Your Retirement Savings: Questions about Your ‘Cash Bucket’

Your Retirement Savings:
Questions about Your ‘Cash Bucket’

A portion of your retirement savings needs to be in a ‘Cash Bucket’.  A well-funded Cash Bucket is an important part of your retirement plan.  And it serves as the foundation for your other ‘Buckets of Money’.

The idea of a Cash Bucket is new to many Federal Employees – here are some of the most common questions people have about ‘where’ to keep their Cash Bucket.

Where Should My Cash Bucket Be?

When you’re thinking about where your Cash Bucket should be, we need to remember that money in your Cash Bucket must meet three requirements:

• You can access the money at any time you want
• You don’t have to sell an investment to get access to it
• You can get access to it without incurring taxes or penalties
  

So where you keep your Cash Bucket needs to allow you to meet these requirements.

The most common examples that would meet these needs would be checking accounts, savings accounts, money market accounts, etc.

But people often ask if they can keep their ‘Cash Bucket’ in other places…

“Can My Cash Bucket Be in My IRA?”

To answer this question, we need to return to the three requirements of retirement savings in your Cash Bucket:

• You can access the money at any time you want
• You don’t have to sell an investment to get access to it
• You can get access to it without incurring taxes or penalties

Would having your Cash Bucket in your IRA meet these requirements?

While you can access the money in your IRA essentially at any time you want – in most cases, you can’t get access to it without incurring taxes and/or penalties.

If you have retirement savings in a Traditional IRA, you’ll need to pay taxes on that money when you take it out.  And if you don’t meet certain age requirements – you may also have penalties to pay on top of those taxes.

If you have retirement savings in a Roth IRA, you may be able to access the money without taxes if you meet certain requirements – but taking money out of a Roth IRA to meet Cash Bucket needs is really a waste of the power of a Roth IRA.

However some people have put so much of their retirement savings into IRAs that it’s just not realistic for them to have all of their Cash Bucket money in non-retirement accounts.  

In these situations, it’s still important that the Cash Bucket money not be directly invested.  But by having your Cash Bucket money in an IRA – you miss out on the full power of the Cash Bucket and that in turn can diminish the power of your Buckets of Money strategy.  

Again, ideally – your Cash Bucket money is money you can access without having to sell an investment to get to it, and that you don’t have to pay taxes and penalties to get to.  And in most cases, this is not your IRA. 

“What About the G Fund?
– Can My Cash Bucket Be in My TSP?”

The TSP is a phenomenal benefit, and it is a fantastic tool to help you accumulate retirement savings.  Most of the TSP funds are mirrors of a specific stock or bond index – but the G Fund is unique.

The G Fund is a unique investment choice only available inside of the TSP.  And when it comes to rates of return, the G Fund rates are consistently higher than any similar investment option like money market or savings accounts.

But is the G Fund a good place to have your Cash Bucket Money?

Again in order to answer this question, let’s return to the three requirements of retirement savings in your Cash Bucket:

• You can access the money at any time you want
• You don’t have to sell an investment to get access to it
• You can get access to it without incurring taxes or penalties

Could you have money in the G fund at the TSP and would it meet these requirements?

First, you need to know that any withdrawal from your TSP is taken in proportion to how your entire account is invested.

TSP Withdrawals Are Proportional

Any time you withdraw money from your TSP, it comes out in proportion to the way your entire TSP account is invested.  

So if you have 20% of your TSP money in the G fund and 80% in the C fund -then 20% of your withdrawal comes from the G fund and 80% of your withdrawal comes from the C fund. 

For simple numbers, if your TSP account has 20% in the G fund and 80% in the C fund and you take a $1,000 withdrawal…$200 comes from the G fund and $800 comes from the C fund.  

You can’t choose to sell just from the G fund.  Unless, of course, your entire TSP was only in the G fund.  But this usually isn’t a good idea for most people.

So unless you have all of your TSP retirement savings in the G Fund, you can’t take a withdrawal without selling an investment to get access to it.  

And of course, with money in the Traditional TSP – you’ll have to pay taxes on it when it comes out – so it doesn’t meet that Cash Bucket requirement either.

If you have money in the Roth TSP, you can’t ‘cherry’ pick that money out either.  All TSP withdrawals are a microcosm of your entire TSP account.  So if you have 10% of your TSP retirement savings in the Roth TSP and 90% in the Traditional TSP – then any withdrawal from your TSP would be 10% from your Roth portion and 90% from your Traditional TSP portion.

But there is an even bigger problem with keeping Cash Bucket money at the TSP…

How Would You Get Access to Cash Bucket Money in Your TSP?

Sounds simple right.  But really… how would you get it out?

Say you retired, and you a couple months of living expenses in a savings account.  

You were hoping your pension check would arrive by 3 months – but we’re in month 4 and there’s still no telling when it will start.  

You’ve drawn down your cash savings – and now you need more money to make your regular monthly bills.  

You have money in your TSP in the G fund.  How do you get it?

So How Could You Take Money Out of Your TSP?

You could take a one-time partial withdrawal.  That is, if you’ve never taken one before – and you didn’t do an age-based in-service withdrawal.  (You only get one chance to do a ‘partial’).  

And if you have already started monthly payments from TSP – that was considered part of a ‘Full Withdrawal’ – so you can no longer do a ‘Partial’ at that point.  

So if you were already set up on monthly withdrawals from the TSP – could you just increase that amount?  

You can fill out Form TSP-73 Change in Monthly Payment Amount between October 1 and December 15, and your change will be effective the *FOLLOWING* calendar year.  

Yes – the following YEAR.  

On TSP’s website, it says that you can use the TSP-73 to…

“Change the monthly dollar amount you are receiving. You may do this once a year.Your request will become effective the following January.”

So if you need to make a change to your TSP monthly payments and it happens to be October, November, or December – waiting for the change to take effect in January may not be such a big deal for you.

But what if you need to make a change in March?  You can’t.

If you try to download the TSP-73 form any other time during the year, you’ll find this message…

Use this form at any time from October 1 through  December 15 to change the amount of your TSP monthly  payments.  The form is accessible for printing only  during this change period.

Click here to read TSP’s page about changing Monthly Withdrawals for yourself.  

The TSP is Good – It’s Just Not a Good Place for Your Cash Bucket Money

Looking back, retirement savings in your Cash Bucket must meet these three requirements:

• You can access the money at any time you want
• You don’t have to sell an investment to get access to it
• You can get access to it without incurring taxes or penalties

But money in your TSP does not meet any of them except in very strange circumstances that probably apply to less than 1% of Federal Employees.

If you have your Cash Bucket money in the TSP…

• You *can’t* access the money any time you want.  You have some options, but they are very limited as we’ve discussed.
• You *have* to sell an investment in order to get money out because all withdrawals are proportionate to your entire account.  So unless you have 100% in the G Fund – you’ll be selling out of other funds to get money.
• You *can’t* get access to it without incurring taxes and or penalties.  Money from your Traditional TSP is taxed at withdrawal.  But even if you had money in your Roth TSP – any TSP withdrawal will come proportionally from your Traditional and Roth TSP monies.  So unless you had 100% of your TSP money in the TSP Roth – you’ll be paying taxes (and possibly penalties) on the money that comes out of your TSP.

The Real Strength of the TSP

The TSP has many wonderful things going for it.  But the real strength of the TSP is in helping you accumulate retirement savings.  

But because of it’s very limited withdrawal options, the TSP is not a good place to keep your Cash Bucket money.