Which Retirement Plan Is Best For You
In many cases you simply wont have a choice of retirement plans. Youll have to take what your employer offers, whether thats a 401, a 403, a defined-benefit plan or something else. But you can supplement that with an IRA, which is available to anyone regardless of their employer.
Heres a comparison of the pros and cons of a few retirement plans.
You Need To Take Rmds From The Roth Tsp
One of the major advantages of a Roth IRA is that you never need to take anrequired minimum distribution. The government uses RMDs to make sure you eventually pay taxes on the traditional contributions that you got tax deductions on during your working years.
Since you already paid tax on money within a Roth account, the government does not require RMDs from a Roth IRA. .
However, the current TSP rules require RMDs from the Roth TSP. If you want to avoid the RMDs, you can rollover your Roth TSP balance to a Roth IRA after separating from federal service.
You Dont Have A Clear Strategy For Your Tsp
Often, when federal employees enroll in the TSP, its done without thinking about how the TSP will complement other retirement accounts and retirement income sources, such as Social Security benefits, pensions, IRAs, 401s, 403s, Deferred Comp, non-qualified accounts, bank accounts, etc.
Enrolling in the TSP is great, but dont just enroll in it and settle for the default settings. Meet with a retirement financial planner and qualified tax professional to see what forward-looking tax planning and advanced retirement income planning options might be in your best interests.
Rather than just enrolling in the TSP and turning off your brain, find qualified professionals even if it’s just for one meeting, because you dont know what you dont know.
They can help you evaluate your TSP choices within the context of a holistic, tailored retirement plan. How much will you need to have saved for a comfortable retirement? Will your TSP fund choices, and your contribution percentage, get you to that goal?
Look for independent financial professionals who are knowledgeable in TSPs, and work together to build a retirement financial plan thats based upon your specific needs, wants, and goals.
Kim Franke-Folstad contributed to this article.
Also Check: Continuing Care Retirement Community Nj
Option #2 Leave Money In Tsp
In retirement, you have the option of leaving your money in the TSP which really isnt any different than it is when you are working. The big differences are that you cant contribute anymore and you cant take out any loans on your account. Other than that, your investment options are exactly the same and you can still make changes to your account balance just like when you were working.
One of the biggest benefits to leaving money in your TSP in retirement is having access to your funds prior to age 591/2. If you retire in the year that you turn 55 or later, then you have immediate access to your TSP without penalty. If you are a special category employee and you retire in the year that you turn age 50 or later, then you have immediate access to your TSP, as well.
The C Fund The Common Stock Index Investment Fund
Pros: Historically has returned around 7-9% over the long term, depending on who you ask, and how you calculate.
Cons: Can have decade long periods without gains falls with crashes and bubbles
This fund follows the S& P 500 index, which is an index of the 500 largest and most profitable U.S. corporations.
Even though there are 500 companies in the index, the top 10 companies, which consist of big names like Apple, Google, Microsoft, and Amazon, make up 20% of the value of the fund.
Recommended Reading: Royal Palm Retirement Center Port Charlotte Florida
Do You Get A Match On Your Contributions
Another great part of the Thrift Savings Plan is the match you get from your agency or service on your contributions if youre part of the Federal Employees Retirement System or Blended Retirement System .
If you are part of FERS or BRS, your agency or service starts contributing 1% of your pay. Depending on which system youre in, you could start receiving that contribution immediately or after 60 days in service. You get that 1% even without contributing anything on your own.
On top of that 1% contribution, youre eligible for a match up to an additional 4% after two years of employment. The government offers a dollar-for-dollar match on the first 3% you contribute. Then they match the next 2% at 50 cents on the dollar. So, if you contribute 5% of your pay, you can get the full match. Thats an additional 5%!
Getting a match on your contributions is free money! Thats why its important to invest at least enough to get the match. Most TSP participants are on top of it: Around 80% of those contributing to a TSP account are putting in at least 5% of their pay to get the full match.6
Keep in mind that the match your agency or service puts in your account will be taxed in retirement, even if you make Roth contributions.
What Is The Difference Between Traditional Tsp Contributions And Roth Tsp Contributions
When the Thrift Savings Plan was created, there was only one tax treatment option available for your contributions: traditional. But in 2012, the Thrift Savings Plan started accepting Roth contributions as well.4 Now when you contribute to your TSP account, you can choose between either a traditional tax treatment or a Roth option.
Whats the difference? Were glad you asked!
Don’t Miss: Benefits Of Retiring At 62
What Is The Ideal Allocation Of The Tsp
Allocating your TSP, according to your co-worker, we see this application more than we care to.
We call this the water cooler theory. Meaning, you get to visit with your co-worker about the TSP, and one party is or has done better than the other, so the other party changes their allocations to match.
One person does not know which options to choose and asks a co-worker they trust for advice.
When a Federal Employee listens to a co-worker for investment advice, they need to first think about a few crucial aspects of what the TSP is, how it works, and what it is designed to do.
Dave Ramsey Tsp Investment Advice
Im a huge fan of Daves book Total Money Makeover. His baby steps for getting out of debt are legendary!
He also has TSP investment recommendations on how to invest in the thrift savings plan. His caveats are typical of Daves approach to money.
In typical Dave fashion, he suggests that you first pay off all your debt besides your primary residence before you begin long term investing and have an emergency fund of three to six months of expenses as well.
He has two sets of recommendations. One slightly more aggressive than the other.
More conservative: 80% in C, 10% in S, 10% in I.
Less conservative: 60% in C, 20% in S, 20% in I.
Here is the link to his recommendation.
Next: Money Guru Paul Merrimans TSP Allocation Reccomendation:
You May Like: What Are The Different Types Of Retirement Plans
How Are Tsp Funds Invested
TSPs offer participants two options for investing their funds. Lifestyle funds are a mix of 10 funds that invest in stocks, bonds, and government securities. This option is designed to make investing easy for those who have a long time before retirement or are not experienced with managing funds.
“Lifecycle funds are a diversified combination of the funds that you can invest in,” says Shawn Plummer, CEO of The Annuity Expert. “The funds are allocated automatically based on your age and the date you plan to retire. If you are younger, the investments would be more aggressive, but the allocations would gradually be more conservative as you near your retirement age.”
If you are more comfortable making independent decisions as to how your money is invested, TSPs offer individual funds. You have five funds to allocate your retirement dollars into, each of which have specific approaches, returns, and purposes.
“These funds are split up by asset class, and you can choose which funds you would like to invest in and what percentage you would like to allocate to each,” says Brandon Steele, CFP, ChFC, and co-founder and CEO of Mainsail Financial Group. “If you go this route, there are no automated allocation changes as you near retirement. If you did want to adjust as you get closer, this would need to be done manually.”
Individual fund options include:
Work With An Investment Pro
Youve worked too hard to end up broke in your retirement years. Thats why its so important to partner with an investment professional or financial advisor to take advantage of the investing options you have. A financial advisor can help you make decisions about your Thrift Savings Plan account so you feel confident about your retirement.
Need help finding an investment pro? Try SmartVestor, a free way to find a qualified investment pro who can create a wealth-building plan based on your specific situation and goals for the future!
About the author
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
Also Check: What Is The Average Retirement Savings
The Federal Thrift Savings Plan
The Thrift Savings Plan is a lot like a 401 plan on steroids, and its available to government workers and members of the uniformed services.
Participants choose from five low-cost investment options, including a bond fund, an S& P 500 index fund, a small-cap fund and an international stock fund plus a fund that invests in specially issued Treasury securities.
On top of that, federal workers can choose from among several lifecycle funds with different target retirement dates that invest in those core funds, making investment decisions relatively easy.
Pros: Federal employees can get a 5 percent employer contribution to the TSP, which includes a 1 percent non-elective contribution, a dollar-for-dollar match for the next 3 percent and a 50 percent match for the next 2 percent contributed.
The formula is a bit complicated, but if you put in 5 percent, they put in 5 percent, says Littell. Another positive is that the investment fees are shockingly low four hundredths of a percentage point. That translates to 40 cents annually per $1,000 invested much lower than youll find elsewhere.
Cons: As with all defined contribution plans, theres always uncertainty about what your account balance might be when you retire.
What it means to you: You still need to decide how much to contribute, how to invest, and whether to make the Roth election. However, it makes a lot of sense to contribute at least 5 percent of your salary to get the maximum employer contribution.
The Best Tsp Withdrawal Options And Strategies
Planning for retirement is a big deal. It is often compared to climbing a mountain and getting to the top is a big accomplishment.
But like all hikers and adventurers know, the journey isnt over once you get to the top of the mountain. You still got to make it down.
Taking money out of your TSP is part of coming down the mountain and there are a number of things that you need to know to do so safely.
The first thing for you to know is that there are only a number of ways that you can withdraw money from your TSP.
Note: These options are significantly better than they used to be since the TSP Modernization Act.
Here are the 3 main ways to withdraw money from your TSP:
You are allowed to use any combination of these 3 withdrawal options and there is no limit to how many withdrawals you can make in retirement. However, the TSP does limit you to one withdrawal every 30 days.
But lets say that you set up a monthly installment payment to pay you $1,000 per month, you would still be able to take single withdrawals while also receiving installment payments as long as the single withdrawals are at least 30 days apart.
You are able to change the amount, frequency, and withdrawal source at any point for installment payments.
When making a single withdrawal the minimum withdrawal amount is $1,000. There is also a $25 monthly minimum for installment payments.
Should I Take a TSP Annuity?
Should I Roll My TSP Into an IRA?
TSP Withdrawal Strategies
You May Like: Retirement Golf Communities In Scottsdale Az
Option #3 Purchase An Annuity With Your Tsp
A third option for your TSP account is to use the proceeds to buy a life annuity. On the plus side, you dont have to make that decision at retirement, but on the minus side, locking yourself into an annuity without being reasonably certain of your cash needs is a bad idea.
If you are married or have someone else dependent upon your retirement income, you also need to make a decision about survivor benefits.. What happens to your annuity income if you pass away?
If your money is in the TSP and you havent chosen to purchase an annuity, the account will pass to your beneficiary. However, if you have annuitized your TSP, what happens to the annuity depends upon the payment option that you take for the annuity.
The Ultimate Tsp Tax Savings
When deployed in a combat zone or other select duty stations, service members receive tax-exempt pay. This sets you up for the possibility of triple tax savings. In particular, for Roth account holders, TSP contributions with tax-exempt pay offer the following savings:
- No tax on TSP contributions
- No tax on TSP account earnings
- No tax on TSP withdrawals
Combine this with the fact that troops can contribute significantly higher annual amounts to their TSPs from a combat zone, and this strategy provides incredible tax saving potential.
Also Check: T Rowe Price Retirement 2015 Adv
What Is The Best Tsp To Invest In 2021 Or Now
For some financial analysts, investing money in gold is a smart move. It gives you safety though there are wide changes in the global event, like a war or even pandemic. Gold increases the value and holds its value even when most stock markets are down. Investing will also help economic stability, it is a good part of diversifying your money and portfolio.
Choosing an investment is hard work. Make sure that you choose the one that suits your needs. When do you ask what is the best TSP to invest in 2021? See your financial advisors help you decide one. Yet, for a long-term investment, gold is also a good idea because it gains value over time.
Roth Or Traditional Contributions
Traditional TSP contributions are pre-tax, grow tax-deferred, and are taxable when withdrawn. Roth TSP contributions dont reduce your taxable income, but withdrawals are totally tax-free in retirement.
The Roth is better if you think youll be in a higher tax bracket in retirement, which often happens when you arent receiving a tax-free housing allowance and other benefits .
If youre a junior officer, especially if you have a family, you are probably in the lowest tax bracket that youll see throughout your life, said Quintiliani.
A Roth TSP also diversifies the tax situation of your retirement income. Pensions and traditional TSPs, 401s, and IRAs are taxable when paid out. The Roth TSP gives you a bucket of tax-free money to tap in retirement.
One thing I hear from people who are retired is that they wish they would have had an opportunity to put more money in a tax-free account because now everything theyre getting is taxable, said Ostrom.
Don’t Miss: Buying A Retirement Home In Another State
How Much You Will Spend
To invest money on TSP, you better invest 15% of your retirement income. And to get the most benefit, make sure you contribute that 15% consistently. When investing, also make sure that you leave some in your budget for other financial goals like paying bills or for college.
After you contribute enough, you can ask your financial advisors to help you open a Roth IRA. By having this Roth IRA, you can get an advantage of the tax-free growth, and have more choices on funds, compared to the TSP offers.
Best Spot For Your Tsp When You Leave Government
For many working feds, their Thrift Savings Plan accounts could provide 30 to 50 cents of every dollar they have to spend in retirement. Thats a chunk.
Most feds are smart enough to invest enough in their in-house 401k plan to get the government match. Many long time feds on modest salaries have become TSP millionaires. The vast majority did it by investing in the TSPs stock-indexed C, S and I funds.
But when they retire, or leave government for another job, most transfer their TSP to an outside IRA. Good idea/bad idea? The TSP is considered one of the best, most heavily monitored and lowest-cost funds in the business. But many people believe it lacks flexibility and doesnt offer as many investment choices as most outside plans.
When they leave government, either for other jobs or to retire, more than half of all TSP investors take some, most take all, of their money with them. They invest it elsewhere for a variety of reasons even though, in some cases, they pay more, sometimes lots more, for the privilege. How come? Todays comments are from a recently retired TSP investor who made it to the millionaires club who said he couldnt wait to leave the federal 401k plan. And heres why:
Also Check: State Street Target Retirement 2040
Option #2 Begin Withdrawing From Your Tsp
The biggest limitation on TSP withdrawals has been lifted. Previously, you were only able to make one partial withdrawal post-separate in your lifetime. This often made keeping funds in the TSP challenging, as cash needs often change in retirement. Now, however, you can make multiple post-separation withdrawals of differing lump sums, and you can choose whether the withdrawals come from your traditional balance or your Roth balance. It is worth nothing, thought, that you can only make one partial withdrawal every 30 calendar days.
Periodic payments are still an option, and you can continue to choose a specific dollar amount or an amount based on the balance in your account and your life expectancy. With the recent plan changes, you can stop, start or change the amount of these payments at any time, but the old rule prohibiting switching to life-expectancy based payments after choosing dollar amount payments remains in place.