Ep #56: Moving Investments Into Your TSP

Full Episode Transcript
With Your Hosts
Micah Shilanski and Tammy Flanagan

Micah Shilanski: Welcome to the Plan Your Federal Retirement Podcast. I’m your co-host and co-founder Micah Shilanski. And with me as usual, is the amazing Tammy Flanagan again. Hey Tammy, how’s it going?

Tammy Flanagan:        I’m doing great Micah. Interested to get into this topic because I’ve been getting a lot of questions from people about moving money around. Everybody wants to move it in or out of the TSP.

So, I’m anxious to hear what you have to say because I always go to you with questions about this type of thing. So, I’m anxious to share that with our listeners.

Micah Shilanski: I’m excited to jump into this, moving your investments into the TSP. There’s pros and cons to everything and really, understanding these benefits and understanding what that means to you.

It’s one thing to understand a theoretical aspect of how something should work, but it’s something else to understand, “Great, how do I apply that to my situation? And is that the right decision for me or not?” And I am super excited to jump into this.

So, before we get too far in there, just a little heads up; I’m traveling because it’s the middle of summer. So, we’re spending some time with the family, which is great, so that does mean I’m in an RV.

So, if you hear any weird background noises, because I’m not in my office right now when I’m recording this with Tammy. So, I apologize if there’s any distractions, but I think we can get through it.

Tammy Flanagan:        We’re going to to do a podcast on how Micah gets to do so many interesting things while managing and running a full-fledged business. I admire that. He is king of financial — not financial, but that too, but time management.

Micah Shilanski: Yeah, yeah, really Tammy, and you know what, I learn a lot from my clients, Tammy, and with you and talking about it. And one of the things is I’m helping so many people retire and we’re talking about things that they want to do, and I really want to learn from that.

And one of the things they always comment is they want to spend more time with their grandkids because they missed that opportunity with their kids growing up.

And so, my wife and I took that to heart with a lot of our planning and we were like, you know what? Our kids are young, we want to make sure we can spend as much time with them. So, how do we be creative with things and to get set up to make sure we have that time to spend with them. Because as we all know, that’s very precious.

Tammy Flanagan:        You do a good job of it. I admire that.

Micah Shilanski: Well, thank you. Alright, let’s jump into this. So, for one, there’s a lot of changes on the TSP front to begin with and we’re not going to talk about all the TSP changes, Tammy. And I did do a phenomenal webinar. Alright, I’m slightly biased, but we did a great webinar, talks about TSP retirement income, some changes with TSP, how you need to take money out, et cetera.

So, we talked about that. The TSP has undergone a lot of changes, but now, we’re starting to get questions about moving funds into your TSP account, which could be a great idea, could not be a good idea. This could really go back both ways.

But Tammy, let’s dive into this a little bit. So, what questions have you been getting from federal employees about putting money into the TSP?

Tammy Flanagan:        Well, I think sometimes people are confused by some of the language that we use. Because I had a question come in recently saying, can I transfer non-IRA brokerage account money? So, if it’s not in a retirement account, so non-IRA, means to me, it’s not in a retirement account — I don’t think that can go into the TSP. I’m pretty sure you know for sure that it can’t, right?

Micah Shilanski: That is correct. It cannot go into the T … I can I say this correctly; it cannot move into the TSP account because it’s not under that retirement umbrella. In order to be in that retirement umbrella, whether it’s an IRA of 401(k), et cetera, there’s a few weird rules, but I’m going to talk to the 99.9% out there; is you must have made a contribution or an employer match into a retirement account.

Once it’s in a type of retirement account, that’s pre-tax, so traditional IRA, traditional 401(k), et cetera, those funds can be eligible to be transferred into your TSP account.

Now, I know Tammy in the new language that TSP has rolled out with, they’re not using the word “transfer” at all, it appears. They’re always using the word “rollover,” but rollover can have a couple of different connotations.

So, on our podcast, we like to be really clear. We love the word “transfer” and that means going directly from one custodian. So, wherever that IRA money is, let’s pick on Schwab as an example.

You have an IRA at Schwab and you want to transfer that into your TSP. It goes from Schwab to TSP directly. You don’t get your lovely little hands on it. So, that means it’s not a taxable distribution.

Tammy Flanagan:        Right, and TSP does have a … you can always tell these new and improved fact sheets and publications because they’ve used a different font and a different color scheme.

So, when you see these publications from the TSP with two really pretty shades of blue in a nice rounded font, you’ll know those are the new ones. And there’s very few that have been rolled out yet. Speaking of rolling, we’re using that lingo.

But anyway, there’s one that came out. It’s a two-page, it’s a very short publication, just a two-page fact sheet and it’s titled Rollovers from the TSP to Eligible Retirement Plan. So, it’s talking about moving money sounds like out of the TSP into an IRA or into something else.

But the one thing they remind people on that fact sheet is that contributions to a TSP account can never be made by personal check. Any new money that you’re putting in, that’s going to be payroll deduction or it’s going to be money that you transfer from an existing retirement account.

And so, the one question I do get from people who are coming into federal service from the private sector or from the education field or from a state plan, they want to know, should I be moving that money from my old employer’s plan? I had a retirement account with that employment — does it make sense or what are the pros and cons of moving that money into the TSP and how do I do it?

Micah Shilanski: So, Tammy, the first thing is-

Tammy Flanagan:        I’d get the pros on that and the cons-

Micah Shilanski: Let’s jump into that. So, as we’re looking at these pros and cons that are going to be there, it sounds super easy. That says, hey, the pros, the TSP, number one; low expenses, phenomenal. You can’t argue with that one, it’s great.

You also have limited investment options. I put that in a pro column. Now, yes there’s this new brokerage feature, we’re going to pretend that doesn’t exist for right now.

But the investment options in the TSP, I think they’re pretty comprehensive even though there’s only five, plus you have the L Funds, which are an allocation method, but those are really good, and it simplifies it.

So, now, all my money’s in one spot, so I’ve simplified things, it’s low fees, it’s all in one account. There’s some pretty positive things with transferring money into the TSP.

But even though those are some good pros, I always hit the stop button and say, “Hey, before we do this, let’s really look at our long-term plan. And just because the TSP has some great advantages, do those advantages help me help you in your individual retirement plan?”

Tammy Flanagan:        Right, and I think the other thing is too, like the TSP is not the only place you can move that money from those other accounts. I think that if you left an employment, such as you were working for a large corporation or you were working for a school system and you had money in a 401(k), I think you would agree that you don’t want to leave the money there because number one, it might be very costly to do that. And secondly, you can forget about it.

I had a friend of mine, she forgot … she didn’t forget, she knew she had it, but she had no paperwork, no website, no password. So, if something happened to her, nobody would even know that money existed.

So, I think it makes sense to have your money someplace where it’s working for you, working for your plan, and also, at the lowest cost possible. We don’t want to have to pay more than we need to, to keep our money in another account, because some of those corporate plans can have pretty high expenses is my understanding.

Micah Shilanski: So, you really got to understand the benefits. Does it make sense for the expenses that are going to be there?

And I love your thought Tammy, I’m a huge fan of consolidation. When clients come to me (and this happens frequently), that they have money in like 8 to 10 different, not accounts, but financial institutions. And they don’t know how much money they have, which I totally get.

We have a busy life, we have a lot of stuff going on. Now, my money is scattered in all these places. So, step one, I always like to talk about consolidation. But before that, we got to understand pros and cons of what we’re giving up when we consolidate.

So, there’s too many plans to talk about all the pros and cons. But one of these … so let’s just talk about the cons or at least the things we need to discuss first, before we put money into our TSP. Now, not contribution but transfers into it.

The first one I’m going to say is tax planning. Well, I love the TSP and it can do a lot of things really well; it does not do a great job in tax planning. Easy example of this is a Roth conversion.

Right now, at least while we’re recording this podcast, the market’s down just a little bit year to date. We’ve seen some volatility that’s gone down. Well, and our clients that have money outside the TSP, we’re doing Roth conversions.

The market has dropped, let’s just say you had an account with a hundred thousand dollars and the market fell 20%, that’s $20,000 your account’s down. It says, okay, this is long-term money. We all say we’re long-term investors, we think their accounts are going to grow — okay, perfect. I love that.

Well, if it’s going to grow back to a hundred thousand and above that, do I want that in a taxable account, whereas it grows I’m going to pay taxes on it when I take that money out? Or do I want to convert it to a tax-free account like a Roth IRA. And now, anything that money grows to in the future is a hundred percent tax-free.

Now, there’s pros and cons to a Roth conversion as well. I talked about those on another podcast. But that’s one of the first questions I want to ask, is do I want to do anything with this money before my planned retirement date?

Because pretty much if I’m 45 years young and I moved into the feds and I want to put all of my other retirement accounts into my TSP account, that TSP account is pretty much locked up and I can’t do anything with it until I either separate from service or I’m 59 and a half.

Tammy, would you say that’s kind of an accurate statement?

Tammy Flanagan:        Yeah, but I think some people might get a little bit confused because they say, “Well, wait a second, Micah, we can take a loan, we can borrow from our account and put that in an IRA.”

But that’s really not going to be the thing you want to do because that loan is just borrowing from yourself and the TSP is going to make you pay that back to yourself. And then the money you’re putting into that IRA account isn’t really the same context, that it would be as if you were taking it out of a rollover, 401(k) plan or a transfer account that you have somewhere in an IRA.

Micah Shilanski: Well, let’s walk through that example. Let’s say you put all your money-

Tammy Flanagan:        So, yeah, you have to be careful there, but you’re right.

Micah Shilanski: Oh, sorry. I think there’s a little bit of lag. I apologize, Tammy. Go ahead.

Tammy Flanagan:        We’re in Alaska time delay. We’re like talking to the moon, “Are you out there?”

So, anyway I was just going to add to that, saying there is one caveat that we have a lot of federal employees who come into federal service a little later in life. So, they might be at the stage where they’re past age 59 and a half, and they can do these types of things from within the TSP.

Because after age 59 and a half, you are allowed to make now, under the new rules, multiple in-service withdrawals, which means you can actually take a distribution from your TSP account even though you’re still continuing to be employed and you’re still continuing to contribute to the account.

Micah Shilanski: Those are great points. And so, a lot of this is age-dependent. So, again, this goes back from a theoretical thing; how does it theoretically work to a realistic thing? How does it work in my plan?

And then Tammy, let’s take the example you had said before, some federal employees come to us and say, “Hey, I’m going to put all my money inside of the TSP, but then I’m going to take a loan,” which we probably don’t agree with anyways, but let’s just go down this because we do hear it: “I’m going to take a loan out. And then with that loan money, I’m going to fund my IRAs.”

Well, there’s a limit though, because for an IRA contribution, which would be money coming out of your pocket, your limited, 6, $7,000 years, the max depending on your age, of how much money you can put in.

So, I just moved over my a hundred thousand dollars 401(k) into my TSP account. Now, I take out a loan for 50 grand to fund my IRA, but I can only put $6,000 or $7,000 in that account. Well, then what am I going to do with the other $43,000? So, we really got to be thinking about there’s a lot of complicated rules with this and what makes the most sense.

Other thing that I’m going to talk about, and we talked about this Tammy in our webinar, is the pro rata distribution requirements. Is sometimes I have clients that are within the retirement window, which I’m going to call about five years, within five years of retirement — we want to start putting money on the sidelines and making it available for them, for distributions. Well, is that best in the TSP? Is that best in IRA?

Well, that’s an age question. When do I need to access the money? What’s the proportionate distribution rules? So, this gets a little complicated.

So, sometimes I like to say, “Hey, we need to keep this money separated and not put that money into the TSP because once it’s in the TSP and commingled, now, it’s a little bit more restricted how I’m going to be able to access that. And because I’m close to retirement, I need some more flexibility with my distributions.”

So, sometimes, even though the TSP is a great tool and it has that little bit of a limiting factor, I want to separate those out and have two different accounts.

Tammy Flanagan:        I think it gives you more flexibility, and I was thinking when you were talking about clients that have different accounts, different IRAs, different 401k plans. And I know people like that as well, they’ll have five different accounts and they’ll say “I’m very well-diversified.” I’m like, “Well, what’s in the accounts?”

Because I think people sometimes get confused when we say you should be diversified in that we’re talking about types of investments, not how many different accounts you have. Like you might have a lot of different bank accounts in different banks, but the money’s still in the bank.

So, I think it’s important to understand that you can have one account or two accounts. You can have the TSP and an IRA and both of those can be diversified within the CFGS and I Fund within the TSP or within the whole family of mutual funds, the whole universe of mutual funds that are out there in your IRA account.

So, diversification is, we’re talking about stocks and bonds or different types of equities or different types of bond investments that you can have. So, I think that’s really where a lot of education has to happen because I see a lot of confusion about not really understanding what it means to be diversified.

And sometimes, this links into the idea of moving money into the TSP, which does kind of limit your diversification to those five core, big, large funds. So, sometimes, you might want to be a little bit more broadly diversified, maybe.

Micah Shilanski: I really like that. You know what? Everybody’s different. What are your retirement goals and how do we need to set those up? I mean, that’s really what this comes down to, is there’s so many great theories, but they need you to apply them.

Tammy, jumping back on the TSP side real fast, another couple of things that we want to talk about is people talk about, well, I want to put more money in the TSP. And so, they hear that they can write a check and put more funds in the TSP. And that’s actually not the way that that works.

So, the TSP, being an employer-sponsored retirement account, the only way you can contribute to the TSP is via payroll deduction. You got to take money out. If you didn’t max fund your TSP at the end of the year, you can’t write a check and make a catch-up contribution, that’s not how it works. Catch-up contributions, payroll, all contributions at TSP must come from your paycheck.

So, you got to make sure you have those withholding set up. I really like them even throughout the year. That way, you get the entire match for your TSP account. That’s also another really important thing.

If I fully funded my TSP between January and June and I put in all … let’s just say, I was going to max out 20 grand inside of there for a nice round numbers. Well, great. I put that 20,000 in there, but then from July to December, I’m not getting my 5% match by my agency because I’m not making a contribution.

So, I really like to have those contributions spread throughout your 26 pay periods, make it consistent. It works out really, really well that way.

And then the other part is just because we have extra money left over in our checking and savings, we cannot just write a check and put that into our TSP. Again, it has to come from that payroll deduction.

Tammy Flanagan:        Right. It’s really important for people to understand that because even though you’re saving for retirement and all of that money generally goes into some type of retirement account where you get some tax advantages whether it’s the pre-tax money going into a traditional type of retirement investment or whether it’s after tax money, going into a Roth IRA or the Roth TSP, that’s all money for that specific purpose of retirement.

But I think we forget that we also have other investments or we can have other investments that we’re setting aside money for that retirement home down payment or for our kids’ college fund or all the different things that we also need to be saving and preparing for.

And sometimes, I don’t think that money all should be wrapped up in the TSP because I hear a lot of people say, “Well, my TSP is going to be to pay for my kids’ college and their wedding, and to put a new roof on the house.” So, they’re using it more of like a savings account rather than a retirement planning tool.

Micah Shilanski: Yeah, and you got to be really careful of that because that’s a lot of ways that we can get in trouble.

So, Tammy, changing gears just a little bit, let’s talk about a unique member benefit for our uniform service individual. So, if you’re in the active duty military and you either have or had a TSP account, there’s a way that you can actually come up with a third type of money in your TSP. So, you can have your pre-tax money, which is amazing, which is how much money you’re putting in normal, traditional TSP.

You could have Roth money, which is how much money you’ve elected to pay taxes on it now. But then it’s in a Roth TSP bucket, which again, we really like. There’s some additional restrictions around that. We got to be a little careful, so understand how the Roth TSP works.

But then the third bucket is going to be for our active-duty military, if you’ve ever made a contribution to your TSP while deployed in an active war zone, so in a tax-free environment, then that money goes into an after-tax section in your TSP. And you don’t see it unless you have it, but if you have it, it’ll be on your statements.

Really important, it’s one of the things Tammy, I always pull when I’m getting an active-duty member or a uniform service member with a TSP comes to my office, I’m always looking at that annual statement. Do they have any after tax money? Because if you do, whenever we go to pull money out of TSP, this has very special tax treatment, it’s tax-free, but it’s not in your Roth bucket. It’s a separate segment of money.

So, I want to make sure I’m watching for that if I ever do a transfer into an IRA because it can get lost in that transfer mix. And now, you can end up paying taxes on that money twice. So, again, if you have that special allocation of money, be aware of that and know you’ve got to pay a little special attention to it.

Tammy Flanagan:        Plus, Micah, that money that you earned or that you put into your TSP account while serving in a combat zone, it was tax-free going in. It stays tax-free, but it’s going to grow right. It’s going to earn interest and growth and unlike a Roth, that growth is going to be taxable. So, I haven’t noticed this on people’s statements, but is that kept in a separate area? Do they show that taxable growth on those combat distributions?

Micah Shilanski: Such a good question. That actually is showed just in your traditional balance. So, it doesn’t segregate that at all. The only thing that’s outlined different is your contribution. So, on the statements-

Tammy Flanagan:        And that never changes.

Micah Shilanski: Exactly. You can put more money into it, but it’s never going to grow, it’s never going to shrink.

Tammy Flanagan:        Even though it is growing, the growth is not shown on that line of the statement.

Micah Shilanski: Yes, because it’s just from a … thank you for that clarification. This is just a tax question: when I pull the money out, what category is the money? Is it a hundred percent taxable, which is your traditional money? Is it potentially tax free, which is your Roth money? Or is it after tax money, which is this tax-free combat pay you received while you’re making your contribution?

So, is it one of those three categories? And that’s a tax question on distributions on withdrawals. So, that’s the reason you’re not going to see any growth associated with that.

Tammy Flanagan:        That’s good, you’ve kind of clarified it for me too because I had never really sat down to think about that. But now, that I have, makes perfect sense.

Micah Shilanski: Perfect, well, Tammy, as you know, this podcast is all about action items. So, let’s talk about some action items that our listeners can do and implement right now.

One of the things that I’ll go ahead and kick it off and say your first action item — well, of course, to give us five stars. Come on, if you made it this far, you got to love us. Share the podcast with some friends. We really, really appreciate that. Get this message out.

But the first real action item on this one is going to be Know Your Plan, not a plan, not the plan, not a conceptual neighbor’s plan, the water cooler plan, but what do you want to do now? This is really, really important because whenever a client comes to me with something that says, “Hey, I’m thinking about doing X.” The first thing I bring them back to is their goals.

What is their plan? Hey, you want to retire at 57 with a hundred thousand dollars year in in income? Outstanding, does this help us get to your goal or not? So, I’m not trying to say no or yes to all ideas, but I’m focused on the goal.

Where I see people not be on track for retirement, is they’re so scattered, they don’t know what their goal is. And so, every decision they got to make financially, they’re not sure where it should go.

So, all of these decisions about your TSP, do I put money into the TSP? Do I pull money out of the TSP? Well, first before we know that, where are we going? What do we want that TSP to do?

Tammy Flanagan:        And I was thinking of a good analogy when you were talking: it’s like when I go on a trip versus when my husband takes a trip. So, when I go on a trip, I am easily distracted. I like to pull off and stop at this rest stop or, oh, I saw a nice, cute little town that might have something interesting to look at.

So, I get distracted, I get off course, and it takes me forever to get to my destination. Where my husband, he stays on course. He goes straight down the road and he gets there as quickly as he can, and he arrives on time.

And it’s kind of like your retirement plan, when you get off course, it means you’ve got to correct. You have to make allowances for those corrections. And it might mean it takes you longer to get to retirement because now, you have to save more, you have to work a little bit longer.

I guess there’s nothing wrong with that because I enjoy my little diversions, but you have to build those into your plan.

Micah Shilanski: That’s a great point. Alright-

Tammy Flanagan:        But my to-do list, my action item is to make sure that you set up your new TSP account because they have gone through a major transformation, it’s going to require a new login.

When you go on to visit your TSP account, there’s a lot there to see, there’s a lot of changes to become aware of. And the sooner you get used to that, the more you’re going to adapt to it, because I’ve heard a lot of complaints.

Some of them are legitimate complaints. There were some glitches in setting up this new, huge conversion of the TSP. Some of them were just people who don’t like change — who really likes a lot of change?

So, I think once you get in there and you start getting adjusted to the new system, I think those changes will hopefully, start to make sense.

Micah Shilanski: I love it. That’s such a great point. And that kind of leads into the third and last action item right here, which is understand what you’re doing before you do it.

And we’ve seen this time and time again where someone has gotten bad advice either from another financial advisor, unfortunately, from someone who says they’re benefits expert from the federal government. We’ve seen this multiple time where OPM or HRs have given the wrong advice and how it’s very negative that’s there.

So, really, the onus is on you to make sure you understand these repercussions before you do them. Ask questions, get training. If it doesn’t sit right, keep asking more questions and press, go find an expert in this, so you can get the advice that you need to make sure you’re not making any mistakes.

And until next time happy planning.

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