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Federal Employee Financial Planning: TSP Accumulation (EP9)

It might surprise many of you how significantly your retirement funds can grow, simply by saving a small percentage of your salary each month into your TSP. However, there is much to be considered as you start to put money towards this. TSP contribution limits for 2022 are $20,500 and catch-up contributions for those over the age of 50 are $6,500. In other words, anyone over the age of 50 can contribute $27,000. In this episode, Michael, Tommy, and John will be sharing more on this and what you need to know about TSP accumulation.

Listen in as they share considerations in regards to Roth versus traditional IRAs and when the government will match your contributions. You will learn how much you should be putting into your TSP, why you should start saving in your TSP at a young age, and  why Roth might be better for your family. 

Listen to the full episode here:

What you will learn:

  • TSP contribution limits. (1:25)
  • How IRAs can be transferred into TSPs. (4:30)
  • When you are vested in a company contribution to a TSP. (6:40)
  • How much you should be putting into your TSP. (8:20)
  • The value of figuring out how you can max out your retirement benefits. (11:00)
  • Why you should start contributing to your TSP at a young age. (13:00)
  • The five funds to be aware of. (19:00)

Ideas worth sharing:

"It’s outside the box, but outside the box is what typically wins.” - Mason & Associates, LLC

"There is nothing more addictive than saving.” - Mason & Associates, LLC

“Financial planning isn’t about doing the least—it’s about doing what’s right.” - 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. I’m Michael Mason, certified financial planner. Across the table from me, John Mason, certified financial planner, and Tommy Blackburn, also certified financial planner and certified public accountant. Mason & Associates have over three decades of experience helping federal employees with their financial plans.

This episode, Thrift Savings Plan, TSP, the accumulation side. This is while you're working and putting money into the Thrift Savings Plan.

Things we’re talk about contribution limits, not only federal employees, but military. Catch-up contributions, federal and military. Considerations in regard to Roth or traditional. Many people ask us, should we do be doing Roth or traditional side, your investment choices, the internal fees, and then coordination with your private IRAs or Roth IRAs.

So, guys let's start with the contribution limits, how much can folks put in to their Thrift Savings Plan.

Tommy Blackburn:    So, if we're underage 50, we can put in 19,500 as of 2021. And if we're over age 50, we can do an additional 6,500, which brings us to 26,000.

Michael Mason:          So, 19,500 under age 50, 26,000 over age 50. And then we can do a mix, right? We've got the option of traditional or Roth. Can I put 19,500 in each one of them.

Tommy Blackburn:    I wish. Yeah, we get this question quite a bit, is can I do one or the other, both — and those are overall limits. So, assuming we're over age 50, we have the 26,000. We can dice that up between traditional Roth, however we want, but we're limited to 26,000. So, it's either 26 traditional, 26 Roth, or some split between those two, but all in 26,000.

Michael Mason:          Perfect, perfect. And then our military folks in the combat zone, they have a little higher limitation. They can get that 19,500 in either Roth or traditional. And then if they're in the combat zone, they can get all the way up in 2021 levels. They could get all the way up to a total contribution and match up to 58,000.

If you still happen to be in the military and you're over age 50, that can go as high as 64,500 when you're in the combat zone. So, you should have a great financial planner on your side if you're military and you've got assets to save or assets to transfer. Not that you can transfer assets through a Savings Plan, but you might have a hundred, 200, 300,000 in mutual funds that are growing taxable.

And John, we've often told folks, hey, if you can defer your entire salary and live off those mutual funds, you're basically pulling taxable money out and putting it into a tax favorite situation.

John Mason:      It's important to note that like you said, Mike, you can transfer — like if you have an IRA, an IRA can transfer into TSP. A Roth IRA cannot. If you have a non-qualified mutual fund that's either individually-owned or jointly owned with a spouse, that asset can't be transferred into TSP.

But a way to get those vehicles because TSP generally only accepts payroll deductions, what we would do is we would liquidate those mutual funds and that joint brokerage account, for example, live on that while we're deferring, whether it's pre-tax Roth or exempt contributions, deferring those into TSP.

It's a great strategy. It's one that we have to talk a little bit about because it doesn't feel great. It's kind of emotionally draining to see your paycheck go down to such a low dollar amount.

But if we think about those military members in a combat zone or in a tax-free zone, it may be the perfect time to start looking at harvesting capital gains, and looking at the tax rate on that, whether it be short term or long term.

It could be an interesting opportunity to live off those non-qualified mutual funds while you're in that tax-free zone.

Michael Mason:          Well, yeah, when you're doing financial planning — and many people in this country when they talk about the tax code and they talk about all the wealthy, they have all the tax breaks, because they have all the accountants and the tax loopholes.

And it's a scapegoat because you have to go out and look for these things. And then when you get a financial planner that presents something to you … let me give you another example: let's say my wife and I, we both have a great living. I make, let's say, three times what she makes and I encourage her to put her entire salary into her 401k, $26,000.

And she says to me, “I won't have anything to live off of,” and we'll be married 40 years in December 5th. So, it makes sense for her to put 26,000 in there. We've got to make sure she feels comfortable that she has the money she needs to do the things she wants to do.

So, that's the same thing here. If you're wealthy outside of TSP and Roth TSP, and you have this opportunity to put money into exempt contributions, you should try that. It’s outside the box, but outside the box is what typically wins.

John, how about the vesting schedule, both for federal and military? How does the vesting — when do you know it's yours?

John Mason:      So, vesting is specifically talking Mike, about when is a company contribution or a company match or in this case, the government contribution, when are you vested in that?

401Ks in the private sector typically operate on like a three-year, five-year schedule. It could be a cliff or it could be gradual. But in the case of TSP for our civilian federal employees, the way TSP works is the federal government wants to match you 4%. So, if you put in 5% employee contribution, the government matches you 4%.

And then in addition to that, there's a 1% kind of give me contribution or automatic contribution, regardless if you contribute anything as a civilian federal employee. So, it's important to note in a 401k or a TSP, anything that that employee puts in, you are always 100% vested in your own contributions.

Number two, you are automatically vested in any of that company match or that government match. So, remember, the government wants to match you 4%. You're automatically vested in that immediately. The 1% contribution, that other 1%, you are not vested in that until after three years of service.

So, a couple of rules there, a little bit different with the military, the blended retirement system; same matching schedule, same principle, but with a blended retirement system, it's a two-year vesting schedule on the 1% company contribution.

Michael Mason:          And many times, folks will ask us how much should I be putting into my Thrift Savings Plan? And of course, for brand new federal employees or military, my answer is always going to be at least 5%. If you do five, you're really doing 10 because you're getting the full match. But financial planning is more about, let's not do the least, let's do what's right and what you should get used to.

So, Tommy what's a good rule of thumb for anybody in TSP or any company-sponsored 401k, where should we at least start the paying?

Tommy Blackburn:    Rule of thumb, they're good as kind of a guidepost. However, of course, as customized financial planners, we love to go outside of rules of thumbs, but they are a good guide.

For a rule of thumb for anybody, particularly for private sector. But even with these government systems that have the pensions, 10% is what we want to go for. That's a good rule of thumb. There's a number of reasons as to why that rule of thumb exists.

Private sector, if you don't have a pension, you got more ground to make up. So, maybe looking more towards 15% and in general, we do don't want to deprive ourselves of enjoying our life today. But as we plan for the future, the more we can do generally is going to be a much better answer.

Michael Mason:          Yeah, I'm a big fan. I'm a big fan of that 10% starting point. Tommy, you make just a great point. Remember our specialty is of course, with federal employees, we get a lot of military retirees that end up being federal employees.

Remember, as a military retiree or as a first retiree, at least a third of your income is a guaranteed pension. And another third is probably going to be social security. So, you can save 10%, which equals 15 and pretty much be winning that game.

But to your point, those private sector folks, they gotta replace your TSP and your pension. So, they need to start at a higher level.

John Mason:      And we don't know in the private sector, whether or not there's any company contributions or any matching contributions. We've had several clients who are married to a military member and right before that person gets vested, they change duty stations, move across a country and lose matching contributions. So, it's a much more difficult financial plan when you don't have that guaranteed pension income.

I love guys, the 10 to 15%. I also love just saying we should be maxing it out. If the government is giving you the opportunity to put away $19,500 in a vehicle that you'll never ever pay taxes on ever again, the default answer should be, we do everything in our power to max it out.

Now, we have to plan: live today, plan for tomorrow. There's got to be a certain amount of enjoyment. We have to have a place to live, but in the context of one's overall financial plan, probably more important to figure out how we can max out a TSP or 401k or IRA before it is to figure out how we can buy a home that's going to continue to kick our butt with expenses and roofs and air conditioners.

We want to think about how we can max out those retirement vehicles before we go to some of these other big purchases.

Michael Mason:          You know, and this is a really good segue guys, to let's maybe separate first 10 years of employment, and then 10 to 20, and then after 20. If you do this early, that 10 to 15%, it might be hard to get to the full 19,500. But if you do that 10 to 15%, you're going to build quickly, compound interest is going to be on your side.

And then if 10 years from now you have children and you can still be doing that 10 to 15, that would be great. And then how many times have we shown folks that when those children are now in college and if they have to scale that down a little bit, they are so far ahead of the game, scale it down to get the children through college, without debt.

And then those last 10 years, boy, if you're prepared for retirement, you should be able to be today doing 26,500 those last 10 years leading up to retirement. Then you know you're on the right track.

John Mason:      It never gets easier to save than it does when you're 22, 23, 24-years-old before life creeps up on you: you have a house, you have a family, you have children, a dog who may or may not have a torn ligament. You know, these expenses creep up on you.

So, if we can get that ball rolling and it can get some momentum building — time and time again, we've all seen the math guys. Somebody who saves more the first 10 years and less the last 30, the person that saves early wins that game all the time. So, getting that ball in motion now, it's never easier than doing it today.

Tommy Blackburn:    Particularly to all those points, straight out of college or early on in your career, yeah, it doesn't get any simpler. It's no less expensive. And if you're somebody coming out of college, you're used to living pretty cheap. And if you can main that lifestyle, you can really save.

And Mike, as you were talking about it at the end, when everybody's independent, and then you can go to that 26,000, that home stretch that we like to focus in on, and really showing things up and making decisions, which I know we've done a radio show on. I'm not sure if we did a podcast. If not, I'm sure we will.

And John, as you were saying, save early and have that growing, it made me think back to Einstein's quote, where he said “Compound interest is the eighth wonder of the world.” It's also funny as he said, “He who understands it, earns it. He who doesn't, pays it.”

Michael Mason:          That's really good. Folks, the last thing I'll say on this and we'll move on, is this show, this piece of it is going to help folks that are 20 to 30-years-old just starting their careers. So, share this, call your children up that are just starting their careers and share it, because there's nothing more addictive than saving.

Once you're saving it, and you're seeing it accumulate, you've managed every other bill around it. People that have been saving 10% to TSP, they don't see a house three years down the road and say, “Ooh, if I just stop my 10%, I can afford the house.” They afford the house based on the 10% they're putting in.

Oftentimes, we get the question, “Should I be doing Roth or traditional TSP?” And we wanted to talk about some of the things that guide our decision there. So, what are some of the considerations: should I be doing Roth versus traditional?

John Mason:      I think in general, Mike, right now, we're big fans of Roth. And right now, we know we have lower tax brackets than we did a few years ago. The Trump tax code, I believe, is set to expire in 2026. So, we have a baked in tax increase coming pretty soon.

So, if you're like a normal employee, a normal federal employee, you're getting cost of living adjustments, you're probably in the same tax bracket now that you were a year or two ago. So, we would in general be fans of Roth just because we believe we're in a lower tax bracket today than we'll be when this tax code expires a few years from now.

In addition, there are several reasons why Roth is better for a lot of families. Number one is from an inheritance perspective. Number two, is if we believe tax rates could be higher, then those tax-free distributions could be very beneficial. And number three just could be — and I guess this is different inside of TSP than an IRA; but Roth IRA contributions, we can access at any time without penalty.

So, thinking about ways that we can have a little bit better liquidity, potentially take advantage of these lower tax rates. And then further, down the line, maybe a better legacy planning tool as well.

Tommy Blackburn:    I'm in complete agreement, in general Roth. I also think about though how we say I've heard around this office before, I think it was from Mike, of we get these annual licenses, whether it's to contribute to an IRA Roth IRA or to contribute to our TSP/401k.

And it brings me back to what you were kind of talking about, John, of let's do as much as we can and we'll split it however we want. So, I can make a case for if we want to do some tax diversification, fine. I do in general, think for most people, Roth, is going to make sense. But if you're high income, maybe want to look at pre-tax.

But I can get on board with if it's easier for you to max out 26,000 or 19,500 and do IRAs, Roth IRAs — whatever gets you to the highest dollar number, I'm okay with that because we can always go back and do a conversion down the road, or at least under current law. So, I'd rather take full advantage of that license if that's what our cash flow lets us feel comfortable with.

Michael Mason:          So, some of the things you want to look at and this hopefully, helps everybody, whether you're 22-years-old and in the military or 58-years-old and wrapping up your career. These are the lowest tax brackets of my lifetime.

There's no doubt when you're in the military, a lot of your pay is not taxed. So, your basic allowance for quarters, your food supplement is not taxed. These child tax credits are as high as I've ever seen them. The standard deduction is as high as it's ever been.

That means your taxable income is as low as it's ever been and you have some of the lowest tax brackets. So, you must be thinking, should I be deferring out of these brackets or should I be paying taxes in these brackets? So, I get back to it at a future date.

Of course, you're always betting on future tax brackets. Many times, the highest earning years, two spouses, both high income earners, they'll want to do maybe what Tommy's talking about: put 26,000 each pre-tax in. So, that brings their adjusted gross income down about 198,000. And it allows them both to do some Roth contributions. So, there's a lot of strategies there, but we wanted to give you just an overview of some of those strategies.

I think it'd be good to wrap this show up. We'll do the other side of Thrift Savings Plan more on the accumulation, but then, the distribution/retirement side. But let's talk about the five investment funds that we have, what makes them kind of special and the internal cost. And then we'll put a wrap on this one.

John Mason:      Mike, there's five funds inside TSP: the C Fund (C as in Charlie), the S Fund (S as in Sierra), the I Fund as in India, F as in Frank for the F Fund, and then finally, G as in Greg or Gamma, the G Fund. So, there's a couple different vehicles here.

In general, they're all index funds. So, the C Fund is going to track the S&P 500 which is the 500 largest companies in America. That is the default, what you see on CNBC, it's the default that most people benchmark their portfolios on.

Just a quick note, you probably should not benchmark your diversified portfolio to one index, but that's a different show. So, the C Fund is tracking the S&P 500. The S Fund as in Sierra, is going to be your midcap and your small cap exposure. Your I Fund is your international exposure. Your F Fund is your bond index, aggregate bonds.

And then finally, your G Fund, which is really just like a neat kind of — I call it the guaranteed to lose money fund. And unfortunately, a lot of federal employees see it as the safe haven, but it's a silent killer because you're going to make somewhere between 0 and 3%. You're going to maybe keep up with inflation, but you're not going to be getting ahead with that vehicle.

So, the G is really unique to Thrift Savings Plan, but don't let it fool you. There is risk there, and the risk is you're not going to lose money, but you're losing money by not keeping up with inflation.

Michael Mason:          And you make a great point, John. I went to a Thrift Savings Plan website today before we started the podcast and the 10-year rate of return printed right off that that website is 1.95. Maybe that stayed up with inflation for the last nine years, but what what's happening in 2021, you're going to get behind pretty quickly.

Five really good funds and low expenses, which makes the Thrift Savings Plan your best accumulation vehicle. You should be using Thrift Savings Plan as much as possible.

There are some caveats: military folks, low-income military folks, they may want to do a Roth IRA maxed out before they max out TSP. We'll get that in the next show. And the next TSP show, we’ll talk about age 59 and a half and retirement. Why the TSP may not be your best retirement vehicle. Even though it was your best accumulation vehicle, why it may not be your best retirement vehicle.

John Mason:      Big shout out to all of our civilian, federal employees, all of our military members, listening to this podcast. Thank you so much for your service. Thank you so much for what you do for our country every single day.

We would not be the United States of America without you. We hope that you're enjoying the Federal Employee Financial Planning Podcast. If you like what we're doing, if you like the content of this show, please rate us five stars. Please share it with your coworkers, share it with your young professional children and their children.

And we really want to see this podcast get some momentum so that we can serve you like you've been serving us. We are Mason & Associates, Thank you again, and we'll see you next time.

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.