#104 Optimizing The TSP For Retirement

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Are you seeking clarity on TSP strategies?

Join us on our latest podcast episode, where Christian and JT decode the complexities of TSP investments. From cracking the complexities of TSP investment options, including the G, F, C, S, and I funds, to unraveling the benefits of dollar-cost averaging, this episode is packed with invaluable insights to help you confidently navigate your TSP.

But that’s not all. Christian and JT will help you learn TSP distribution strategies, guiding you through the pros and cons of various approaches. Discover how to optimize your TSP for long-term wealth accumulation while staying informed about potential changes to tax laws and regulations.

Tune in now and unlock the secrets to making your TSP for a secure retirement!

What We Cover:

  • TSP Investment options for retirement, including growth and accumulation
  • TSP distribution options and tax planning
  • Overview of how FERS contributions work, including employee and employer contributions
  • Understanding the impact of contribution rates on retirement benefits
  • Tips for maximizing contributions within FERS:
  • Tax advantages of contributing to FERS accounts
  • Investment options within FERS accounts
  • Common misconceptions about FERS contributions

Action Items:

  1. Review and update beneficiaries
  2. Develop a distribution strategy
  3. Ensure contributions are at least 5% to get the full 5% match.
    a. If you are already doing this, push for increasing the contributions even further.

Resources for this Episode:

Ideas Worth Sharing:

We do not like the word rollover. Just briefly, a rollover means that the TSP is going to send you a check, and they're going to withhold some money for taxes. – JT Ferrin Click To Tweet

On the tax planning side, basically, what we're looking at is Roth conversions and qualified charitable distributions. Those are the two main big ones that we're looking at, that we can do outside of the TSP. – Christian Sakamoto Click To Tweet

So it's worth reviewing that (the beneficiaries: regularly because either there may have been lost or your wishes changed, right? People change, the family dynamics change. financial situation has changed. So, it's always good to review those… Click To Tweet

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Christian Sakamoto  00:20

Welcome back to the Plan Your Federal Retirement podcast. I am the host today Christian Sakamoto and with me is JT FerrIn, JT, how’s it going, man?

JT Ferrin  00:31

Really good Christian, excited to be here and talk about the TSP 

Christian Sakamoto  00:35

Yeah, me too. Love talking about the TSP and in particular, we’re going to be chatting through how do we optimize the TSP for retirement? And we work with lots of clients, helping them get ready for retirement, planning what their pension is going to be social security, all the other areas of their financial plan, of course, and then especially talking about the TSP, but once we get to retirement, things are a little bit different. Now we’re no longer working. Now we’re living on our pension income and eventually when we turn on that Social Security income, and it’s really critical, how are we going to manage our investments for any extra dollars that we need for retirement? How are we going to make sure that our investments are going to be there for the rest of our lives? Maybe for the rest of our spouses lives? How are we going to make sure that we’re invested appropriately for our goals and how much risk we need to take versus how much we need to be more safe? There’s lots of little details here that we have to be making sure. And especially when it comes to the TSP, there’s a little funky rules that we need to be aware of, to make sure that we’re optimizing it as best we can for retirement. Now sometimes we can get accused of ragging on the TSP. There’s a few things that we’ll go through today that goes through maybe the downsides about it. But there are some good things about the TSP, things that are I would say are really good. Number one is it does growth very well. And we’ll talk about that more here in a second. But number two is it also does accumulation very well. So JT, why don’t you talk about how the TSP does accumulation very well and what that actually looks like inside of the TSP. 

JT Ferrin  02:22

Yeah, so what do we mean by accumulation? Right? What we’re talking about is every two weeks for your entire career, you’ve been contributing to the TSP, whether you’ve been working for five years or 30 years. This is called dollar cost averaging, you know whether the market is up, you’re contributing money, when the market is down – you’re contributing money. And so over the long term, this is one of the best strategies to build wealth. And, you know, historically, some of the best performing accounts are these retirement accounts like the TSP, 401Ks and things like that because of dollar cost averaging. So it’s a really great kind of out of sight out of mind. It just kind of automatically withheld from your paycheck and contribute to the TSP, though it’s a really great tool for building wealth. Now, Christian, the other thing we liked about it, like you said, is growth. He tell us a little bit more about why it’s good at it?

Christian Sakamoto  03:14

Yeah, absolutely. So with the TSP, I’m sure all of you know the five core funds that make up the TSP, right? The G fund, the F Fund, the C,S and I funds. I like that, it’s simple. There’s only really five to choose from. There’s lots of research out there that says when other 401k plans, 403B plans, other plans out there have dozens of choices, hundreds of choices that people often will just sit in cash, not knowing how to invest the money. When we break it down to just five core funds, makes it a little bit simpler. Now we also have a few other options, the L fund options, whether that’s the L Income Fund, you know, the L 2025 fund all the way up to the L 2065. Fund. And this has to do with what we call a target date fund. But that’s basically just allocating the five core funds that between the G,F,C,S, and I. There’s also now something introduced which is the mutual fund window. We personally haven’t seen a ton of clients utilize this yet, but that is exciting that they’re making some changes there. But when it comes to growth inside the TSP, we know that the the funds there are simple. The G fund is the government securities Fund, which has a guaranteed growth rate, recording this in 2024 in April, the G fund is, last time I checked, somewhere paying around 4% interest which is great. In the past Historically, it’s been a little bit less than that. But with higher interest rate. It’s a little bit higher right now. The F Fund is the fixed income, you know, think of that as the bonds fund, and that’s great as well. Now bonds are kind of a teeter totter when it comes to the price of the bond and the interest rate. As interest rates go up, bond prices tend to go down and then once interest rates go down, bond prices go back up. So, the F Fund in particular has seen a little bit of a decrease in value just as interest rates increased over time, the bond values have gone down. If and when they go reverse that, the bond prices would go back up. Now we also have the C fund which is our large cap, which is basically like the S&P 500, really diversified US, large US based companies. We have the S fund which is the small cap fund, which would be more like the Wilshire 5000. More companies, they’re mostly US based, but smaller than the S&P 500 type company. So in that case, we’d have a little bit more risk in the S fund. The I Fund is the last one there, which is stands for the International Fund. And the International Fund is roughly probably I would say 85% Europe based and then maybe 15% Asia based companies, but between all of those funds, we get lots of diversity, whether that’s within the US itself, between large cap and smaller cap companies, and then of course, the international side. So I like it that we have the limited options there. But it’s still well diversified. And over time, as JT was saying is we’re dollar cost averaging. We’re putting more dollars in, we’re accumulating, but we can invest it in a way that hopefully we can get some nice growth there. So I think the TSP does phenomenal at both of those things. Now there also is the option for doing Roth versus traditional. So JT, can you tell us a little bit about Roth and traditional dollars?

JT Ferrin  05:37

Yes, so whenever we’re deciding if we should do Roth versus pre tax, so there’s an IRA or TSP, whatever it is, I always like to look at the long term and coming up with the long term tax plan, right? And making these decisions through the lens of that tax plan. Because really, what we’re doing here is we’re either deferring taxes to a later date when hopefully we’re in a lower tax bracket, or we’re deciding to pay the taxes today when you contribute to a Roth because we think that we’re going to be in a higher bracket in the future. So, a couple things, you know, looking at your own income, looking at your own sources of income and future sources of income. And then the other thing is looking at the tax law, right? We do know that the current tax law with tax cuts and Jobs Act of 2018, is set to expire in 2025. It’s just around the corner. So in 2026 with the current law anything can happen, right? Congress can change the law, it’s an election year. So really, anything can happen, but we can only plan for the law that we have. With our current law in 2026, we’re all gonna see a little bit of a tax increase. So, two questions, what’s your future sources of income and were the tax law’oing? Using that as a lens to make the decision. So, for a lot of my clients, it makes a lot of sense to contribute to the Roth, because the federal employees especially have a lot of sources of taxable income. You have your pension, taxable, you have Social Security does up to 85% taxable, not an 85% tax rate, but 85% of it is taxable, 15% is tax free, and of course the TSP pre tax is taxable as ordinary income. That’s a lot of money that is taxable later on. And if we think that tax rates are going up, it makes a lot of sense to contribute to the Roth. But, not everyone’s in that case. So I’m going to say, let’s look at a long term tax plan and then make that decision of pre tax or Roth through the lens of your tax plan. 


And I think that’s great too. And let’s just say that the clients are now in that phase of retirement, and they have those Roth dollars and traditional dollars, the after tax and pre tax dollars. What’s nice about the TSP is we got that choice, that we were able to contribute to the Roth, if it made sense for you. But, now that we’re in retirement, we have the choice, which cap do we take money from? Right? And in some years, maybe it makes more sense to take pre tax dollars, the traditional side, maybe in some years, it makes sense to take some Roth and with the TSP you now have that choice in the past the TSP didn’t allow you to take just from Roth or just from traditional it was that it came out proportionately, but now it’s changed. Now you can select if you just want to take money from the Roth or just from traditional, which I think is a huge step in the right direction there. Now, JT could you tell us a little bit more about distribution options? So now let’s say fast forward, everybody hear that’s listening to this podcast is retired, let’s just say, and now we are looking at our TSP. What are our options for taking money out of the TSP? What are those distribution options that we have? 

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JT Ferrin  11:00

You mentioned earlier that sometimes, you know, we get accused of ragging on the TSP, right? And we there’s it’s just a tool like I mentioned, it’s good at some things. It’s it’s not so good at other things. So this is the part where we’re gonna rag on with TSP a little bit, right? There’s two things here that the TSP is not great at. And one of those is distributions, the other one’s tax planning. Though getting into distributions here, you have a few different options. The first one is a lump sum, and making monthly payments or just partial payments can transfer or rollover to an IRA. You can buy an annuity through MetLife, or you can leave it there. So, in looking at that lump sum, a couple things to be aware of, if you were to just take the money and we call this the Vegas option – just send me the money, right? If you did take a lump sum, the entire amount is taxable to you in that year that you take it. So if you had $500,000 in the in the TSP and you took the entire amount, you would add $500,000 of taxable income to your tax return in that year. It would put you well into the 32+ percentage, not even considering the state taxes here. It would be a huge tax liability for you. Consider that really carefully. Monthly payments or partial distributions – the thing to watch out for here is that proportionate distribution rule. So if you have, let’s just say that you have three funds in the TSP, you have the G fund, which is government paid by a money market account right? decent money my market account right now it’s like made 4% So say you know the G fund, you have the C fund and you have some S fund, right? That’s three. If you wanted to take $1,000 out of the TSP, you have to take equally from the G fund, the C Fund and the S fund. They’ll send $333 from each one of those, which as you know, Christian, breaks our investment rule, which are general investment rules that we never invest money that we need to spend in five years. That includes distributions. So if we need to take $1,000 a month for income, we want to make sure that we have that set aside in cash, or money market, fixed income, something like that to keep it safe and secure from market volatility. The last thing that we want to do is sell our investments when the market is down and it will go down. It’s not a question of if, but when, right? So when the market goes down, if we’re selling our investments, that is just going to make those declines, those losses even worse and makes it really hard to recover from that in retirement. So we want to make sure that we’re pulling money from cash, or from money market, or something like that. So that’s one thing – watch out for that proportionate distribution rule to take equally from all the funds that were in. Transfer. If you’re a longtime listener of the podcast, you know that we use the word transfer. We do not like the word rollover, just briefly a rollover means that the TSP is going to send you a check and they’re going to withhold some money for taxes. So in this scenario you have $500,000 you request a rollover, they will send you $400,000 And they’ll send $100,000 as an estimated tax payment to the IRS. Now you have 60 days to get the full $500,000 into your IRA. If you don’t find another $100,000 That 100,000 is now a taxable distribution to you. So, be very careful with the word rollover. We should be using the word transfer. Transferring it to the IRA. This is a trustee to trustee transfer. There’s no tax withholdings. It doesn’t go to you, it just goes to the IRA. You could buy an annuity, again like I said this is done through MetLife. This also needs to be done very carefully, or with caution, because this is an irreversible decision. Anytime we’re making an irreversible decision it’s good to take a pause and make sure that this is the right fit, maybe have another set of eyes on it. Or we can leave it to do nothing until your requirement when distribution age is somewhere between 73 and 75 Depending on your birth year. So those are some of the distribution options. Again, two things that TSP is not good at – one is distributions. It’s just a little bit cumbersome and there’s a lot of potential pitfalls here that we need to watch out for. The other thing is tax planning. Christian, could you tell us a little bit more about tax planning and why the TSP might not be the best tool for the job. 

Christian Sakamoto  16:13

Yeah, on the tax planning side, basically what we’re looking at is Roth conversions and qualified charitable distributions. Those are the two main big ones that we’re looking at, that we can do outside of the TSP. The TSP doesn’t allow us to do both. So, Roth conversions. If you’re a listener of our podcast, you know, we’ve chatted about Roth conversions quite a bit, where we’re taking money that’s in a pre tax account, like IRA, paying the taxes on some of that and then moving up some of that into a Roth. That’s a Roth conversion. You can’t do that inside the TSP unfortunately, there isn’t any in plan Roth conversions, some 401K’s allow for them, so that’s one of the good things, but the inside of the TSP we can’t. Qualify charitable distributions are another tax planning tool that the TSP doesn’t allow, which would be after age, currently 70 and a half, we can take money directly from our pre tax IRA, you know, our traditional IRA, take money out of it and pay it directly to a charity, or a nonprofit. And if we do that, we’re not actually paying taxes by doing that. It’s lowering our modified adjusted gross income. And there’s lots of tax benefits with those qualified charitable distributions that we can start doing at age 70 and a half that we just aren’t able to do inside of the TSP. So there’s a few things there like we were chatting about, the proportionate distributions, and some of the other things on the distribution side and then on the tax planning side that the TSP just kind of falls a little bit short. One thing I would add, when JT was talking about with those proportionate distributions, to me, that’s the that’s the big one. That’s the that’s the main reason why the TSP in retirement has a big flaw because it’s either going to do growth very well, the C,S, and I funds, or it’s either going to do safe very well, which is I would say the G fund. It just can’t do both at the same time when we’re taking money out. Right? So good to use that example where we’ve got $1,000 A month of income, and we’ve got, you know, 33% in the G fund, and then 67%, between the C and S funds. Well, if we need 1000 bucks a month, and we’re taking that proportionate distribution out and then the market goes down in value because there’s another downturn in the market and we’re still withdrawing that monthly we’re just sell, sell, sell, sell, sell, sell, sell, no matter what the market is doing. That’s a big problem, that we’re not able to specifically say hold up, let’s pause taking money out of the C and S funds, and let’s only take it out of the G fund. Now, some might say in that case, well, maybe I’ll just move my money all into the G fund, which you can do, but now we’re playing that timing the market game, and how do we know when to get back in, right? Even just one day or two days out of the market can have a big dramatic impact on our success in in our retirement, right? So and overall with our investments in general. So we just have to be very careful that we’ll say well, we can avoid that by just going to the G fund and then one day we can go back into the market. How do we know we’re doing it at the right time, then now we’re playing again that timing the market game. JT, any other thoughts there on the TSP that you’re thinking of that we just should be aware of? Whether on the tax planning side or on the distribution side? 

JT Ferrin  19:59

Yeah, when you’re talking about moving the TSP into the G fund during those times of the month when you want to take a distribution, right, and potentially missing out on a few days of market of the market. This isn’t just a one time thing, right? We’re talking about this is your monthly distribution strategy. And so you are actively managing this every month. And you’re out of the markets for a handful of days, every month, that adds up. Over time that adds up. That’s a lot of work. And if it sounds good in theory, you know, some clients, some people we’ve talked to attempt to do that and it’s fun for a little bit and then eventually it gets old, right? So there are some better solutions here. It seems like a depending on your situation. The transfer to the IRA gives you a lot of that flexibility, takes away a lot of those pain points where you can draw just from your cash, you can draw from the money market, and you can do the tax planning in there. So, again, there are a handful of options there. But that one seems to be one that’s working well. Last thing I wanted to point out is, in retirement approaching retirement, it’s always good to review beneficiaries. We have seen this come up more and more, but a few years ago, the TSP changed their their website a little bit, upgraded the technology and in that change 1000s of beneficiaries were lost. Just gone. Right? And so when the clients bring us their tsp statements for review, on what is it page four or five, somewhere in there? Yeah, there’s a big yellow attention triangles. There’s no beneficiaries on file, even though they fill out the paperwork, even though they added one, gone. So it’s worth reviewing that regularly, because either there may have been lost, or your wishes changed, right? People change, the family dynamics change. financial situation has changed. So it’s always good to review those beneficiaries.

Christian Sakamoto  22:08

Absolutely. One other one, bonus bonus for the podcast today for the TSP that I would say does very well would be if you retire or separate from service after age 55, then you’re able to access the TSP without any penalty. Penalty free withdrawals. So we’ve got several clients that fit that cap, where the IRAs if they solely had IRA, they wouldn’t be able to take those distributions. So utilizing the TSP for its strengths in that case is always always a good idea. Right? And it’s going to be really dependent on your unique situation, what’s going to be right for you. And even more so if we’re special provisions then that that age 55 gets pushed earlier than that, right, to age 50. And in that case, we’re able to access the TSP even sooner if you’re in that special provisions capsule. The TSP can be some really good tool again we just have to look at it from that objective lens. What’s what’s going to be the right tool for the job. Well, this podcast is all about action and taking action. So tagging along with what JT said, I would say the first action item is to make sure your beneficiaries on the TSP are up to date. Go to the TSP website, pull your statement and see who’s listed there. Not just primary beneficiaries, but also contingent beneficiaries. JT what’s another action item?

JT Ferrin  23:38

I said this a few times now, the TSP is just a tool, and it’s good at something, it’s not so great at others, but know how to use the tool, I would say come up with a distribution strategy. For us, the most important thing here is that you have a plan. What’s your plan for income in retirement and how does the TSP fit into that? That action item number two, what’s your distribution strategy in retirement? 

Christian Sakamoto  24:04

Yep. Last bonus action item. If you’re still working, you’re still contributing to the TSP, make sure at least you’re putting in 5%, because of that 5% match that you get it’s the only time I’ll be giving investment advice on the podcast here is to get in take advantage of pre money, which is in that match is to at least try to get that 5% contribution to get that match. And then of course pushing yourself to try to maximize it, or really add to your contributions to get closer and closer to that maximum contribution, I think would be a win. Well, JT had a lot of fun today. Thanks for going through the TSP with me. Until next time, happy planning.

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