#85: TSP Spillover and funding

Full Episode Transcript
With Your Hosts
Micah Shilanski and JT Ferrin

 

Micah: Welcome back to another amazing episode of Plan Your Federal Retirement podcast, the podcast that is dedicated to helping federal employees learn more about their benefits and apply that so you can have a successful retirement this next exciting chapter of your life. And today, we have a special guest on our podcast today. We’re going to bring in another advisor that’s inside of our team is certified financial planner JT Ferrin. JT, thanks for joining us, bud. 

 

JT: Thanks, Micah. Super excited to be here and be on the podcast. 

 

Micah: Yeah, you know, this came up of having you as a guest on here because we were talking to just the other day with a new client, and they had brought up an interesting question about the TSP. I was like, Oh my gosh, this would be so great for our listeners because the TSP, JT you, and I both agree on this right. The TSP is a phenomenal tool to save money for retirement right. We have those three stages of saving money in our life. Right? We have that accumulation. I gotta save money, I gotta build money, or it’s I have enough for retirement, man, that’s where the TSP shines. Then, from accumulation, it goes to preservation; okay, I have enough money. How do I keep it then it goes to the distribution stage right through these days, Jerry Maguire, right? Show me the money. How do I take my money out of this account and never outlive it? We have those three stages. At each stage we got to think about how we’re using investments differently. But I think JT, we’re really going to focus right now on this accumulation stage and how powerful that TSP can be in that stage. 

 

JT: Yeah, I think it’s great. I mean, there’s a lot of confusion because there’s a lot of different plans and people hear things read things, and sometimes it applies to the TSP and sometimes it doesn’t. So I’m excited to get into it. 

 

Micah: Yeah. And not only does it apply to the TSP, sometimes not the rules have changed. Right. You know, that from the TSP Modernization Act, which happened several years ago. The TSP made some more tweaks in 2021, and how the TSP should be 2022 how the TSP was working as well. So we have all of these other things and the rules keep changing. So you stay on top of them to make sure you can maximize your benefits is really important, which again, is why we love doing this podcast. I’ll get you that great information. 

 

JT: Exactly. Yeah. And sometimes the rule changes don’t really affect you, in the case of this spillover change, more of an administrative change, right, and we’ll get into those details, but I think it can be really confusing, so we’ll be good. 

 

Micah: It can. Alright, so we want to talk about tsp funding, but I guess it JT before we jump into this where I’m going to put you on the spot with  this very ambiguous question here. I know right? All right. Let’s get them on the on the hot seat. How much should someone be saving for retirement?

 

JT: All of it.

 

Micah: That is one option. That is that is the fire option, right financial independence retire early. That’s pretty much their theory is saved like everything you possibly can, which that is one option that’s out there. But the problem is we’re going to suffer from our lifestyle today, right? So we got to kind of balance these things out. 

 

JT: It really comes down to your long term plan and goals and cashflow, figuring out how much we’re spending now how much are we spending in retirement and then walking back into that. And that will give us the number of how much we need to save.

 

Micah:  I love it. JT 100% spot on this is a depends question, right? It’s not a cut simple answer. That’s their that’s everyone should do. X is this No, no. What are your goals? I love that. You said that JT. What are your long term goals? IE, when do you want to retire? You brought up cashflow. How much are you spending today? How much are you planning on spending retirement? Here’s a pro tip. What you’re spending today is probably what you want to spend in retirement if not more, right? So a big mistake that sometimes we see as clients will come in and be like, hey, I want to retire and have $8,000 a month this is okay, great. Let’s start working on that. How much are you spending today? They don’t really know we work with them and it comes up they’re spending $11,000 a month. Okay, you’re spending $11,000 A month today you’re retiring in one year and you think you’re going to spend 8000. Where are you going to drop that 3000 a month from? And it’s like, Oh, it’ll cost me less because I’m retired because I won’t be commuting every single day. I don’t think we’re spending $3,000 a month on the commuter cost, right? So these are things that we really have to look at in that consideration for longevity and long term cash flow. How much money do they have? Where’s it going to come from? 

 

JT: Yeah, and what do you want to do in retirement? I mean, federal employees retire relatively early, right? That’s MRA age 57. What are you going to be doing every day? You probably want to go have fun. You want to go pursue your goals and your dreams and that costs money. 

 

Micah: You know, another benefit that federal employees have as well as you have a fantastic pension. Right. So this is where federal employees get in trouble is they read online. In a news article it says everyone should be saving 20% of their income to be retired when they’re 65 or 70. Or whatever that number is right. I’m just making it up. And that’s an interesting aspects from one angle, but we got to take that in and apply it and JT you brought up a point that I forget because I’ve worked so much with federal employees is they do have a tendency to retire early compared to non federal employees because you have such a great benefit set. That means we need to be earmarked maybe to save a little bit more, but we really got to factor in that pension that you’re going to get as well because that can be a big part of your retirement. 

JT: Oh yeah, for sure. Right. One of the three of the three pillars 

Micah: That’s right. Yeah, we have the pension right you first pension, you get your TSP and you get Social Security. Those are three sources of income, TSP, other investments etc. Those are those main three sources of income that you’re gonna have coming in. Alright, so we have you that you should save. Alright, well, we don’t know how much everyone should save that’s going to be different. I’m gonna say hands down and now JT is a financial advisor. He does a great job and one of the things that we beat into our heads at a young age as financial advisors is you do not give generic investment advice. You don’t give investment advice publicly. This is everybody should do this because you don’t know their situation. And I’m about to break that rule. Oh, I know. Right. Here’s one bit of investment advice that I think everybody should do. And I cannot think of an exception for this. Every single federal employee, especially if you’re under FERS, should be putting at least 5% into your TSP account. Now. I’m not telling you how to invest it right. You can go put it whatever you want. If you just wants to get the G fund so it’s guaranteed knock yourself out. But every single federal employee should be putting at least 5% and our listeners already know why because if you put 5% in youre doubling your money, because the government is going to match that fully added 5%. That means it’s going to be a 10% contribution between your match and the government match that’s in there. So again, especially for newer federal employees, they tend to miss this and saying I don’t have the cash for it or you know what, I’m not ready to save that. That’s the minimum we should be putting it. So, we don’t know what the maximum is for everybody just yet. But that’s definitely going to be the minimum every federal employee should be putting into their TSP. JT any pushback on that? 

 

JT: No, no pushback at all. I mean, that’s money that early on the table. If you’re not going to do the full 5% you’re missing out on that. 

 

Micah: And it’s money you earned, right. Let’s be super clear about this. Right? This is a benefit in which your you’ve earned as part of your benefit package. This would be like not taking health insurance. You know, it’s like, whoa, hold on a second. Why are you going on the marketplace to get health insurance so much more when you could be getting health insurance to the federal government? So this is a benefit you’ve earned. Let’s make sure you do it. Alright. So that’s the minimum you should be putting it. Oh, sorry, JT you need something to add to that?

 

JT:  We’re just going to say, Yeah, this is a benefit. It’s not free money, right? It’s not that they’re just gonna give you an extra few percentage. No, this is money that you’ve earned. It’s part of your benefits package, and you need to take advantage of it. Don’t leave it on the table. 

 

Micah: Amen, I say to you, all right. So that’s really important. So we have meant that we should put in well; we don’t know how much you should be contributing overall to retirement accounts. There is a cap on how much we can put in the TSP. It went up this year. It’s probably going to go up next year. We don’t really have those numbers for 20 to 24 just yet, but JT, how much can people put into their TSP account this year? 

 

JT: For 2023? It’s 22,500. And if you’re over age 50, you get to do a little bit extra, an extra 7500. So if you’re employed at your age 50 and older you can do $30,000 a year. 

 

Micah: Oh man, it’s fantastic. Now with that, age 50 and over I love it. Now keep in mind, it’s the year you turn 50 that you’re going to do this. So if you turn 50 In November, in January, you can start adding that ketchup because guess what, you’ll be 50 by the end of the year, so the year you turn 50 you are eligible for that catch up contribution. 00So that is a fantastic benefit. It is an extra form or you can go online to the TSP in order to elect that to have that withdrawn for your payroll deduction. So we got the TSP contributions right down to a minimum you should be putting the 5% the maximum is 20,000 or 30,000. If you’re over 50 years old, and what we love about these rules that’s there is they keep going up just a little bit. But sometimes JT, as you mentioned before, gets a little confusing. This came from a question we got from a new client. He says, Well, I’ve missed that catch up contribution for a few years and since I missed it, can’t I just catch up and go backwards and make up that contribution? So he could have been putting in a catch up. He didn’t have the opportunity to now he really wants to catch up. Isn’t that what it’s designed for? 

 

JT: Yeah, no, it makes sense, right? But it’s not it’s a little bit different. These catch up provisions in these retirement plans are all a little bit different. A 403B, 401K, TSP. They’re all they’ll have their own little nuances. So again, that’s why it can be confusing. But catch up might not mean what you think it means. 

 

Micah: Yeah. And in this case, what catch up means is they’re saying hey, you may not have been able to save enough when you were younger, so we’re gonna allow you one year at a time to save a little bit more. So that’s a great benefit. But that doesn’t mean if you’ve missed contributions, you get to go back and make them up. Now if you have a spouse that has a 403B plan. there’s rules that are slightly different over there that may apply to them. But for you in the TSP, which is a great program, is it’s a calendar basis contribution. We are calendar year taxpayers right from January to December, so the contributions must be made via payroll deduction during that time. So if we’ve missed an opportunity in the past two years to make a contribution, unfortunately, that is done and gone. But great news, we get to look forward and be able to make those contributions going forward. JT, the other question on this talking about catch up contributions is the TSP is not the only place that we get before we leave the TSP. So you can put let’s just say 22/5, right, everybody can put 22/5 into the TSP account, but we have the traditional and we have the Roth TSP. So if you’re putting 22/5 in, does that mean you gotta put 22/5 in traditional and 22/5 in the Roth? 

 

JT: No. Combined 22/5 total. 

 

Micah: You got it set. The TSP is just one umbrella, you can put 22/5 in which is fantastic. You get to choose where that money goes into Roth or into traditional, right and so you get to choose do I want the tax deduction day or do I want tax free money in retirement? There’s pros and cons to this I gotta say, we’re both pretty big Roth IRA fans and Roth TSP fans. There’s some catches right? So it’s not carte blanche, everybody should do it. But it’s definitely something I’m going to say everyone should evaluate. Are you putting money away? One of the biggest misnomers that federal employees have is they go into this impression that when I retire, my taxes will be less, and vast majority of the time, they will not; they’ll probably be higher unless you’ve done some planning to help reduce those into retirement. Alright, so we got to TSP money, we got contributions, etc. JT, what about IRA contributions? How much cash should we be sticking in IRA accounts every year?

 

JT: Alright, before we get going, I want to mention one more thing on the TSP. I recently had a question from a client about the spillover rule and how that works with the catch up provisions. And this was a change that happened in 2021. Just a few years ago, so I think there’s still a lot of confusion around it. But the spillover rule is more of an administrative change, right? doesn’t really change the, the amount of contribution or how you’re making that contribution, but really just the accounting behind it, 

 

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Micah: Yeah, so I think with a spill of rule really talks about is before if you were just making your normal contribution to the TSP, and let’s say your contribution was set for 22/5, I know it would have been less in previous years but it was set to 25 and your funding and you fund to fully fund to the TSP early in the year, then your contributions would stop if you were scheduled to be fully funded with a tsp in October, those contributions would stop, and then you wouldn’t be making any other contributions. Now if you’re eligible for the catch-up that spillover what happens is that money dumps automatically into a catch-up contribution. Is that right JT?

 

JT: It goes into that type of contribution towards the 7500. It doesn’t spill over into the next year either. Rather think there’s an attribution there’s that maybe we said that the maximum is 30,000. What happens when you contribute? $30,001 right. Then that $1 is not spilled over into the 2024 year or 25 year, whatever it is, it’s just for meeting that 22,500 limit and then spilling over into the catch-up provision. 

 

Micah: Right. So this is really important that you know how how much money you’re saving into the TSP and where that money is going now, Pro tip on this, we recommend clients to say Hey, make your TSP election contribution make your pension contribution beginning of the year, leave it set Oh get right, we can increase it whatnot. But don’t try to monkey with it and saying hey, I want money, and sooner there’s some things that happened with a match etc. Just plan on funding at all over your 26 periods. That is the simplest way to go to make sure it all gets funded. Love it. Alright, so let’s show some IRA rules and I wanna make sure we’re talking about some IRA rules and quickly some easiest rules because they get HSAs are so misused. I keep talking about on the podcast, I’m going to talk about it. So I’m blue in the face because there’s some awesome ways that we should be using these accounts, but JT, perhaps, how much are contributions? I’m gonna put in IRAs, whether it’s traditional or Roth.

 

JT: IRA contribution limit just changed again, in 2023 over  $6,500 per person. If you are over  50 you can do an extra 1000 to make it 7000 for the year. 

 

Micah: Yeah, that’s really important to be thinking about are we in an individual plan or family plan? I started setting my HSA is already. Yeah, the IRA contributions are so great because we can put those money in those those accounts and they can grow and JT I think a misnomer that we have on IRA accounts is that if somebody makes quote, too much money if they quote too much money to fund IRA accounts, that’s not true?

 

JT: Not true. You just can’t deduct it. You can contribute to the traditional IRA you can not just deduct it.

 

Micah: Yes. Now for a great do-it-yourself, for clients that love TurboTax and putting the stuff in there that TurboTax warning is pretty prompt, it says Whoa, you’ve made too much money. You can’t deduct this contribution. And we get calls from clients that say Micah, I can’t contribute to my IRA account because TurboTax says this warning and JT, just as you said, we got to read that right? It says you cannot deduct the contribution. It doesn’t say you can’t make the contribution. This becomes an after-tax contribution to your IRA account, which is actually pretty powerful. It can be a great tool for planning taxes, right?

 

JT: For sure. Bacdoor IRAs, and other staretegies out here, but yes, you still can make a contribution. 

 

Micah: Yes, so powerful. Knowing your contributions, our discussion on IRA versus a Roth traditional versus Roth, there are some income words Roth accounts that we’ve talked about on previous pause and the screen is the short answer is there’s ways around them. So if you think that you’re limited, you can put money in a Roth account because your income that is probably an incorrect statement. You gotta give us a call and we can talk about some backdoor Roth IRA funding. So really, there’s some catches, we got to be careful in how we do it. There’s some great ways we can almost always get money in a Roth IRA, which is pretty fantastic. For sure. All right. So JT I want to jump to and I already started kind of going down that list. Sorry. I was reading my notes a little bit advanced when you’re talking about IRAs because, again, super excited about HSAs. I love health savings accounts. Now. There’s there’s a lot of concern about these. There’s a lot of questions and those on misuse, not inappropriate use, but maybe not maximizing our HSAs the way that they should. An HSA is, of course different than an FSA. FSA is a flexible spending account. This is a health savings account, which I love because you can keep in save money. And so you get to put money into this now, as you guys already know, because I know our listeners are super savvy on this is that in order to get an HSA, you must be in a high deductible plan. JT when I’m talking to clients, that’s generally when I lose them, right? They’re like, Oh, no, I’m out. I don’t want this high deductible plan. I love my Blue Cross Blue Shield, low deductible. I don’t want anything to do with this. 

 

JT: And it seems like these days, every plan is a high deductible plan. 

 

Micah: At least for us outside of the Federal Employee world. I was gonna say out of the government circle that is that’s a correct statement. There’s so many that are high deductible, but inside the federal FEHB space, there’s a lot of these low deductible plans. Yeah. So what we had to look at when we’re working out this is just saying, Alright, so we are picking our health. The reason I am talking about this is because I know this airs in September,  and I plan talking about this more in November; we’re open season. Why this is so important? Is so often, we get stuck in a run with our health insurance plan.It’s a good option, but I want everyone to evaluate their health insurance plan once a year. If you’re relatively good health, if you are seeing a doctor once or twice a year nothing major is going on, I am gonna make an argument; maybe look at an HSA, maybe a high deductable plan because this allows you to save money. Not only can we save money pre tax, we get to invest that can grow 100% tax-free, which is a pretty amazing tool. This is another Roth IRA tool that we have. So it’s really powerful. So JT, as we have this, how much can we fund into an HSA account? How does that work, kind of whatever their catch-ups etc. 

 

JT: Yeah, this is awesome. Deducted and the Roth IRA where it grows totally tax free. For 2023 contribution limits are 3850 inclusive for a person and  7500 for a couple of married filing joint, and if you’re over age 50, you get an extra $1,000 of contribution. 

Micah: So this can again be a super powerful tool. Now here’s how I personally use my HSA account because I have a high deductible plan. And don’t worry, we look at your FEHB with the with green with envy, because we are on the outside and see how beautiful that plan is. But in my high deductible plan because of a very high deductible plan. I maximized my family HSA every single year. Now my intent is that if we go see the doctor or whatnot, I’m actually not using my HSA money for that doctor event. If I can afford it in cash flow right we go to a checkup the kids got to get a physical like those little things I’m probably going to pay out of pocket now if I need the HSA. I always have in my HSA bind deductible in cash that’s available, but anything above my deductible, I invest that in the HSA and you can do the same in your HSA. It’s TD Ameritrade, which is now bought by Schwab. So we got to see how well that shaking out but now in your Schwab account, you’re going to be able to invest that money and now I can borrow this long term approach. Keep in mind the investment rules. Any money you plan to spend the next five years it does not play should not be invested? Why do we say five years? 2008 9,10, 1,112 Right when the market fell, it took five years to recover. It’s going to happen again. So we got to have that that in mind. But assuming this money meets that criteria, I like investing especially for my younger clients, federal employees, we get to put money in in their 30s and their 40s Maybe even early 50s I get a save for 10,15, 20 years and extra $7,000 A year into these accounts. Okay, quick math here for 10 years at 70 grand for 20 years is $140,000. I give you something away that grows tax-free. That’s on top of my Roth IRAs that’s on top of my Roth TSP account. This is a massive savings tool. Now the catch is when we pull that money out, it has to avoid taxes. And penalties. We got to be able to pull that money out for a qualified medical expense. JT is that right?

JT: Yeah, that’s right. And you’re talking about paying for medical expenses with cash flow, at least the ones that you can afford. It’s worth looking at the qualified medical expense list, because it’s really long. There’s a lot of things that qualify. So if you’re going to pay for it with cash flow, save the receipts or use some other accounting method to keep a record of that.
Micah: Now here’s here’s a great little catch with the HSAs over our hack with the HSAs When we’re doing these it’s so cool when we’re doing this with the HSA account. It’s not a calendar year expense issue. What does that mean? Let’s say I save money in my HSA for the next 10 years, and I don’t take any of the money I’m funding and every single year I gotta at least $70,000, probably more in that account. Because I’ve been, it should be growing at that time. But then I have a big medical expense that comes up. Fantastic. All I have to do is go back and look at all of the medical expenses I’ve had for the last 10 years. And I can say, what did I pay out of pocket? I can then go to the HSA and pull aggregate those over 10 years and pull that out as you need that money to grow. Now, let’s say I don’t have any medical expenses, but I’m great. I’m healthy. Now. I’m past 65 years young, awesome. I get a l HSA, I can pull the money out without a penalty, but I gotta pay taxes on it. So if you will, it just became an IRA. So, instead of a Roth, it became an IRA. That’s not that bad of a deal. It’s a great savings tool for you.

Jt: An extra IRA. That’s awesome.

Micah: So these are things that we really got to be careful of when we’re funding retirement accounts. We’re doing these things. How are all of these pieces put together? How do they come in? This kind of goes back to that first question. How much should you be saving for retirement? JT back to your point? What are your goals? Right? On the goal side of the equation? It’s going to be when do I want to retire? When do I need to access this money? How should it be saved that all need to back into this funding question about where and how much should you be putting every single year away? All right, I love it. So JT, as you know and our listeners know, this podcast is all about action items. I know it’s fun just listening to us talk about retirement accounts. But in addition to that, we want you to take action on this. I’m going to say your first action item that’s out there. We have a goal to help another 1 million federal employees with retirement and the only way we can achieve that goal is with your help. So, like share, send this information out. It’s not just for our benefit. We truly want to be a great resource to federal employees. We want to get them the right information on them. So make sure you’re sharing the podcasts you guys, those so thank you so much. So that was my selfish action item. So forgive me. We want to make sure we help a lot of people.  JT what’s another action item our listeners can do this week?

JT:  We mentioned at the beginning with the first thing is make sure you’re getting that 5% match. Make sure you’re contributing contributing at least 5% of your pay.

Micah: I love it. That’s it. Now if you’re not maxing the TSP out, then once a quarter every 90 days, maybe once every six months, go increase that TSP just a little bit. Not a lot. Go increase it a half a percent go increase it 1%. Here’s what we know, working with clients. In particular, you guys do the same thing. When I have money in my checking account. It’s amazing. I spend it every single month that money gets spent. If I have a little bit more there, I spend a little bit more if I have a little bit less, I spend a little bit less. So, a simple hack, you’re slowly but surely keep increasing how much you’re saving into that tsp into that 401 K account, whatever you have, and listen to keep growing for retirement. So the next action item I’m gonna say is just to increase those TSP contributions. JT. I think I have one more, but any other action items on your list?

JT: Then we have open enrollment coming up, look at the HSA, eligible health plans, go look at the high deductible health plan, and see if that can be a good fit for you.

Micah: I love it. And then the other thing is tax planning. We love taxes. You thought you’re gonna listen to an episode without us talking about taxes all right, but no, every episode taxes is are so important. I want you to think about this year, and we love October and November. That’s when we do most of our effective tax planning with our clients. I get 10, 11 months under our belt. We know what this is. Should you be making traditional or Roth contributions for next year? Start looking at those decisions now. Start making those changes so you can get set up for your retirement. JT, love to have you on the podcast. Thank you so much for taking the time.

JT: And thank you. It’s been super fun to be on the podcast.

Micah: All right. And for our listeners. Until next time, happy planning.

 

 

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