thrift savings plan review
TRANSCRIPT
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
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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
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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
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Retire With Dignity Tomorrow
Make Wise Decisions Today
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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• TSP account balance at retirement depends on:‒ How long contributions are made‒ How much has been contributed or withdrawn‒ Earnings on contributions‒ Plan expense ratio/fees
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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
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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
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Your TSP ContributionsSaving for Retirement
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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?
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Main Menu
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Contribution Elections
0
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Address and Date of Birth
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TSP Website (www.tsp.gov)
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See “Calculators” under “Planning and Tools” on TSP.gov 19
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Use this calculator on the TSP.gov website under “Planning and Tools” to find out!
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Example: E-3, under 2 years (2015)
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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)
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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)
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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)
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25
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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)
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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
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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
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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
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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
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(Assuming 7% annual rate of return)
$377,425 TSP @ .029%
$336,477 401k Plans @ .41% $307,361Mutual Funds @ .74%
Years30
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Questions?
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Managing Your TSP Account
Investing for the Long Haul
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(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
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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
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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
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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
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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
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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
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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
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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
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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)
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TSP Bulletin 14-3
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• 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
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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
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Inbound Transfersand Rollovers
Traditional IRA
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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
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Lump Sum Withdrawal
• May request all or any percentage of account balance as a single payment‒ Treated as an eligible rollover distribution
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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
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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
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Questions?
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TSP Resources
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TSP Publications at TSP.gov
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TSP Thriftline
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Communicating with the TSP
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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.
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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.
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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/
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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
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