Understanding How A TSP Beneficiary Participation Account Works

A surviving spouse is the only survivor that can leave inherited funds in the Thrift Savings Plan (TSP). It is very common for a federal employee to tell their spouse to leave the funds in TSP should the spouse survive the federal employee spouse.

Let me share an example of how a hypothetical conversation between a couple may go.

Meet Christopher and Angelica

Angelica dear, in the event I predecease you, just leave my retirement money in the Thrift Savings Plan (TSP). It is low cost and you can leave it invested as it is now, in the L income fund. Make sure to name our children, Harry and Danielle, as your beneficiaries so they will eventually inherit these funds when we both have passed.

Christopher’s TSP

Christopher was taught by his wise grandfather as a young lad, that to be financially dependent, he needed to start saving and investing early on.

As soon as he graduated from college and secured employment with the government, he diligently contributed the maximum allowed into his TSP account each year. Christopher allocated his TSP funds within his comfort level and did not panic when the stock market took a downturn.

At retirement, Christopher had accumulated $1.2 million in this TSP account. During retirement, he withdrew less than 4% to supplement their income need.

Christopher’s TSP continued to grow and had reached $1.4 million when he passed at age 86.

Follow link to read more important information about TSP Beneficiary Participation Accounts.
 https://www.fedsmith.com/2019/04/03/understanding-tsp-beneficiary-participation-account-works/

The Rally in 2019 – A Tale of Two Assets By: Kezia Samuel, CAIA Investment Committee Member Senior VP, Chief Portfolio Strategist

So far, 2019 has proven to be a very different year in markets compared to 2018. Prospects of a U.S./China trade deal and a “patient” Federal Reserve (Fed) have led to a sharp rally, reversing the losses experienced in 2018.

Global stock and bond markets are painting two different forecasts of the global economy: Stocks have soared from December lows, reflecting positive investor sentiment, while bond yields have fallen. Bonds have also posted positive returns, reflecting worsening economic conditions.

The economy continues to grow in 2019, albeit at a slower pace, and the probability of a recession remains low. These factors should support a healthy stock market over the intermediate term.

In the near term, investors should remain cautious when market sentiments go from being far too pessimistic in December 2018 to far too optimistic in 2019 – a long way for the pendulum to swing in such a short period. Click here to read more.

Securities offered through GF Investment Services, LLC. Member FINRA/SIPC.  Investment advisory services offered through Global Financial Private Capital, LLC.

The Shutdown is Over — For Now. Here’s a Financial Plan To Get Workers Back on Track

The government agencies that were shut down are back in business, but the financial crisis it left behind for many federal workers and contractors isn’t over.

Yes, the 800,000 federal employees who were affected will get their back pay. But that doesn’t mean they’ll be made whole. Some had to borrow money, incurring interest charges. Others stopped paying bills, which could lead to late fees. Folks who were on an aggressive mission to pay down debt had to pull back.

Without pay, some federal workers felt they had no choice but to tap their Thrift Savings Plan (TSP), the government’s version of a 401(k). But if you take money out of your TSP before you reach age 59 1/2, you might have to pay an early-withdrawal penalty of 10 percent in addition to regular income tax.

Then there are the contract workers who won’t receive back pay. With many of them already living paycheck to paycheck, these workers will find it hard to recover. If they were contributing to a retirement plan through their employer, their contributions probably stopped with the shutdown. And they aren’t likely to make catch-up contributions.

Most troubling is that there’s still a threat of another shutdown in a few weeks. Congress passed only a stopgap funding measure that lasts through Feb. 15 for the affected agencies. Click here for full article.

This material is for informational purposes only.  It is not intended to provide tax, accounting or legal advice or to serve as the basis for any financial decisions. Individuals are advised to consult with their own accountant and/or attorney regarding all tax, accounting and legal matters.

Now is the Time to Seize the Day

By Carol Schmidlin

Last January, the feature articles in our newsletter were “Celebrating the 20th Anniversary of the Roth IRA”, and the highlights of the “Trump Tax Plan”. Our webinar for that month was “Roth TSP, Peaks and Pitfalls”.  Well now a year has gone by and we are nine months away, September 2019, from TSP implementing the TSP Modernization Act, which was passed into law November 2017.  As I was looking back, I realized that now is the time to seize the day for a great number of you that are trying to make positive changes for your future by instilling proactive tax planning into your retirement strategies.  During this month’s webinar we will focus on Roth TSP Peaks, with none or very little pitfalls.

So, you may be thinking, what does the title of this article have to do with getting excited about the TSP Modernization Act. Well, it so happened that as I was getting more and more excited about the opportunities that await you, a song from Newsies The Musical, “Seize the Day” began playing non-stop in my head. I had the opportunity to watch the Newsies musical many times between November and December, as my son, Evan played Crutchie, and after watching the incredible cast of performers give it their all night after night of dancing, singing and hooking the audience into this story, this musical got ingrained in me. As I was thinking about the tax planning opportunities and outcome potentials that are available to you, “Now is the Time to Seize the Day” could not escape me.

Contributing to a Roth account means paying the tax on the seed (contributions), in today’s known tax rate environment, with the goal of having growth. Thus the longer you delay starting these withdrawals the larger harvest (growth) you will have to draw tax-free income from.

Prior to the implementation of the TSP Modernization Act, TSP participants having both traditional TSP and Roth TSP balances can not specify where to take a withdrawal from, because currently it comes out from both balances on a pro rata basis. For example, if 80% of your account is in your traditional balance and 20% is in Roth, any withdrawal you take will be 80% traditional and 20% Roth. This would certainly create a problem for those federal employees retiring before 59 ½, that need to take distributions from their TSP.  Many federal employees are eligible to retire before attaining age 59 ½ and can access TSP without incurring a 10% early withdrawal penalty. Specifically, for those that separate service in the year they turn 55 or after, or for Special Category Employees (SCE) that separate service in the year they turn age 50 or after, can take withdrawals from traditional TSP and avoid a 10% early withdrawal penalty. The catch is that there is still a 10% penalty for the Roth portion because, in order for distributions from the Roth account to be tax-free they need to be considered qualified: (1) The Roth TSP account must be established for at least five years and (2) you must be 59 ½ or older. This would mean that prior to the TSP Modernization Act being implemented, a withdrawal from TSP would come out pro rata from the traditional balance and the Roth balance. The result would be no 10% penalty on the traditional portion, but of course fully taxable and the Roth portion would suffer a 10% early withdrawal penalty. And since it is not a qualified withdrawal (5 years and age 59 ½) a portion of the Roth balance will be taxed.

Under the new rules that are scheduled to go into effect September 2019, you’ll have the option to take a withdrawal from just your Roth balance, just your Traditional balance, or both. These options will be available for all types of withdrawals. Although there are ways to work around the current withdrawal limitations, they can be very confusing. The new rules will make the TSP Roth a great strategy for pro-active tax planning. This may be more important than ever due to the state of our federal budget.

According to www.usdebtclock.org the National Debt is getting ready to top 21.9 trillion. In addition, our nation’s unfunded liabilities are currently 116 Trillion, with Medicare leading the way, followed by Social Security.

In the 2018 Long-Term Budget Outlook, the Congressional Budget Office (CBO) states “If current laws remain generally unchanged, CBO projects federal budget deficits and debt would increase over the next 30 years, reaching the highest level of debt relative to Gross Domestic Product (GDP) in the nation’s history so far.”

The chart below indicates we are currently at 78% of GDP, the highest level since shortly after World War II. If current laws generally remain unchanged, CBO projects the federal debt would approach 100% by the end of the decade and 152% by 2048.

The CBO 2018 Long-Term Outlook explains that in order to put the budget on a viable path, lawmakers would have to make major changes to tax policies, spending policy’s or both. Our nation cannot continue at this pace without change. Many people believe, along with me, that the low tax environment that we are currently in will soon be ending.

So why am I promoting, now is the time to seize the day? The “Tax Cuts & Job Act” signed into law on December 2017, reduced tax brackets and is allowing many citizens to pay less in taxes. This law is scheduled to sunset in 2025, which would allow seven years to do tax planning for your future through Roth TSP contributions, Roth IRA contributions, and Roth conversions. For 2019 federal employees can fund Roth TSP up to $19,000 a year, plus catchup if age 50 or over, of an additional $6,000. And now have a more compelling reason to do this based on the changes in TSP withdrawal flexibility that will go into effect in September giving you the ability to take withdrawals where it best suits you in the future. For those of you that have attended one of my retirement classes, you have heard me talk about a Road Runner episode. Wyle E Coyote is of course planning a way to kill the Road Runner, and in this particular episode he is sitting in a shed building a bomb on a train track. When he looks out the window and finds there is a freight train approaching, he makes a quick decision to pull down the shade, thus ignoring what is approaching. We as Americans quite possibly have a freight train approaching on us in the form of taxes. We have choices. We can simply ignore the train and hope that it will go away, or we can do things now that will safeguard our future against the threat of rising tax rates.

Carol’s son Evan performing as Crutchie in Disney’s Newsies the Musical at The Grand Theatre, a Road Company

production, 2018

This material is for informational purposes only.  It is not intended to provide tax, accounting or legal advice or to serve as the basis for any financial decisions. Individuals are advised to consult with their own accountant and/or attorney regarding all tax, accounting and legal matters.


Advanced Training from America’s IRA Experts at Ed Slott and Company, LLC

We are pleased to announce that Carol Schmidlin, President of FedSavvy Educational Solutions has completed Advanced Training from America’s IRA Experts at Ed Slott and Company, LLC. in Coronado, Calif. October 25-27, 2018. The workshop, which was attended by members of Ed Slott’s Master Elite IRA Advisor GroupSM, provided in-depth technical training on advanced retirement account planning strategies, estate planning techniques and new tax laws, as well as a pro-active look at 2018 year-end retirement planning deadlines and opportunities.

“There are several year-end to-dos that financial professionals should guide their clients through including taking required minimum distributions by the December 31st  deadline and considering a qualified charitable distribution, which is now more desirable than ever under the new tax laws. In fact, several year-end financial moves have been impacted by tax reform, so I can’t stress enough the need for financial professionals to educate themselves on the latest strategies,” said Ed Slott, CPA, founder of Ed Slott and Company and a nationally recognized IRA expert who was named “The Best Source for IRA Advice” by The Wall Street Journal. “I commend Carol, a member of our advanced training program, for staying current with her retirement planning education. With this ongoing training, Carol can better instruct her clients on year-end moves to help reduce their tax liability and avoid costly penalties.”

Highlights from this event included: IRA planning strategies that should be used now before tax season; Medicare income planning and IRA strategies that can cut Medicare costs for high income earners; 2018 retirement plan contributions limits and estate tax rates; key retirement, tax and estate planning provisions affected by the Tax Cuts and Jobs Act including the repeal of Roth recharacterizations, the confirmation of back-door Roth contributions and the repeal of many itemized deductions; a look at Roth conversions when a trust is the IRA beneficiary; strategic retirement account moves to consider during market volatility; a close look at spousal rights in retirement plans under the Employee Retirement Income Security Act of 1974 (ERISA) and training on advanced spousal rights; how excess IRA contributions occur, how to fix them and the various correction options available to financial professionals; inherited IRAs, strategies for protecting the funds for beneficiaries and a look at creditor protection cases; dealing with ineligible Roth IRA contributions; a look at advanced IRA cases and rulings and more.

Training was provided by Ed Slott and Company’s team of retirement experts, including Ed Slott, CPA; Beverly DeVeny; Sarah Brenner, JD; Jeremy Rodriguez, JD and Jim Glass, JD. Ed Slott and Company and many of the advisors in Ed Slott’s Master Elite IRA Advisor GroupSM are the go-to resources for attorneys, CPAs and other financial advisors because of their in-depth knowledge and expertise in all areas of retirement account and income planning.

Members of Ed Slott’s Master Elite IRA Advisor GroupSM have year-round access to Ed Slott and Company’s team of retirement experts for consultation on advanced planning topics. The membership also includes step-by-step processes, including the Complete IRA Care Solution™ 30-module planning guide. Members also have access to proprietary worksheets and pamphlets, including 19 Things to do for 2019: Holiday Client Conversations and Ed Slott’s 2018 Retirement Decisions Guide, that they can use when working with clients.

“While my clients are busy preparing for the holiday season, I consider it my personal responsibility to help them plan for important end-of-year financial moves,” said Carol Schmidlin. “Proactive planning like this provides my clients confidence that they’ll end the year right and start the New Year strong.”

“Tax reform has many wondering whether or not their retirement plan is up-to-date and as the end of the year approaches, it is especially important to make sure you’re taking advantage of new tax laws and strategies,” said Slott. “Working with one of our members helps ensure that you’re in the hands of a well-trained, qualified professional that prioritizes both their ongoing education and your needs.”

ABOUT ED SLOTT AND COMPANY, LLC: Ed Slott and Company, LLC is the nation’s leading provider of technical IRA education for financial advisors, CPAs and attorneys. Ed Slott’s Elite IRA Advisor GroupSM is comprised of nearly 400 of the nation’s top financial professionals who are dedicated to the mastery of advanced retirement account and tax planning laws and strategies. Slott is a nationally recognized IRA distribution expert, best-selling author and professional speaker. He has hosted several public television specials, including “Retire Safe & Secure! with Ed Slott.” Visit irahelp.com for more information.