thrift savings plan review

Thrift Savings Plan Review

https://learn.extension.org/events/2361

This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Readiness Policy, U.S. Department of Defense under Award Numbers 2010-48869-20685, 2012-48755-20306, and 2014-48770-22587. 1

Research and evidenced-based professional development

through engaged online communities

www.extension.org/militaryfamilies

Sign up for webinar email notifications at www.extension.org/628312

Join the Conversation Online!

MFLN Personal Finance

@MFLNPF

Military Families Learning Network

Military Families Learning Network LinkedIn Group https://www.linkedin.com/groups/8409844

3

77 K Street NE | Washington, D.C., 20002 | www.tsp.gov 4

Thrift Savings Plan Review

Presented by Stewart Kaplan, AFC®, RFC, RPA

Federal Retirement Thrift Investment Board

Agenda

• Overview of the 2016 NDAA – “Blended” Retirement System for the Uniformed Services

• Overview of the Thrift Savings Plan

5

TSP Rules under 2016 NDAA “Blended” Retirement System for

the Uniformed Services6

TSP Rules Under Blended System*

Effective Jan 1, 2018 2016 National Defense Authorization ActAutomatic Contributions 1%, Begins 60 days after entry (or at election), Ends at 26 YOS

Matching Contributions Up to 4%, Begins 2 YOS + 1 day after entry, Ends at 26 YOS

Enrollment On or after 2 Jan 18: Automatic at entry; auto reenrollment every Jan if member has opted out

Service member contribution rate

3% automatic; full match requires 5%, no default to Roth TSP

Vesting of DoD contributions

2 YOS

Opt-in eligibility Serving on 1/1/2018 and < 12 YOS as of 12/31/2017

Opt-in period 1/1/2018 – 12/31/2018 (+ hardship extensions)

*As of Jan 8, 2016 7

Overview of the Thrift Savings PlanMake Wise Decisions Today—Retire with Dignity Tomorrow

Saving for Retirement—Your TSP ContributionsInvesting for the Long Haul—Managing Your TSP Account

Turning Savings to Income—TSP Income OptionsTSP Resources

8

Retire With Dignity Tomorrow

Make Wise Decisions Today

9

What will your retirement look like?

• In retirement, the Thrift Savings Plan supplements fixed (formula-based) income sources‒ Social Security‒ Defined benefit plans, e.g., CSRS/FERS annuity, military

pension

• TSP account balance at retirement depends on:‒ How long contributions are made‒ How much has been contributed or withdrawn‒ Earnings on contributions‒ Plan expense ratio/fees

10

Factors that affect TSP balance

Helpful‒ FERS: contribute enough to get full agency match

Contribute five percent to get maximum agency match of four percent

‒ Allocate contributions to investment funds based on appropriate balance of risk to return

Periodically:• Review account performance and long-term strategy• Rebalance and reallocate based on review

Or, choose a Lifecycle Fund – rebalancing and reallocations occur automatically

11

Factors that affect TSP balance

Harmful‒ Frequent Interfund Transfers

Short-term, tactical moves using index funds is an unsuccessful long-term investment strategy

‒ Using TSP to access savings that should have been put into another type of account

Loans• Temporary depletion

Financial Hardship In-Service Withdrawals• Permanent depletion

12

Your TSP ContributionsSaving for Retirement

13

14

myPay

Make contribution

election:•Basic Pay•Special*•Incentive*•Bonus*

Choose tax treatment: Decide how much:•Percentage of basic pay•Plus a percentage from incentive, special and bonus pay

and/or

Enter birthdate and address:

•Must update address each time you move•Note this is not the same as your DFAS correspondence address

Receive correspondence from the TSP:

•Welcome Letter•Account number•Temporary password needed to access account on TSP.gov

Establish account access:•Make a “contribution allocation” to allocate future contributions•Make an “interfund transfer” to change the investment of money already in your account

Roth(after-tax)

•Contributions deducted from pay after Federal taxes are withheld

•Federal taxes no longer apply to contributions

•Earnings may be withdrawn tax-free once they are “qualified”

Traditional (tax-deferred)

•Contributions deducted from pay before Federal taxes are withheld

•Federal taxes are “deferred”

•Taxes must be paid on everything when withdrawn

*must also contribute at least 1% from basic pay

myPaymyPay

myPay TSP.govUS Mail

How Do I Start?

14

Main Menu

15

Contribution Elections

0

16

Address and Date of Birth

17

TSP Website (www.tsp.gov)

18

See “Calculators” under “Planning and Tools” on TSP.gov 19

20

Use this calculator on the TSP.gov website under “Planning and Tools” to find out!

21

Example: E-3, under 2 years (2015)

22

Your future contributions: $14,499.00Growth of your future contributions:$139,808.72Total estimated TSP account balance:$152,307.72

Example: E-3, under 2 years (2015)

22

23

20

Your future contributions: $40,464.36Growth of your future contributions:$250,499.35Total estimated TSP account balance:$290,963.71

Example: E-3, under 2 years (2015)

23

24

30

Your future contributions: $73,082.88Growth of your future contributions:$294,188.58Total estimated TSP account balance:$367,271.46

5.00%Example: E-3, under 2 years (2015)

24

25

30

Your future contributions: $102,315.96Growth of your future contributions:$411,864.62Total estimated TSP account balance:$514,180.58

5.00%7%

Example: E-3, under 2 years (2015)

25

Traditional TSP

• Federal income taxes are deferred on “Traditional” contributions made to the TSP‒ Contributions are deducted from pay before Federal taxes are

withheld, i.e., contributions are “pre-tax”‒ Employee pays Federal income taxes only on remaining salary

• Participants pay Federal income tax on distributions from their TSP account based on the applicable tax rate for the year they receive them

• Deferral of state or county taxes is determined by each individual jurisdiction

26

Roth TSP

• Federal income taxes are withheld on “Roth” contributions made to the TSP‒ Contributions are deducted from pay after Federal taxes are

withheld, i.e., contributions are “after-tax”‒ Employee pays Federal income taxes on entire salary

• Participants will not pay Federal income tax on distributions from their TSP account in the future:‒ For the portion that consists only of contributions‒ For the portion that consists of earnings if they meet both criteria to be

“qualified” Five years have passed since January 1 of the year participant made their first

Roth contribution Are age 59½ or older, permanently disabled, or deceased

27

25% You make a Traditional Contribution of

$10,000

You make a RothContribution of

$7,500(and pay $2,500 in Federal

income taxes for current year)

After tax distribution Tax free distribution

15% $46,133 $40,706

25% $40,706 $40,706

28% $39,078 $40,706

assuming 7% average annual rate of return)

Traditional or Roth?

In 25 years, tax rate is:

Current tax rate is:

Equal impact on net pay

Example:

OR

28

1 Net cost to TSP participants, averaged across all funds2 All-in, participant-weighted cost of large 401(k) plans. Source: Deloitte, Inside the Structure of Defined Contribution/401(k) Plan Fees, 20133 Asset-weighted average expense ratio for equity mutual funds. Source: Investment Company Institute, 2014 Investment Company Factbook

TSP

401(k) Plans

Retail Mutual Funds

29

(Assuming 7% annual rate of return)

$377,425 TSP @ .029%

$336,477 401k Plans @ .41% $307,361Mutual Funds @ .74%

Years30

30

Questions?

31

Managing Your TSP Account

Investing for the Long Haul

32

33

(F Fund) (C Fund) (S Fund) (I Fund)

$596.77

$1730.02

$1525.64

$405.03$410.52

$205.20

Growth of $100TSP-Related Indices, 1987-2014

34

L Income

L 2020 L 2030

L 2040 L 2050

Lifecycle Funds Investment Allocation*

*As of Jan 2016 35

Logic of the Lifecycle Funds

G 74%

Investment in the L Funds does not protect from investment losses

Expected Risk HighLow

High

Low

Expe

cted

Ret

urn

36

Choose an asset allocation that corresponds to your time horizon Rebalance and reallocate accordingly, or Choose a Lifecycle Fund

Use a long-term strategy

Studies show no evidence of successful outcomes using “market timing” strategies

Attempting to time the market increases the risk of not being invested when the market goes up significantly

Loans Financial Hardship Withdrawals

Don’t attempt to “time the market”

Avoid using the TSP as a solution to meet short-term financial needs

37

Participant-Directed Account Transactions

Contribution Allocation Interfund Transfer- Tells the TSP how participant wants

new money going into their account to be invested among the TSP investment fund options

- Includes employee contributions, agency contributions, TSP loan payments, and any transferred or rollover funds

- Allows participant to transfer all or part of their existing TSP fund balances among the different TSP investment fund options- Does not affect the investment of future deposits into their TSP account

May be done via TSP ThriftLine or TSP.gov

Generally effective as of close of business each day (based on 12 noon ET cutoff)

Participant will receive confirmation via website, email or mail

38

Residential For purchase or construction

of a primary residence only(pay back in 1-15 years)

General Purpose No documentation required

(pay back in 1-5 years)

Types of Loans

39

Costs of a Loan

• $50 processing fee - deducted when loan is disbursed

• Loan interest‒ Based on G fund rate at time application is processed‒ Fixed for life of the loan

• The invisible (and possibly the largest) cost is foregone investment earnings and reduced compounding of retirement savings

40

Financial Hardship Withdrawals

• Qualifying circumstances‒ Negative monthly cash flow‒ Medical expenses‒ Personal casualty losses‒ Legal expenses for separation or divorce

• Restrictions‒ Minimum withdrawal $1,000‒ May only withdraw your own contributions and earnings‒ Six month non-contribution/waiting period

41

Costs of a FinancialHardship Withdrawal

• Withdrawal can’t be repaid – permanently reduces retirement savings

• Contributions suspended for 6 months‒ No contributions means no matching (FERS)

• Withholding rate is 10%, actual tax is likely to be higher• Additional 10% penalty tax on distributions prior to

age 59½

See tsp.gov/plan participation or the TSP booklet: “In-Service Withdrawals,” for more information 42

TSP INCOME OPTIONSTurning Savings to Income

43

Partial Withdrawal(Must be separated)

• Allows for a one time withdrawal of a minimum of $1,000 up to the entire balance of the account• Withdrawing entire balance will close out account• Provides an opportunity to transfer a portion of

account to an IRA or another qualified plan • Participants should discuss and understand all

options with tax or financial professional before making withdrawal decisions

See the instructions for Form TSP-77, Request for a Partial Withdrawal When Separated, for more information 44

Full Withdrawal(Must be separated)

45

TSP Bulletin 14-3

46

• Use for retirement income or use for purposes other than retirement income?

• Income Options‒ Flexible income: Monthly payments‒ Guaranteed income: Life annuities‒ Custom solutions: Mixed withdrawals

• Participants with both Uniformed Services and civilian TSP accounts may combine them*

Options

*See the instructions for Form TSP-65, Request to Combine Civilian and Uniformed Services TSP Accounts, for more information 47

Wait

• If income is not needed until retirement, leave your savings in the plan and do nothing

• Continue to stay invested in the TSP funds and earn market returns

• Continue to defer income taxes until distributions begin

48

Flexible Income

• Monthly payments by fixed dollar amount‒ Amount specified by participant‒ Minimum payment $25‒ Amount may be changed annually

• Monthly payments based on life expectancy‒ Payments are computed by TSP‒ Amount automatically adjusts annually

49

Inbound Transfersand Rollovers

Traditional IRA

50

Guaranteed Income

• TSP life annuity‒ Income is guaranteed for the life of the annuitant(s)‒ Funds are transferred from TSP to the annuity

provider, and benefits are “locked in” when request is processed

51

Lump Sum Withdrawal

• May request all or any percentage of account balance as a single payment‒ Treated as an eligible rollover distribution

52

70

Mixed Withdrawals

Form TSP-70 53

Exceptions to the IRS Early Withdrawal Penalty

The 10% IRS Early Withdrawal Penalty does not apply to payments that are:

• Received at age 59½ or later• Received after you separate/retire during or after the year you reach age 55 (or the year

you reach age 50 if you are a public safety employee as defined in section 72(t)(10)(B)(ii) of the internal revenue code

• Received in a year you have deductible medical expenses that exceed 10% of your adjusted gross income (7.5% if you or your spouse is 65 or over)

• Received as a result of total and permanent disability*• Annuity payments• TSP monthly payments based on life expectancy• Ordered by a domestic relations court• Made because of death• Made from a beneficiary participant account

* Participant must provide the justification to IRS when they file their taxes

See: IRS Publications 575, Pension and Annuity Income and IRS Publication 721, Tax Guide to U.S. Civil Service Benefits

54

Spouses’ Rights

Retirement Plan Requirement* Exceptions†

FERS orUniformed

Services

Notarized spouse signature required**

Whereabouts unknown or exceptional circumstances

- TSP-16 or TSP-U-16 required

CSRSSpouse is entitled to notification of the participant’s withdrawal election

Whereabouts unknown

- TSP-16 required

* If account balance is less than $3,500, spouse’s signature/notice is not required**If married but no spouse signature: Spouse is entitled to a Joint Life Annuity with 50% Survivor

Benefits, Level Payments, and no cash refund feature† Waiver of spouse’s signature/notification valid for 90 days from approval

55

Questions?

56

TSP Resources

57

TSP Publications at TSP.gov

58

TSP Thriftline

59

Communicating with the TSP

60

TSP Training Information for CY2016

TSP 101: Overview of the TSP (2-day class)

TSP 200: Advanced TSP Topics (1-day class)

TSP for the Uniformed Services (1-day class)

Introductory course designed primarily for human resources staff members who administer all or part of the TSP program. Covers all facets of the TSP including automatic enrollment, contribution rules and limits, traditional vs. Roth contributions, how information is exchanged between the TSP and employing agencies, vesting, the TSP investment menu, court orders, loans, withdrawals, and death benefits.

Advanced course for agency benefits officers who are responsible for developing financial education plans and providing retirement financial education to their employees. Explores frequently asked questions about the and common misconceptions about the TSP. Knowledge of the basic rules for TSP eligibility and participation are prerequisites for this course.

Course designed for individuals providing personal financial counseling and/or financial education in military environments. Provides a fairly comprehensive overview of the TSP with special emphasis on issues most relevant to military financial educators. It also may provide a basis for financial educators to build their own TSP curriculum. Covers contribution rules and limits, traditional and Roth contributions, the TSP investment funds, loans, withdrawals, and death benefits.

March 22-23 March 24April 20-21 April 22 April 14May10-11 May 12 June 7-8 June 9

July 20-21 July 22 August 9-10 August 11 August 25

October 25-26 October 27

*Classes held at FRTIB in Washington DC 61

Agenda

• The 2016 National Defense Authorization Act includes major changes to the military retirement system regarding service member participation in the TSP.

• Service members who contribute to the TSP must understand its role in providing retirement income and how to manage this asset wisely.

• Service members must understand the steps to begin making contributions and setting up an account on TSP.gov.

• Service members should understand which type of contribution is most advantageous for them (Roth or Traditional).

• The Lifecycle Funds may be an excellent choice for service members because they include an investment mix tailored to time horizons and are rebalanced and readjusted automatically.

• Service members should understand the pros and cons of TSP loans and hardship withdrawals before taking a loan or hardship withdrawal.

• TSP’s income options provide a great deal of flexibility and careful consideration should be given before making any decisions.

62

Evaluation and CEUs/Certificate of Completion

The Personal Finance Concentration Area offers 1.5 credit hours from AFCPE and FinCert certificates of completion for today’s webinar.

To receive a certificate of completion, please complete the evaluation and post-test found at: https://vte.co1.qualtrics.com/jfe/form/SV_d6XVIoQZtIUd8sB

Must pass post-test with an 80% or higher to receive certificate.

63

Personal Finance Upcoming Event

Savings Strategies for Military Families• Date: Tuesday, February 16, 2016• Time: 11 Eastern• Location: https://learn.extension.org/events/2344

For more information on MFLN- Personal Finance go to: http://blogs.extension.org/militaryfamilies/personal-finance/

64

Find all upcoming and recorded webinars covering:

Community Capacity Building

This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Readiness Policy, U.S. Department of Defense under Award Numbers 2010-48869-20685, 2012-48755-20306, and 2014-48770-22587.

www.extension.org/62581

65