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FEFP: TSP Competitive Advantages and Disadvantages (EP68)

Have you ever wondered about the ins and outs of the Federal Thrift Savings Plan (TSP) and its impact on your financial future? In today's episode, John, Michael, Tommy, and Ben break down the competitive advantages and disadvantages of the TSP. We'll explore the benefits of maintaining your TSP long after retirement, including one option that allows post-tax contributions to grow tax-free.

Listen in as we discuss what happens if you retire with a TSP loan, the nuances of beneficiary guidelines and estate planning, and the concept of a qualified charitable distribution related to TSPs. You’ll also learn how to compare investments, select the right funds, and understand why TSP is a tool rather than a comprehensive plan or advisor.

Listen to the full episode here:

What you will learn:

  • Why having TSP be automatic is such an advantage. (4:00)
  • How TSP sets you up for success. (10:00)
  • The Roth option available. (20:40)
  • What happens if you retire with a TSP loan. (22:00)
  • What the beneficiary and estate planning rules are in TSP. (27:00)
  • What a qualified charitable distribution is. (31:20)
  • How to know which funds to select. (35:40)
  • What kind of advice you will receive from the TSP hotline. (37:50)

Ideas worth sharing:

  • “The world has determined that humans are not capable of making good decisions on their own, so things need to be automatic. This is why TSP being automatic is one of the biggest advantages, especially for those new hires.” - Mason & Associates
  • “The ability to maintain TSP long after you retire is a huge advantage.” - Mason & Associates
  • “TSP is a tool—it’s not a plan, and it’s not an advisor. You can’t look to TSP to do all of those things for you.” - Mason & Associates

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.

John Mason: Welcome to the Federal Employee Financial Planning Podcast. John Mason, Certified Financial Planner and President at Mason Associates. And in today's episode, honored, I think honored is a good word for today, honored to be with my usual co-host, Ben Raikes, Mike Mason, Tommy Blackburn, and folks, one of, if not the most credentialed financial planning podcast across the country, specifically for federal employees, but maybe even broader. There are a lot of financial planning podcasts out there and we believe we're bringing a really good product.

Thanks again for being with us on this journey. Today's episode, we are talking TSP, federal thrift savings plan, competitive advantages, and competitive disadvantages. So we're excited to bring this topic to you. We know TSP guys is a fan favorite among federal employees, especially those covered under the federal employee retirement system.

And for those who haven't heard this term, Federal Employee Retirement System or FERS is a three-legged stool. So you have your social security, you have your federal pension, and then you have your thrift savings plan, and TSP is the most sexy, right? Everybody wants to talk TSP. Everybody wants to hear about TSP. So competitive advantages and disadvantages, before we go into that topic, how is everyone doing this morning?

Ben Raikes:John, you mentioned the YouTube channel a lot on the podcast and podcasts on YouTube and vice versa. And anything that has the words TSP or thrift savings plan in the title of a YouTube video for some reason tend to get thousands and thousands of views.

So it's certainly something that people are interested in, even though it may not be the biggest piece of their retirement, typically it's not because of their pensions. But it seems to have this magnifying glass on it. And everyone seems to want to know what do I do with my TSP. How should I invest? How does it work? I don't know what it is. And so I think it's great that we're kind of breaking it down today.

John Mason: What's the one thing that federal employees really have ultimate control of, right? They can pick how much money they put in. They can pick pre-tax and Roth. They have some funds to choose from, but federal employee retirement system pension is pretty straightforward.

Years of service times 1% times your high three, social security has got its bin points and its maximum calculations. So two out of the three legs are spoken for, and then you have one out of the three legs that you don't really get to, or that you get to mess around with. And it's interesting because messing around with things maybe is not a good idea. Maybe it's a benefit that two of the three are these static calculations.

Ben Raikes:Go ahead, Tom.

Tommy Blackburn: It certainly makes the financial planning a lot more fun for us to have the legs that we have in place that you just went through. It is very nice to be able to plan with those benefits and factor in social security and a pension and all the ancillary benefits that come with the federal retirement system, whether it's CSRS or FERS. So I think you guys want to jump on into the TSP here.

John Mason: Let's do it. TSP competitive advantages and disadvantages. And we've written down a few as we were game-planning this podcast episode. And one of the ones that I think is probably the best, and we see it in the news and I don't watch as much news maybe as some other people do, but it's automatic, right?

So when you start with the federal and government under FERS, you get automatically enrolled in the thrift savings plan. You start contributing automatically per paycheck. You get automatic matching and that automatic feature is something that the government is trying to legislate us throughout the country, whether it be 401k plans or states creating IRA or savings plans.

So clearly, the world has determined that humans are not capable of making good decisions on their own, and therefore things need to be automatic. So we'd have to say that automatic is one of the biggest advantages of TSP, especially for those new hires.

Mike Mason: Absolutely. We've, again, I've been doing this 37 years, was a manager at Equitable, for 10 of those years, and every new employee or advisor, agent, whatever we called them, it wasn't mandatory, but I made it mandatory to start contributing because people need that because tomorrow is a long way away. Every day you wake up and tomorrow's a day ahead of you and it can turn into next week, next month, next decade before you get started. So automatic is huge.

Ben Raikes:I think another advantage, John, and we talked a little bit about this beforehand as well, and this is kind of an advantage and a disadvantage, but a small fund selection. So a lot of folks out there may not be federal employees that are listening to this. And maybe they work with a financial advisor and they say, “Hey, how should I be invested?”

The immigrant advisor says, “Well, give me your investment options and I'll get back to you.” And then sometimes it's two, three, four, five, six pages of investment options, everything from international to large cap, to small cap, to blends, to growth, to arbitrage funds and it can get confusing and it can get kind of wild out there with all the options that you have. You can have a little bit of analysis paralysis and that may say, “You know what I don't even know what I'm doing here. I'm not going to do anything at all.”

The TSP has five fund options that you can select. They make it about as easy as possible. And so to your point about it being automatic, it's also automatically invested in the life cycle funds, I believe, John, if that's right. And that just, again, simplifies everything, takes some of the pressure and the stress out of wondering, “Am I doing the right or wrong thing?”

John Mason: Ben, you're spot on. So you've had the CSI, G and F funds. And then when you enroll as a new employee under FERS, they pick the target date retirement fund that best matches your age so you're automatically enrolled in that. Maybe folks listening to this podcast aren't aware of what the CSI, G and F are.

So really quick on that, C fund is basically S and P 500, S fund, S is in Sierra is small caps, small and mid, I is international, G is like a guaranteed interest rate account basically. Sometimes we joke that it's a guaranteed to lose money fund, but over the last three years, that's been probably the best place to have your fixed income exposure would be the G fund.

And then you have F as in Foxtrot or Frank, and that is the aggregate bond index. So by nature, low-cost funds, super simple. And then you made me think of something when we get these big 401k summary plan descriptions and big 401k investment selections, it occurs to me that not all 401k plans are created equal.

So for instance, Mason & Associates, we have a 401k for our nine employees. Well, then there's Lockheed Martin and there's Huntington Ingalls and there's big employers, small employers, and everything in between. And I have a friend at a decently big privately held company, and he sat, he didn't have a finance degree, but he was on the board or like on the 401k committee and they would vote in funds and vote out funds.

So he's not a certified financial planner. He's not a CPA. He's not a CFA, but he was one of the more intelligent guys at the company. So they put him in charge of deciding what funds should and should not be available. And they have a fiduciary obligation with no experience to do a good job. So are they better picking and choosing winners and losers, or are they just better giving their employees access to everything? And so it just occurred to me that the TSP board is probably maybe a little more sophisticated in what they're doing than some of these small and medium-sized companies who are trying to offer their best for their clients. But at the end of the day, maybe American funds A shares is the only thing they know in life, and they think they're doing the best thing, but they don't have any knowledge otherwise.

Mike Mason: Yeah. And I mean, how much work is it on the TSP board? I mean, they haven't changed the fund in the 30 years I've been doing this, right?

So it's, some people think they have more than five funds because of the life cycle funds, which is just a mixture of the five funds. So not to slam your idea of them working harder, but really what do they do?

Tommy Blackburn: So I would say on a small fund selection, it's definitely a plus and a kind. So sometimes we'd like to introduce some different asset classes or have some tilts, maybe a little bit of different ways within those funds when we're managing it, but you can build a low-cost, globally diversified, sophisticated portfolio with those five funds. So I'd say TSP has done a pretty good job of setting you up for success and probably trying to protect yourself from yourself, assuming you don't know what you're doing by limiting it to those funds.

I'm surprised, Ben, I thought for sure you were going to jump into matching because that's one of your favorite things to point out there is the match that FERS employees get and what they pay for their first benefits.

Ben Raikes:That's right. You get at least the automatic 1% that goes into your tsp Whether you put in a dime or not. And Tommy, this is where you thought I was going, and your first pension cost, what is John? 0.8% for those hired before, I can't remember what date it is, so I've always said, “You know what, your FERS pension is actually free because TSP is automatically contributing 1% to their plan, and your pension only costs you 0.8% per year.” I'm not sure if anyone else thinks of it that way, but that's kind of the way that I thought of it when I joined.

Mike Mason: Don't we have a podcast? What's the name of it, John? It's A Damn Shame.

John Mason:It's A Damn Shame, yes.

Mike Mason:It's a damn shame. While you're on that, and you guys will do the rest of this, but we're seeing million-dollar TSPs all the time. And just to draw a comparison, it takes a lot of work to get a million dollars in your TSP.

And just like it would take a lot of work for us to get a million dollars in our 401ks and IRAs. And then for that freebie that Ben just mentioned, you work 40 years, retire as a FERS. Yeah, you have a 40,000-dollar-a-year cost-of-living adjusted pension, which is the equivalent of a million dollars in a 401k.

So it's just to draw, and so it's a damn shame as a joke, it's funny, you listen to it, but it helps you understand that you are one of those secret millionaires out there and how this benefit package comes together.

John Mason: Well, the first federal employee retirement system, I think, began in 1984. So we're really now getting into the sweet spot. Those folks who were hired mid to late eighties, early nineties, they're now approaching their retirement age. They've been saving in TSP the entire time, three decades of pretty good market. So a million dollars in a TSP is, it's not the unicorn it used to be, Mike, when you were serving CSRS clients 20 years ago, you never saw a million dollar TSP, a hundred thousand dollar TSP was a big number.

So things have certainly changed and evolved over time. And Ben, you mentioned the 0.8%. So that was everybody hired, audience, don't quote me on this exactly. But 1984 through like 2014, maybe I think was typical first. And then they introduced FERS RAE, revised annuity employee, and then they introduced FERS FRAE, further revised annuity employee, and in FERS FRAE, I believe, is 4.2% that they're paying. So it went from 0.8 to 3.2 to 4.2, and we can argue that even the people paying 4.2 are still getting FERS for free, aren't they?

Tommy Blackburn: Yes, because they're getting, if you do what you need to do, you're getting 5% from the federal government and to your TSP. So even at this higher rate that you need to contribute, you're still getting more put into your 401k and a pension and some other benefits than what you contribute to it at the higher rate.

John Mason: That's right. So if you put in 5%, the government matches you four plus the 1% freebie. So 5% gets you five and FERS costs 4.2 on the top end.

Mike Mason: Yeah. And I would guess that any of the four of us would gladly step up and pay 8% if we could buy the equivalent FERS pension, right? So it's still a great deal even if 4. 2, which again, with the matching, is effectively free.

Tommy Blackburn: And many, many private companies, that could be a normal match with no pension, right?

It's a 5% going into your 401k and you don't get all these other ancillary benefits. So definitely a nice benefit there, and the automatic nature and just the entire cost structure is pretty attractive. I think one thing I, and it, maybe it gets further down the line and we've mentioned in other podcasts and really this is me getting ahead of myself to a degree, but TSP is just honestly a great tool and that is how I view it as of everything as part of that three-legged stool.

And where I'm going with that is we get to keep it open when we retire as long as we don't empty it. This is one of the things about it to me that makes it a great tool is that we can almost empty the account. We'll leave it just barely open. And now we still have a tool that we can move funds back into it for various planning reasons, or just for psychological reasons.

So we didn't have that coming into this, but as I was thinking about it, I think that is an advantage of TSP is the ability to maintain it long after you retire.

Mike Mason: And you guys know that I like to take a point like that and then tell a story around it, so, and you'll remind me, North Carolina, the Bailey Act, if you were vested, 1987, I think was the year. Your pension in North Carolina is state tax-free and your TSP withdrawals are state tax-free. So we had a client in Virginia, we left his TSP with 25 or 30,000 in it. The rest of it was being managed at Mason & Associates and lo and behold, he moves to North Carolina and we, it's a two-way street, as Tommy said, and we don't have to move all of his money that we're managing.

He still wants us to be his financial planner, but as he begins to make withdrawals, we don't want to withdraw from the IRA. So we'll push money into TSP so that he can withdraw from the IRA. That TSP stays tax-free.

Tommy Blackburn: There's maybe a few stories to tell here. I know we've got a lot of ground to cover so I don't want to do too much time on this. One, had a client the other day, you just reminded me of this under 59 and a half, but when he retired, he was MRA. So let's just call it 56 or 57. And so he's still in this kind of gray zone before he can take IRA distributions with no 10% early distribution penalty before 59 and a half.

So as him and I were conversing recently, they needed some funds and he said, “So take those from the accounts you're managing for us, however you see fit.” And I said, “Well, actually what we're going to do is we're going to roll the money back. We're going to roll some into your TSP, ‘cause we kept it open, and we're going to take the distribution from there.” And the reason is to avoid this 10% penalty. So that's, again, just to try to illustrate because he was, he retired at over 55 but hadn't got to 59 and a half. It gave us a penalty-free distribution tool that we kept in our belt. And it still was subject to taxes, but we avoided a 10% penalty.

So that's one of the neat planning tools. And the other one, if we have time, we think it's worthwhile, John, maybe I'll throw it at you is for IRA aggregation and doing potentially things like backdoor Roth conversions.

John Mason: Sure. Yeah. I love the penalty-free withdrawals at 55. So that's a competitive advantage for both TSP and 401k and employer-sponsored retirement plans over an IRA where you would have to do something like a 72 T distribution to have access to penalty-free withdrawals. So the point of being able to leave TSP open when you retire, being able to transfer money back into it, post-separation, penalty-free withdrawals before 59 and a half, assuming you met the criteria.

All of these are great competitive advantages. And then, yeah, so TSP, very user-friendly. And then for these employer-sponsored retirement plans, if you were to do things like Roth conversions or backdoor Roth, aggregation for our audience basically means is you can't put 7,000 in an after-tax IRA and only convert the 7K if you have another million dollars out there.

So they're going to say, “What percentage of your total IRA is after tax?” And if only 10% is after tax, then 10% of your conversion is tax-free. I know that's confusing, but they don't let you skirt that. So they want distributions from an IRA to come out after tax proportionately. So an advantage of TSP is you can transfer in the pre-tax money.

You actually aren't allowed to transfer an after-tax. So what you're doing is you're segregating the two assets and then opening up the door, Tommy, to do those conversions, which–

Tommy Blackburn: It's a lot to cover. The main thing is if you thought you wanted to put money in an IRA, not take a deduction and convert it and none of it be taxable, you can't have any other free tax IRA money out there. TSP is an easy tool to allow you to get rid of the IRA money, at least for a moment in time, and accomplish this.

John Mason: So let's take a quick break from TSP competitive advantages and disadvantages because as you, all three of you were talking about that, I fact-checked myself and I just wanted to kind of share my screen here with the audience and go over.

So let's go, Chrome tab, Federal Employee. So I want to show everybody how I fact-checked myself. So I went to and you can see here employees hired before January 2014 were under the old rules and then after that is when RAE and FRAE began. So it looks like 0.8 increased to 3.3 and is now currently 4.4. So I was pretty good in my memory folks, but there's the actual numbers for you and when that came in. So hopefully that was helpful. So let's go right back into TSP competitive advantages, disadvantages. Maybe we can just hit some easy stuff really quickly. So number one can be, there's a Roth option.

So being able to put in money post-tax and have it grow tax-free, that's an easy win. Loans, if you're still working. So TSP loans, there's 2 kinds. We have a general-purpose loan that is a 5-year loan, and we have a residential loan. So the general purpose is repaid over 5 years. The general purpose repaid over 5 years. Residential, over 15, and not all 401k plans allow for loans like that.

Mike Mason: Yeah. And we just found out the other day, John, a friend of mine retired in Colorado, used to be, if you retired with a loan about three months into your retirement, you'd get a letter from TSP that says, “Okay, this is how much you owe,” and it's going to become a taxable event.

Well, now the TSP actually will send you payment coupons where you can continue to stroke a check into retirement to pay off that loan. I don't know of any 401k that would do that.

John Mason: So pop quiz. So pop quiz, and this is for the three of you as well as for the audience. What happens if you retire with a TSP loan? What does that mean? What happens?

Tommy Blackburn:You know what Mike just went through?

Mike Mason: First and foremost, I think I kind of went through it. You've got a, you either–

John Mason:So what happens if you don't pay it off?

Mike Mason: Then it's a taxable event and God help you if you retired before 59 and a half. I mean you could have taken the loan at 57, right? And then retire it at 60 and let's say 10,000 of it is a taxable event. Well, it's not a taxable event, and a 10% penalty. And you had use of that money, before 59 and a half so.

John Mason: And the government does weird things, right? So they call it, I believe they call it a default. So it'd be interesting to see the payment coupons that your friend received because it used to be, we would use terms like you're going to default on your TSP loan.

And we have been ingrained as a society that defaulting on things is a very bad thing, right? “It's going to hurt my credit score. It's really, really bad.” Well, defaulting on a TSP loan, you're under no obligation to pay it back and it just becomes a taxable distribution. However, there's no withholding on that.

So we really need to make sure we understand the tax plan for that year and have an updated projection. But as I think about that term, defaulting on something, I know that gives a lot of people heartburn and just wanted to throw out there that it's not necessarily a bad thing to default on a TSP loan,

Mike Mason: Right? I mean, they make it sound like in the, it's a great point. They make it sound like it's negative, but understand you're retired, right? You're retired and maybe you're delaying your social security. And maybe that's the right time for that 10, 15, 20,000 to be taxed. So it's not necessarily a bad thing, but they sure make it sound that way.

Tommy Blackburn: And I would just say, it's funny like you defaulted on what? I took money from one pocket, my TSP pocket, and put it in the other pocket in a loan. So one pocket defaulted to the other. There's not like the banking situation here. The main thing to be aware of is just the tax ramifications if we do that.

John Mason: And Ben, I know there was one other benefit or advantage that you thought made a lot of sense to talk about here. So why don't you go ahead and throw that out before we move into the next topic?

Ben Raikes:I think kind of encompassing everything that we just talked about, probably the biggest advantage to TSP in some folks' eyes, it's just that it's familiar.

You might be a 20, 25, 30-plus-year career federal employee. You might not even have an IRA. Your spouse might be a federal employee and they have a TSP as well. So you might not even know what a 401k or a 403B or an IRA is. And you've only seen your TSP grow because historically we've had great markets.

You've been contributing to it your entire life. And so there's just, it's almost like, “Oh my gosh, I have to roll over my TSP. No, that thing is my baby. I don't want to do anything with that. What is an IRA?” And so I don't think we can take away from the comfort that the thrift savings plan gives to a lot of federal employees as we're going through all these advantages and disadvantages.

I think it's just good to keep in our mind that, “Hey, this is all some people know,” and that provides them a lot of comfort.

Tommy Blackburn: One of the reasons, the advantage of we can keep it open is because it is comfortable in the knowledge and hey, as long as we don't close it out, you can always go back to what was very familiar and comfortable to you.

John Mason: It's interesting, too, right? So we've said many times that federal employees are also some of the least trusting of the federal government of anybody that we've met. So it's also interesting that people get familiar with the idea of they don't want the TSP or the government having any access to their money in retirement.

They've heard that the government can borrow from the G fund, so they're getting the heck out of Dodge, and they're familiar With enough aspects of the government that says we want to get ours out of there. Now we're not saying that's right or wrong or frankly, I don't even know if we know that it's a bad idea that the government can borrow from the G fund.

That's probably a whole separate ball of wax to cover another day. But it is interesting that familiar can be good or familiar can be bad. And we talked really quickly about the funds. Limited fund selection being both a pro and a con in the TSP mutual fund window gives federal employees access now to a whole slew of funds that they didn't have before.

So although the core funds are limited in nature, to be determined, there'll be a study 20 years from now that says, “The TSP window did this to people that used it.” And we'll find out 20 years from now whether or not that was a pro or a con that the TSP board decided to offer that to its employees over the next 2 or 3 decades.

So we're getting 27 minutes in already. Hopefully, audience, you're sticking with us. So we're probably going to rapid-fire, some discussion points here on disadvantages, we may go a little longer than normal, but couple of disadvantages that came to our mind were the beneficiary designations in the estate planning is so complicated, guys, in TSP now.

And there it's bifurcated. So there's TSP beneficiary rules that existed before the new website launched as the easiest way to say it. And then TSP beneficiary changes that came in place after the new website launched and the rules aren't necessarily the same. So two things, and we can't talk about this all today, but number one is, no sub-trust.

So if you have a revocable living trust that specifically leaves money to like two, three, or four sub-trust for your children, it's our understanding that TSP does not allow for that anymore, those sub-trust designations. We still need to call TSP and independently verify that at Mason & Associates, but that's what we're being told. And then the second thing is a per Sturpey's designation on primary beneficiary. So what that means is if Mike Mason was leaving money to John and Chelsea, and I, John Mason, pre-deceased Mike. Well, he would probably want my son to get my share. Well, in TSP, it doesn't work that way anymore.

If there's anybody left on that primary beneficiary line, my share goes to my sister. It doesn't go down to my son. It didn't used to be that way. It did not used to be that way prior to the new beneficiary system in the new website. So just understanding your entire estate plan, this is a disadvantage is that maybe the website's not as user-friendly as clients would like it to be.

This beneficiary thing has bifurcated the rules and that our understanding, guys, is that if you had a form on file before all these changes, those are still supposed to be honored. But that's also confusing because, yeah, did the computer system get all those forms and we don't really know that answer yet.

Ben Raikes:I don't think it can be understated, John. I think you did a great job going over it. One, there's two different dates for which you could have submitted your beneficiaries. If it's before X date, there's different rules. If it's after X date, there's different rules for you as well. And then again, let's say you have multiple primary beneficiaries and a couple of them predeceased the account owner, well now the remaining primary beneficiary is going to get everything. And I think a potentially unique situation that may happen is if you have a trust that's named as a primary beneficiary, or if you have a charity that's named as a primary beneficiary, it is impossible for those to predecease anyone.

So in some cases, you might have all of my primary beneficiaries are gone, and I was hoping that would go to the next level, to their kids or to their grandkids, but since you had a charity or a trust named as the primary beneficiary, now everything is going through the trust or the charity rather than those contingent beneficiaries.

It's something that I don't think any, we, you know, TSP probably gave a lot of thought too or maybe the implementation isn't right, but just wanted to piggyback on that, John. I thought you did a great job, but I don't think it can be overstated how complicated that process is going to become.

John Mason: And for too long, clients, federal employees have relied on, in our opinion, the statutory list You know, that says spouse, then children, et cetera.

And like anything, we want to take ownership of our financial plan. We want to take ownership of our estate plan and maybe the statutory list. Like so many clients have never even named a beneficiary on TSP because they just go by the statutory list. And that's probably not the answer. Maybe it is, maybe it isn't, but if you're not going to have a beneficiary, we need to take ownership of that and understand, like are we really getting what we hoped for?

Mike Mason: Yeah, one of the other negatives we discussed was the qualified charitable distributions. You can't do a qualified charitable distribution from TSP. What is a qualified charitable distribution? You have to be 70 and a half for it to be a player. You give 10,000 to your church.

If you had that money in an IRA, you put it in pre-tax, it grew, pre-tax, tax-deferred. And now you pull 10 grand out and send it directly to church and it doesn't show up on the front of your tax return or what most people do is you take 10 grand that's in your bank account, systematically give to church over the course of the year, and that was already tax money that would be much wiser for you to use and use for other things versus charity. You're probably not going to get the itemized deduction. So one of the best ways to give is through that QCD. And again, most people think they can't do it until they reach required minimum distribution age.

You can do it at age 70 and a half. It doesn't have to be an RMD that you're sending, and it can be up to 100, 000 a year. So QCD from IRAs is a big, big advantage.

Tommy Blackburn: No question. That's the way to give, if we meet all those requirements. I know Mike and I were going through one the other day where even something as simple as the IRA distributions, we're raising up the medical floor as to what we could deduct on our itemized deductions there.

So hands down, QCD, for various reasons. That's the way we want to do it. We can't do it through a TSP. For many of our clients, Roth conversions, taking pre-tax money inside of a TSP or an IRA and moving it into a Roth IRA, probably systematically over time, paying taxes so it's never taxed again, is usually a common strategy.

It's not for every client, but it is a common one. We can't do those inside of TSP. So that is also another limitation and a few more. One that I wanted to hit on is when we help clients, for various reasons, maybe they're not 59 and a half yet. And we need to use TSP to take a distribution to avoid the 10 percent penalty.

Withholding is lackluster. It leaves much to be desired. The system that you have to use at TSP to have taxes withheld, usually you have to have a minimum of 20% federal withheld. So I saw a case the other day where we were in the 12% tax bracket, couldn't do anything about it. We had to have at least 20% withheld.

So that was, you know, leaving some to be desired. And there was no state tax, no state tax withholding option. So yet again, something that you have to work around. So withholding, it's just, it's not as friendly at all as an IRA or Roth IRA is for distributions.

John Mason: Maybe we can sum it up in the interest of time, Tommy, that TSP is a wonderful accumulation vehicle and still leaves a little bit to be desired on the distribution side, whether it's conversions, monthly systematics, random withdrawals as needed. And there's been some things that have improved over the years, but generally speaking, it's still just a little more inconvenient probably than most people want to deal with.

And, if I didn't already say it, or we didn't already say it, the website is just, we don't think it's as horrible as some clients do, but we've heard that's been a pain point, this launch or rollout of the new website. So, and that matters to folks, technology matters, the app matters, the website matters.

So as we think about using our money and whether it's contributing or distributing from the vehicle, the website and the user experience or the user interface really does make a big difference for folks, especially in 2024. So last two categories, you have costs. So let's, and more specifically, I'm going to talk about like fund fees really quickly and platform fees, comparing investment to investment.

Then we really want a quick hit on customer service. And then we really want to just like one more time drive down a little bit further on just general costs of hiring somebody like Mason & Associates as compared to leaving your money in thrift savings plan. So I'll kind of take the lead here, if that's okay with y'all, on funds and then whoever wants to take the next one on customer service.

So fund selection, when TSP was introduced in the 80s, they had the cheapest funds probably available. It was like Vanguard and TSP, right? Index fund revolution started in the 80s, I believe. And the cost for CSI G and F is essentially free. All of them are less than 0.1%. I think the C fund’s like 0.03% to have access to the S&P 500.

And that used to be sexy. That used to be important. But now you can get those same funds in a Fidelity Vanguard Schwab brokerage account at the exact same cost as that you're getting them inside of TSP. So it's a competitive advantage that you have low-cost funds compared to other 401ks that don't offer those funds.

But generally speaking, the cost of your index funds inside of TSP is no longer the primary driver of your financial plan success or the reason you leave it open. It's more like the tax planning window, the penalty-free withdrawals, the Bailey Act that we hit on earlier. It's not really the cost of the individual funds anymore. So just kind of want to debunk that because I think a lot of people still have that as a primary driver of why TSP beats others.

Ben Raikes:I think that was great, John. And while you were talking, I was actually googling the cost of the Vanguard S&P 500 ETF and it's 0.03%. Again, all of the costs on these passive ETFs have come so far down that they're essentially free.

So just to further amplify your point. You can get cheap investments outside of your TSP. that's not the only reason to be invested in your TSP. I hope I'm not jumping the gun when I go a little too far down here, but kind of maybe we go down the route of your advice. So what kind of advice are you getting, John, if you call someone on the TSP hotline and say, “Hey, how should I be invested?”

John Mason: Well, number one, you're not going to get any advice from TSP. And we'll say this is across the board, whether you're calling Vanguard brokerage, or you're calling TSP, or you're calling Fidelity 401k at the end of the day, they're not providing financial planning, investment advice, or tax planning advice. They're not going to help you pick how much you should have withheld in taxes on a distribution. They don't know how it's going to impact your social security. They don't care about your charitable donations. They are going to answer the questions you have, not the questions you didn't know to ask.

And at the end of the day, they're there to facilitate a customer service transaction and nothing more. That doesn't make them bad, but that's what you're paying for is essentially a customer service transaction. It's a teller. They're tellers.

Mike Mason: Well, I mean, John, if you can't get the answer from TSP, can't you just call OPM and ask them?

Tommy Blackburn:Good luck.

Mike Mason:Military time.

John Mason: Well, the only time I've heard a busy signal in the last 14 years because I think busy signals were like a thing of the past when cell phones came out, but like the only place where you still consistently get a busy signal is if you call 1-800-OPM.

Mike Mason: Well, I can tell you this and you folks can go listen to the survivor benefits podcast, but the only advice I've ever seen OPM give, ‘cause they can't give advice, they won't, they can't tell you whether you should buy that military time. They can't tell you whether you should make that deposit for the CSRS time.

The only time they ever venture into advice is when somebody says, “Should I take that survivor benefit plan,” and then a human resources person will make a statement like, “I've heard you could do better with life insurance.” Guess what? That's advice. So we're just making a case for, and that's bad advice by the way, we're just making a case that you're not going to get advice. You're going to get a teller. John said it very clearly.

John Mason: So last but not least, we have Mason & Associates in our fee and we have other good financial planners and their fee. So maybe we can just say financial planners in general are hopefully buying clients or recommending low-cost index funds and ETFs, or even if it's an actively managed fund, trying to keep fund fees as low as possible. We're probably going to have higher expense ratios because we're going to have more asset classes than what's available in TSP.

So thinking that your expense ratio on your funds is going to be identical. Probably it will be a little bit higher if you venture out of TSP, just because you have more asset classes to choose from. If there's a platform, Tommy, like we custody at Access Advisor services, there may be a platform fee there for clients to be aware of.

Tommy Blackburn: Right. And for various reasons, we think that makes sense. As far as the cost, I guess the main thing I would say is if we wanted to build a portfolio that has the same underlying expenses as your TSP, we can do that. So if it's a higher-cost portfolio, there's an intentional reason for it.

What you're paying for is the advice. And really, I had wrote down throughout this entire episode, like, what's the takeaway from me? The takeaway, which I think we've been hitting, is this is a tool. It's not a plan. It's not an advisor. So you can't look to TSP to be those things for you. These things that we're talking about, rolling money in and out, opportunistically taking advantage of various tax rules, they're not going to be able to guide you through that. And if you're working with a planner who also doesn't understand how to utilize the tools you have available, that's not a good planner. So it should be recognized as a tool and it should be part of the overall strategy, but it is not advice. And therefore that's why there's a separate fee for the advisor.

John Mason: Well, Tommy, you just took us into action items and I think that was perfect and that in no point in this episode did we say you should leave your transfer money out of TSP to a financial planner because they're going to beat the market and in 63 or five, however many episodes we've done, we've never claimed we're going to beat the market because we're not going to, nobody's going to consistently beat the market, in our opinion, over the next three, four or five decades.

The reason you transfer money out of TSP is for the human advice and all of these other strategies that we've talked about for the last 60-some episodes. If you're hiring a financial planner or financial asset gatherer that's charging you some percentage fee, To manage your portfolio to potentially beat the market, you know, that probably not going to be a recipe for success, I think is the action item. We should be demanding a lot more for your 1%, one and a half percent, or 2% asset under management fee other than asset allocation. Of course, that has to be a part of it, but we take the tool and then we make it a plan and then we have to use those tools to implement that financial plan over a lifetime.

Mike Mason: So you're a football team and you're playing the Eagles and the Eagles have 27 points and you have 30 and you think you've won the game and then all of a sudden the referee step in and say, “Yeah, but you were really playing the Cowboys and they scored 35 points.” So I don't even know what the market is, right? How many people is the market, the S&P 500 this year? Is it NASDAQ? Is it G fund, you know, in 2022 because bonds took it on the chin? So I don't know what the market is. Anybody that talks about beating the market. It's a losing, yeah, it's a losing proposition.

Ben Raikes:I think if we're sticking a little bit on the lines of action items, we've done a lot of great advantages, disadvantages. Here's how your TSP should work. Here's some potential pitfalls. How many of you even know your TSP login credentials? How many know what you're invested in today? Know your beneficiaries, know how much you're contributing if you're getting the match. My action item from this is log into TSP and find out all of these items. Sometimes ignorance is bliss and you don't want to log into TSP because the market's been really bad and maybe you think your account should have grown more than it has. You can't afford to do that for your career.

So log in today. See how much you're contributing. See how you're invested, and if you think you need to talk to a financial advisor about this, pick up the phone

John Mason: Well to my co-host, thank you. This has been another awesome episode of the Federal Employee Financial Planning podcast. To our clients listening, to our loyal audience for over two years now.

Thank you again for being on this journey. If you like this episode, drop us a line at Do all the things for us: like, subscribe, hit bell notifications, and most importantly, share what we're doing with your friends, family, and coworkers. We want to continue to spread the word of the federal employee financial planning podcast.

Remember, we're financial planners first, we do this second, and things are what they seem at Mason & Associates. We're here to support, empower, educate, and motivate you to make a change in your financial plan. 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.