was that?
He could plot his way, plot his way around the golf course, and if he knew on hole nine that he won the tournament, he made nine pars. He didn't go for Eagles on the par fives, he didn't make mistakes. He hit two iron instead of driver. He knew what it needed to take to win the tournament, and that's what he did.
And as a federal employee, that's what we get to provide to you. Like knowing that you're winning the game, knowing the score, we can make decisions on those last nine holes because that's kind of what it is.
You've spent your first nine holes getting ready for a retirement, you're going to spend your next nine holes in retirement. We want to help make sure our clients don't give up that lead in the second half of the game.
Tommy Blackburn: I realize, have a strategy, as I was thinking about it, is that he realized in that example, only he was going to lose the game. He was already ahead, and if he tried to get better than par on each of those holes, he could potentially blow the lead, by trying to hit home runs per se.
So, the idea is know where you are so you can plot the appropriate strategy, so you don't blow the game.
John Mason: So, let's dive into new year, new goals. There was some changes. So, SECURE Act 2.0 we believe was passed. Again, we're recording this episode slightly in like the holiday season.
So, it looks like SECURE 2.0 has been passed. More to follow on that, but there are some changes with contribution limits coming in 2023. Let's do a little bit of what were those changes? What did those look like as it relates to TSPs, IRAs, HSAs, et cetera.
Michael Mason: And if you allow me, guys, just before we jump into that, I want to get out this statement from 1987 to 1989 timeframe. When I started this career with Equitable, people don't plan to fail, they fail to plan.
So, it's time, it's time. Whenever you're listening to this, it's time to say I am going to do something different in my financial plan this year. I want to celebrate one success that I didn't think about until you talked about it. And then we'll go through those numbers.
SECURE Act, you just said SECURE Act 2 passed. Part of SECURE Act 2.0 is automatic enrollment in 401(k)s.
So, I go back to 1989 when I was managing probably four advisors with Equitable. And as soon as they became eligible for their 401(k), they didn't have a choice. They were going to do 5% because they were going to get match 5%.
And I explained to them that if you can't save in your own, you can't go give other people advice. And it only took the government, what, 35 years to catch up to what advice we were given back in 1989. So, that's kind of a proud moment.
But let's go through those new numbers, Tommy.
Tommy Blackburn: Some of these, we're going to sprinkle in some SECURE 2.0 changes that are coming based on that recent legislation. But some of this was also just inflation numbers, just a kind of a routine change.
And the first one that comes to mind is for 401(k) or TSP contributions for 2023, hard to believe we're approaching 2023 — 22,500 if you are under age 50. If you are over 50, you get that extra catchup contribution, which is now 7,500.
So, in total, if you're overage 50, you can do 30,000 into your TSP or your 401(k), 403(b), whatever have you, retirement plan.
Michael Mason: And that's pretty amazing because I can remember back in the day, FERS folks could do a cap of 15%, CSRS could do a CAP at 10. And I think even at those caps, you were capped out once you hit $10,000 back in the 1987, 89 timeframe. So, now, $30,000.
Tommy Blackburn: And it's going to get even better under this latest legislation. I think John is looking up the exact numbers over beside me. I think is it starting at age 60 in 2024? John?
John Mason: I think it's 62.
Tommy Blackburn: So, 62 through 64. There's this weird range that they've identified in this new law. If you're between, we believe 62 and 64, and we're going to iron all this out, as the dust settles and it gets signed into law; but between 62 and 64, you get to do an additional catch up I think starting in 2024.
John Mason: Yeah, it looks like it's going to be $10,000 for this specific range of people. And here's my quick theory on it as it just popped into my head guys, why do you think it stops at 64? Probably because they don't want you to have that $10,000 to take out IRMAA brackets would be my guess.
Tommy Blackburn: I mean, it's a very good one. Clearly, your co-host are in agreement with that. That's very possible. So, we're up to 40,000 now that people can put in to … I mean that's phenomenal.
A weird provision though, I thought I read with these catchups, now is they're going to make them be Roth. So, it's interesting how the landscape is changing. So, I don't know if that's going to be all catchups or just this super catchup, we're going to get.
Michael Mason: That's super catchup. I read that. That was Roth, so that might defeat that IRMAA thing you were talking about because you have to pay taxes on it. But it's still, yeah, it's all interesting stuff. IRAs, 6,500, underage 50 — 50 and older, 7,500
John Mason: And then HSAs were bumped to 38; 50, single 77; 50, married or family. And then for those 55 or older, it's a thousand dollars each for both spouses if you both have an HSA.
So, all of these things have gone up. SECURE Act 2.0, I think indexes a lot of these for inflation going forward. So, it should be, we always are googling what's going to happen, what are these things changing to, so having an index to inflation I think will be really nice going forward.
Other couple changes, and this ties into the new year, new goal, is should you still be contributing to pre-tax TSP? Or maybe should you be contributing to Roth TSP, or Roth 401(k)? That's something to think about in a new year that maybe you haven't thought of previously.
And SECURE Act 2.0 gives us more to think about because I believe they're also now providing Roth provisions for SEPs and SIMPLEs, which didn't exist before. So, that's going to be for self-employed individuals.
And yet another wrinkle, potentially, having your employer matching contributions go in as Roth. And this has kind of existed in the private sector guys, with disability insurance where a company would offer you free DI, but it was taxable, and then you could pay a tax on it to make that a tax-free benefit.
It looks like it's going to be similar with these matching contributions as well.
Tommy Blackburn: Yeah, it's like an election you'll be able to make and it'll be an imputed income, so to speak, of you can pay the tax on the employer match or contribution that they do to get it into the Roth side.
Maybe that's why some of this stuff's not going to take place until 2024 because they need some time to get it implemented.
Michael Mason: You know, what's fun as we talk about this, this show is kind of just putting microphones in front of us as we spit ball amongst each other. So, what if you're in the home stretch and we've got an episode, The Home Stretch.
Think about this: your children, you just got them through college, you and your spouse are working, you don't have that college bill anymore. I've done this on the low side; you guys, couples could make $260,000, and I'm not taking anything off of that 260 other than the ability to put 30,000 a piece into their pre-tax 401(k).
You can make $260,000 and put that 30,000 a piece in, and be able to do 7,500 each into Roth IRAs during this home stretch. I mean, if you factor in your pre-tax health insurance and maybe HSAs, you could be up to 275, 280, and be able to put money into Roth IRAs.
And you guys know that the biggest reason people don't put money is they're like, “Well, I'm all saved out from the paycheck” and they never look at that after tax brokerage account that's sitting there growing taxable, do they?
John Mason: Well, that takes me right to taxes as a year-round sport. So, you're listening to this episode, our audience now, it's past January, which means whatever happened in 2022, you probably have some realized losses in your account, and maybe those realized losses can be used to offset some unrealized capital gains.
So, Mike, to your point, what were our losses last year? Where do we stand from a gain standpoint? Do those net out to zero? Do we realize those gains? Do we use that to fund Roth? Thinking, being so thoughtful.
Tommy Blackburn: Holistic.
John Mason: Holistic on those non-qualified accounts, guys, those have to be massaged frequently. That's not something we can ignore.
Tommy Blackburn: If you want to do it right, if you want to be good and you want to get the most value out of it, I guess you could go to sleep and just ignore non-qualified accounts and let them do whatever they're going to do.
But again, we're all about being proactive. So, we look at those accounts and we think about how does this fit into everything, and can we get it to a more tax efficient place. There could be a number of answers there.
But Mike, that's very thoughtful too of maybe we think we should be doing Roth TSP, but maybe I also see if I do every enough things pre-tax, I can still do max out my Roth IRA. So, this is the value of advice and having that holistic view to really put all these pieces in place.
Michael Mason: $60,000 saved as a couple, 30,000 apiece, and the ability to save another 15. And again, we're not saying pinch into your daily budget, we're just saying maybe take some of that money that's taxable in that brokerage account and just move it over to a Roth so that you never have to pay taxes again.
Tommy Blackburn: Move the funds from one pocket to another pocket, so to speak. But one of those pockets is far more tax efficient.
John Mason: So, it's still really early in the year. And we have things like required minimum distributions, we have things like qualified charitable distributions, we have some changes yet again, as SECURE Act 2.0.
So, why don't we touch on a little bit guys, how do people plan for that? Again, it's first quarter probably when our audience is hearing this; what are we planning for with QCDs and RMDs, and quick crash course on what the heck those acronyms stand for too?
Michael Mason: Yeah, let's take QCD first (Qualified Charitable Distributions) — were first made permanent four or five years ago and it was tied to the RMD age, 70 and a half. And qualified charitable distribution just suggests that if you're going to make contributions to your church or charity, once you hit 70 and a half, let's go ahead and make it from the IRA.
You put it in pre-tax, you can send it to the church. You know, pre-tax, churches don't pay tax, so you can take it right off of your tax return. Fortunately, Congress kept the QCD age at 70 and a half. You physically have to be 70 and a half. But if that's happening this year, any time this year, you may want to think about not doing your charity until you've hit 70 and a half.
And even though you don't have to take it — you don't have to take it because you're not forced RMD because you're only 70 and a half. You may want to take it from that QCD.
Tommy Blackburn: It's got to be one of the most tax-efficient ways to give. So, don't overlook these QCDs. So, maybe part of it is just taking stock of where are we with some of these like tax milestones as far as our age, the 70 and a half is one of them. RMDs which is required minimum distributions, that used to be 70 and a half, then it changed to 72 if you hadn't gotten there yet.
And this latest SECURE Act 2.0 is changing it to, if we're not 72, this year, in 2022, it's going to be 73 is your new age that you have to start those in 2023. And then another one's going to come in, I think in 2033, it gets pushed back to 75. So, just taking stock of do some of these life events, these tax milestone years, are those happening?
John Mason: And one more time on non-qualified accounts guys, which is the qualified charitable distributions, the RMDs, understanding how all these coordinate, and if you're giving a significant amount to charity, it's time to really put pen to paper or a mouse to Excel spreadsheet to say, okay, what are we going to give this year? What are we going to give for the next five years? And does it make sense to do something different?
Can we donate highly appreciated stock? Do we have RSUs that are vesting? Can we reach into maybe an inherited savings account or life insurance policy and use that to do 5 to 10 years of charitable giving? So, forward-looking.
Tax planning, tax preparation is the act of inputting data into a software program to generate a return to file with the government. Tax planning is the idea of determining what actually shows up for you to input.
So, most people just get the source data, and the source data tells them what to do. What we're saying is, let's make the source data say what we wanted to say so that when we file our return, it's completely expected.
Michael Mason: Yeah, so John and Tommy, we've both talked about RMDs, SECURE Act, and you'll watch the media. It could be CNBC and they’ll be celebrating the fact that it's now 73 years old. Just because Uncle Sam says you don't have to take it until 73, doesn't mean that you probably shouldn't take it. Let me just give an example.
If you've got a million dollars combined in IRAs and $40,000 is your required minimum distribution, maybe you're not given 40,000 to your church or charity. So, if an RMD was due this year, let's say you're giving 10,000 to the church or charity, well, you still add $30,000 to your bottom line.
But if you're not doing RMD and you still give that 10,000 to charity, now, you are adding zero to the bottom line, and you're using the best money you can give. So, just because Uncle Sam said you don't have to take it out, doesn't mean you probably shouldn't do some taking it out.
Now, whether you take it out via Roth conversions or qualified charitable distributions.
John Mason: We want to be intentional. Too many federal employees who don't work with us, retire, do not touch TSP from age 57 or 60 until 72, soon to be 75, because they don't want to pay the tax penalty.
How many times have we heard tax penalty? There is no penalty Mr. and Mrs. Client, you owe taxes because you've never paid them. You are not paying a penalty. So, too many people defer taxes into perpetuity, which creates a bomb, a tax planning bomb that either is going to happen in your life while you're alive or you're going to pass it down to your heirs.
Caveat, if your heirs are a charity, maybe you do defer into perpetuity, but that's a whole separate story.
Michael Mason: You know, I think about penalties John and Tommy, and let's think about we live here in Virginia, which is a reasonable state tax, 5.75. But many people have migrated out of the northern states, New York, maybe a California tax bracket of 13%.
So, you put in 10,000, we'll make it easy. 10,000 in your 401(k) last year, and you deferred it out of a federal bracket, and a 10% state bracket. Now, you're one of the millions that's moved to Florida and there is no state tax.
How is getting your money out even in just one year, even in one year that you avoided 10% New York tax, and you got it out in Florida, and you didn't pay anything, and you paid the same federal tax that you just avoided. I don’t think that’s a penalty.
Tommy Blackburn: No, I think that's what we call tax arbitrage. That was an opportunity that you should be taking advantage of, you should be proactive and be able to see the game and plan around that.
Another one I know we want to take facto or take stock of is our FEGLI election, that federal group life insurance that we have every five years age bracket range, that premium's going to go up and up and up.
So, we should be aware of that, and we should be thinking, is this the appropriate coverage for us or should we be looking at some type of life insurance outside of it? Do we even need life insurance, depending on where we are in life.
And this applies — I said FEGLI, but this could apply to anybody's life insurance. So, we should be taking stock of that.
Michael Mason: Most importantly for me, is that FEGLI option B where beginning at age 50 is when it starts getting on hyper track of rate increases. Don't let the dog wag the tail or the tail wag the dog, I think is a proper thing.
Don't wake up at 55 and one-month-old, look at what the FEGLI premium was and then decide you don't need life insurance. That's not planning, that's reacting.
John Mason: Yeah, the call to action here, guys, is if you're 45 now, look at the 45 premium and look at the 50 premium.
So, the call to action here is to be looking five years ahead. So, every five years, let's look at the brackets, let's see where we are, and then let's look at the one, five years from now, and say, “Okay, well, I don't like the way that looks. Maybe we should do some replacement. Maybe we should go get some term insurance.”
And really, as we think about new year, new goals, when you're younger in your financial plan, you may not have milestone years every year, but at least, every five years, we need to be checking things off the box, whether it's updating your estate planning documents, getting them in place, reviewing your FEGLI, adjusting what you're contributing to TSP or what have you.
Like probably younger in your career, you don't have as many milestone years. But as you start getting older and you start hitting 50, 55, 60, almost every year turns into a milestone year at this point.
And as we think about 59 and a half, or really 55 is when FEGLI B gets nasty, then you have 59 and a half in-service transfers from TSPs and 401(k)s, 60 is survivor Social Security, 62 is your own social security, every month between 62 and 70. 65 is Medicare, 70’s qualified charitable distributions. RMDs are thrown in there too.
It's like at the end of your career, every year becomes a milestone year and every year, we need to be looking 5, 10 years down the line, and we're missing the boat. So, new year, new goals is don't just focus on what's happening these 12 months, let's make sure we're looking very forward, not just today.
And I think as we wrap up, let's just touch on 59 and a half really quickly, which is a little self-serving for us, but the in-service transfer for federal employees at 59 and a half that allows them to transfer TSP to an IRA, why do we believe that's such a good idea? Why do we encourage folks to do it? And then are there any drawbacks?
Tommy Blackburn: Well, as I was thinking, particularly with TSP, there's not many drawbacks because as long as we … well, if we're still working, the account stayed open. And if we retired and we left a balance there, the account stayed open, and we can always roll back into it.
So, there's not much risk if you maintain a TSP and maintain your access to it. It's not an irreversible decision. I know in our planning, we're very conscious about making sure that we leave that flexibility.
And then why would we do it? Well, we get a lot more flexibility in general with an IRA or a Roth IRA. However, that balance needs to be split in a tax-free transfer rollover to an outside private account.
We got more investment options. Although no other TSP now has the mutual fund window, I believe, which gives us a little bit more flexibility. We can't do QCDs from an employer retirement plan like TSP. We can do that from an IRA of Roth conversions, those are much easier. The ability to just change things.
Like even the other day, we called TSP to change a reoccurring distribution that had been set up for a client. I mean, that was not the easiest … you couldn't do it online from what they told us. We had to call in, we had to cancel one after the most recent deposit hit.
So, we had to wait, call in, cancel, call back, set up the new one. So, it's a lot easier to administer in those individual IRAs and Roth IRAs.
John Mason: And even on those two, just the tax withholding. TSP doesn't withhold state taxes, Mike. And federal, they're either going to do single and zero, married and three, or they're just going to do an arbitrary 20%.
Tommy Blackburn: For TSP, right, it's going to be 20% or higher. But I think this is a mandatory minimum of 20.
John Mason: Yeah, it's really just not a very user-friendly system. So, I think we're big fans, and this is when a lot of people become clients to us at 59 and a half, they can move assets under management. This is a celebratory moment.
When you reach 59 and a half, it's a celebratory moment because all of those years of hard work just became liquid. Like you thought on 59 and four months, you were like, I only have 20,000 in savings. Not you in particular, but-
Tommy Blackburn: Like ready access, liquid, I can get my hands on savings.
John Mason: Yeah, 20 grand. That's a good emergency fund for most folks. At 59 and a half, it becomes $1,020,000 because TSP is now fully liquid. This is a celebratory moment. It's something that we believe a lot of people should take advantage of.
And before you trust a financial planning firm, Mike, what are just maybe one or two things that somebody could do to vet a financial planning firm before they do maybe an in-service transfer to one of those folks?
Michael Mason: Yeah, and the first thing I'll make sure we put out there is that there is an episode, your TSP at 59 and a half that you can listen to. There is a federal employees group life episode that you can listen to that gives you all the reasons why you should/what you should do at age 50 in your life insurance; why age 59 and a half may make sense to move the money out of TSP.
It's huge. First and foremost, you want to vet a firm if the only thing they understand is TSP. If they don't understand what FERS means and they can't do the first calculation, then they're not your financial planner.
The elephant in the room is that you're charged almost nothing for the TSP, and you get almost nothing as far as advice goes. We're happy with the fee that we charge our clients to give them overall financial planning advice.
So, vet them. Make sure they understand the federal lingo. Make sure that they're doing this and their plan is not just selling a product.
John Mason: Well, this has been another episode of the Federal Employee Financial Planning Podcast. Thank you to Tommy and Mike, the co-host of the show.
Thank you to our audience both returning and new. We hope you enjoyed this episode. Thank you for your support. As we enter year two of the Federal Employee Financial Planning Podcast, we're accepting new clients.
The new client process and experience episode talks about how you can become a client of Mason & Associates. That's on our homepage at masonllc.net and available in whatever app store that you're using to listen to this podcast.
So, yes, we are accepting new clients. Make sure you follow us. Make sure you rate us five stars, and we'd love to hear from you in the comment section or email masonfp@masonllc.net.
We'd love to hear from you, what keeps you up at night? What are your fears, what are your concerns, what are your questions? We'll address it on a future episode. We are Mason & Associates.
The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.
We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.