What To Do With Your TSP When Leaving the Service

Feb 06 2014

When you leave the Service, what happens to your TSP? You have four options to consider.

  • Leave your money in the TSP.
  • Transfer your money to an IRA.
  • Transfer your money to your future employer retirement plan (e.g. 401k).
  • Withdraw your money and put it in your pocket.

Before we get into the discussion about the four options, please be aware that the TSP has many rules. You’ll need to check the rules to understand the technicalities involved with your chosen plan of action. See the fine print of the technicalities here.

Be aware that in TSP lingo, “withdrawal” means putting money in your pocket. “Transfer” is moving money from one retirement account to another electronically and you never touch the money. A “rollover” is when you take delivery of the money before you roll it into another retirement account.

Withdrawals and rollovers have major tax issues. Transfers don’t (unless you are moving a traditional account to a Roth account).

piggy_bank_savingsFirst, let’s start with the last option because it’s the easiest to cover. Don’t do this.

You have one working lifetime to invest for your future. If you don’t get it right the first and only time you have, you have no options at the point of retirement to find retirement assets to live on. You can find sources of money for other, non-retirement, issues that pop-up during your working life. Use other sources of money before you rob your retirement accounts.

By robbing your retirement accounts you risk working a lot longer than desired or lowering your standard of living to correspond to your assets when you reach retirement age. Not good choices when you are in your 60s. The tax penalty for withdrawing retirement account money early, should you decide to use your future retirement income, is just the gravy on the potatoes.

Now to the meat of the issue. What to consider with the three remaining real options.

Pick your “base camp”

You’ve been with one employer up to now. The TSP is your only employer retirement plan. You are moving on and you can’t contribute to your TSP anymore. Your next employer will have their own version of a TSP, their 401k plan, and you will contribute to that plan. Now you have a TSP and a 401k plan.

When you change jobs one day (you will), you’ll have a TSP, a past employer 401k, and a new current employer 401k. See how your retirement accounts are growing? Plus you may have your personal Individual Retirement Account (IRA) on the side. Don’t let this growth in the number of accounts happen. Keep the number of your retirement accounts to a minimum.

Too many retirement accounts cause problems. One is “out of sight, out of mind.” Two is that you start to juggle too many balls in the air. Three is cost. Four is managing an investment allocation. Five is the administrative hassle working with so many firms, separate management processes and paperwork. Six is what if one of your old employers goes out of business; hint, it’s a pain. Seven…you get the message.

Pick an account to be your retirement base camp. After you leave each job, transfer the retirement funds to your base retirement account. Now all employer retirement funds are consolidated in the fewest possible accounts. The following are not in priority order.

  • Base camp option #1. Keep your TSP and used it as your base camp. You can’t make regular payroll contributions to your TSP after you leave employment but you can transfer future retirement assets back into the TSP.
  • Option #2. Use your IRA. You’ll need a traditional IRA for traditional TSP/401k assets and a Roth IRA for future Roth TSP/401k assets.
  • Option #3. Your current employer’s 401k. Just keep transferring your old TSP/401k accounts into your new employer’s plan.

Before you pick one of these options, consider the factors that follow. These factors will help determine the best option for you.

Costs

This is important since the more the plan cost you, the more the costs whittle away at your returns. On an annual basis, some of the costs may not seem like much. But over decades, the final amount of your funds could be substantially less if you pay just a bit more each year.

Impact of Fund Annual Expenses

Type of Fund

Annual Expense %

Final Account Value*

Difference

TSP C fund

0.027

$296,443

-

TSP S fund

0.027

$296,443

-

Very Low Cost “C fund” equivalent

0.17

$287,983

-$8460

Very Low Cost “S fund” equivalent

0.24

$283,942

-$12,501

Standard “C fund” equivalent

1.25

$232,293

-$64,150

Standard “S fund” equivalent

1.65

$214,894

-$81,549

*30 years of work, $200 a month contribution, with an 8% return before expenses are factored for the final value.

NOTE: Larger contributions over time create larger differences in accumulated account values. Well over six figures difference lost to higher costs.

The very low cost funds noted in the table are available in an IRA if you have the right kind of IRA that allows the selection of very low cost funds. With an IRA, also consider any management fees your IRA company charges on top of your funds’ annual expenses. A do-it-yourselfer IRA with an on-line account can have very low cost funds and no company management fees.

Your 401k funds are what they are; you’re stuck with what the boss provides. You want to review your 401k fund choices before deciding to transfer retirement assets into your new employer’s 401k account. Employer 401k accounts can have very low cost funds or they could have the expensive funds noted—or a combination.

Familiarity and Simplicity

Your TSP has six fund choices and you are familiar with them. You don’t have to do anything to keep your TSP.

Your 401k is limited to the choices your employer allows in the 401k. You’ll have to start your 401k at your new employer but you would do that anyways. Research the choices well.

Your IRA could have one choice or all possible choices depending on your IRA provider. Your IRA may work as is or may require changing providers if you want something better or cheaper. The more choices you have available in the IRA, the more research or time may be required.

Investment choices

Your TSP has six fund choices. Your 401ks are limited to what the employer offers employees. An IRA can be limited based on your IRA provider or have unlimited choices if that’s what you want. What level of choice do you want? Does your employer provide 401k assistance?

Access

How easy is it for you to manage your funds? For instance; monitor the account, make changes, paperwork required, or contact a service rep.

Investment Strategy

One of the most important investment strategies for working people investing to build wealth for retirement is called “averaging down” or AKA “dollar-cost-averaging.” This strategy is based on the practice of contributing to your retirement account in regular, disciplined amounts every pay period. It is the best way to accumulate shares in your funds which leads to wealth over time.

If your base retirement account isn’t receiving regular contributions, you are not taking advantage of this critical wealth building strategy. Without averaging down, you need to rely on a proper allocation to do the heavy lifting in your wealth building strategy.

investors_guideMOAA members can download or order the MOAA Investors’ Manual for more details on these wealth building strategies. See http://www.moaa.org/InvestorsManual/ for info.

No responses yet

G.I. Bill Comparison Tool: Compare Schools Before You Enroll

Feb 04 2014

Mouse handToday, the government launched a long-awaited G.I. Bill Comparison Tool.  The user-friendly online tool is designed to assist service members and veterans make better choices about their schooling options before they apply for G.I. Bill benefits.

In response to a growing chorus of complaints from student veterans, policy makers and veteran organization stakeholders, President Obama charged the VA with developing a comparison tool in April 2012.

Executive Order 13607 directed Federal agencies to implement “principles of excellence” for institutions that provide educational opportunities for veterans and families, and to encourage them to make informed decisions before applying.

The VA also recently released a G.I. Bill Feedback System to give student veterans, service members and their families a channel to provide feedback if they experience problems with educational institutions receiving funding provided under the Post-9/11 GI Bill and the Dept. of Defense’s military tuition assistance programs.

2 responses so far

Improved Servicemember Mortgage Protection

Jan 30 2014

housekeysImproved Mortgage Protection rules for active military servicemembers were recently written by the Consumer Financial Protection Bureau (CFPB) aimed to alleviate financial challenges unique to military families.

The Consumer Financial Protection Bureau’s mission is “to make markets for consumer financial products and services work for Americans…” through education of consumers; enforcement of laws; and perhaps most importantly, “watching out for American consumers in the market for consumer financial products and services.”

Key mortgage protection changes include:

  • Restrictions on lenders working to foreclose and assist servicemembers simultaneously.
  • Single applications for all options available vice having to repeatedly re-apply for different options.
  • Rules to improve customer service quality and efficiency

Separately, Fannie Mae and Freddie Mac, government-sponsored mortgage backers, have also improved mortgage assistance for military Servicemembers, to include: Short Sale debt relief (similar to VA’s loan “compromise sale” assistance); and military Permanent Change of Station (PCS) moves as a “qualifying hardship” – allowing military families to obtain mortgage assistance before they fall behind on payments.

For more information, check out CFPB’s blog titled Servicemembers, you have new mortgage protections in 2014.

MOAA LIFE and PREMIUM members also have access to NOLO’s Real Estate Guide – answering questions on everything from how to find a real estate agent, to finding loans and mortgages and listing your home for sale!

No responses yet

Say Hello to Your New Health Care Partner: The IRS

Jan 15 2014

doctor_calculatorI was recently at a two day session on tax preparation for the upcoming year(s). I know…I know, who would willfully do that? One quarter of the instruction covered the tax implications of the Affordable Care Act (ACA) also known as ObamaCare. That is how big a presence the IRS will have in enforcing this law.

I know a lot of the readers of this blog have TRICARE or other government coverage and don’t need to worry too much about ObamaCare. But, a lot of us have relatives (like kids) who will be affected. A lot of this is still being determined, but here is what I’ve learned so far. In no particular order…

  • There are new forms to fill out for some of us. Those with earned income in excess of $200,000 (Married or Single) will have to complete a new Form 8959.  Those with total income (AGI) in excess of $250,000 ($200,000 Single or HoH) and investment income will need to complete a Form 8960. This applies now, as in the 2013 tax year.
  • Families who purchase insurance on the exchanges that want to qualify for subsidies will have to calculate a new number…family income.  This will include the income of all individuals listed on the Form 1040 (i.e. dependents).  So if Junior has a summer job, his income will be counted towards family income.  If things line up just right (or wrong, depending on your point of view) Junior’s income could cause a family unit to lose subsidies.
  • When applying for insurance on the exchange you can receive a subsidy (if qualified) for insurance.  This subsidy is paid directly to the insurance company.  To receive the subsidy, the taxpayer will need to estimate income for the upcoming year.  If the income is estimated too low, then when taxes are filed the taxpayer will need to pay back the “undeserved” subsidy.
  • You are required to have qualifying coverage.  If not, the taxpayer will be subject to a fine (I mean tax, according to the Supreme Court).  Everyone has been talking about the $95 per adult penalty (it is also $47.50 for children, max of two).  BUT, the law also states the fine is 1% of Family Income whichever is GREATER.
  • There are requirements to prove that you have insurance.  For those with insurance provided completely by their employer, insurance coverage will be documented on the W-2.  For those that pay for insurance themselves there will be yet another form to get prior to filing your taxes.  The form should be called a 1099-HTC.  Finally, for those who receive coverage from the government (TRICARE, MEDICARE) I think the IRS will go into your electronic records to verify coverage.
  • The IRS has no authority to levy or assess to enforce the penalty.  They can only withhold penalties from refunds.  So, in other words, if you never have a refund due, you’ll never have to pay the penalty.  However, the penalty will incur interest and they may eventually get you with your final tax return.

Those are some of the big things.  I’ll keep an eye on this for you and provide updates here as I learn them.

For more information on health care for veterans, servicemembers and their families, including the latest on TRICARE premiums, long term care, and pharmacy options, visit www.moaa.org/health.

No responses yet

Give Pause – Rebalance or Reallocate Your Asset Allocation Portfolio

Jan 14 2014

U.S. stock markets begin 2014 near record highs, with 2013 recording the best annual return for the S&P 500 index since 1997. With the current stock bull market approaching five years old, financial pundits are still predicting further gains for this year, albeit much more modest, and probably not without some noticeable market swings up and down.

eggbasket_WEBLong-term investors following the investor’s ethos ‘don’t put all your eggs in one basket’, needn’t concern themselves with market swings, or even year-to-year performance. These investors follow a widely popular strategy of portfolio asset allocation and systematic rebalancing. If you are not already following this strategy, a few simple changes will provide you some protection from market volatility over the long-term.

Asset Allocation

Simply, asset allocation is based on the notion that stocks and bonds perform differently. Portfolio asset allocation aims to balance the investor’s potential risks and rewards by allocating a percentage of investment funds into various asset classes; in broadest terms, either stocks, bonds, or cash. The right amount of ‘eggs’ in each basket is the investor’s target asset allocation mix based on the investor’s goals, time horizon and risk tolerance.

And because stocks and bonds perform differently given market and economic conditions, over time, an investor’s current asset allocation will drift from their target allocation – requiring the investor to ‘rebalance’ or buy and sell to redistribute assets back to the target mix.

scales_WEBAsset Rebalancing

Systematic rebalancing prevents the distortion of an investor’s desired risk-reward balance of the target portfolio allocation that occurs when one asset class significantly out-performs other asset classes and subsequently dominates an investor’s portfolio.

Think of the 2000 dot-com tech bubble collapse or the 2008 financial crisis – these particular events had significant stock market increases prior to the collapse – these run-ups skewed many investors’ risk-reward balance, and the investor, in effect, had ‘too many eggs in one basket’ at the time of market collapse.

Given the higher returns run of the stock markets this past year – rebalancing may be your best course of action. While it may seem counter intuitive to scale back a hot performing asset class, by rebalancing, an investor is in fact, selling high, and using the proceeds to maintain the desired risk-reward exposure based on risk tolerance and time horizon to goals.

However, investors with a shorter time horizon should give pause before rebalancing.

Your Risk Tolerance

The Federal Reserve has indicated that it will likely raise interest rates starting in 2015 creating headwinds in the bond market; in addition pundits have argued that low interest rates have artificially propped up the stock market. As such, the potential for increased interest rates looms ominously over the financial markets. This uncertainty combined with continuous rhetoric and speculation creates so much confusion that it serves to fuel market swings in both stocks and bonds.

How much, how fast, and exactly when the Fed raises interest rates is still anyone’s best guess. To the long-term investor this is just ‘noise’ to simply ignore and stay on course with systematic rebalancing.

But, if this ‘noise’ keeps you awake at night, then it is likely that your tolerance to risk or time horizon has changed; in this case, don’t re-balance… Re-allocate.

As mentioned earlier, a portfolio asset allocation mix should be a reflection of the investor’s risk-reward balance based on an investor’s goals, risk tolerance and time horizon. If your risk tolerance and time horizon has changed, since establishing your current asset allocation mix – invariably unavoidable as an investor ages through life and work paths – portfolio re-allocating, and not portfolio re-balancing may be more appropriate.

If you would like to know more, call and talk to one of MOAA’s on-staff Financial Planners, or check out The MOAA Investors’ Manual.

No responses yet

« Prev - Next »