Helping to Understand the Thrift Savings Plan, the New Roth TSP, & the TSP in Retirement

Transcription

1 Helping to Understand the Thrift Savings Plan, the New Roth TSP, & the TSP in Retirement Michael Nakashima, CFP Certified Financial Planner with Transamerica Financial Advisors, Inc. Chartered Federal Employee Benefits Consultant (ChFEBC) Lauren Brown Financial Planner with Transamerica Financial Advisors, Inc.

2 Disclaimer Michael Nakashima is a financial planner and he works with a lot of federal employees and their spouses. The information contained in this presentation has been researched on the websites of the Office of Personnel Management ( the Thrift Savings Plan ( and through the other related sources. The Federal Government does not favor, endorse, or recommend any commercial company, supplier, product, Innovate Financial, Inc., or Michael Nakashima. Michael Nakashima is an Investment Advisor Representatives offering securities and investment advisory services through Transamerica Financial Advisors, Inc. (TFA) Member FINRA & SIPC and Registered Investment Advisor. Non-securities products or services are not offered through TFA. TFA and its representatives do not give tax or legal advice. This material is provided for informational purposes only and should not be construed as tax or legal advise. Clients and other interested parties must consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here. Transamerica Financial Advisors, inc. is not responsible for the validity, completeness, or accuracy of any information provided in this presentation. TFA and Innovate Financial, Inc. are not affiliated.

3 About the Speaker Mike Nakashima lives in Minneapolis with his wife, Kelly, and their three children: Adilyn (age 8), Emma (6) and Teddy (4). He is originally from Dubuque, IA and is a graduate of the University of Iowa. Mike has been in financial services since In 2006 he obtained his Chartered Federal Employee Benefits Consultant designation and opened his own company, Innovate Financial, Inc.. He is an Independent Financial Planner through Transamerica Financial Advisors, an Investment Advisory Representative (IAR), and a Chartered Federal Employee Benefits Consultant (ChFEBC). He has worked for TD Ameritrade, Jackson National Life, Transamerica Financial Advisors, J.A. Counter & Associates, and is owner of Innovate Financial, Inc. Michael Nakashima is a registered representative and investment advisor representative offering securities and investment advice through Transamerica Financial Advisors, Inc., a registered Broker/Dealer and investment advisor, Member FINRA. Contact Information Innovate Financial, Inc. Attn: Mike Nakashima 6701 Penn Ave. Ste 200 Richfield, MN Ph: (612) Toll Free: (866) Fax: (612) mnakashima@tfamail.com Website

4 Thrift Savings Plan 1. Overview of the C, S, I, F and G Funds 2. Diversification, Rebalancing and Dollar Cost Averaging 3. The Lifecycle Funds 4. The TSP Roth Option 5. The TSP After Retirement

5 Disclaimers for the TSP Section 1. In this TSP presentation there are slides with different investment allocations. We are not recommending that you copy any of the allocations on the following slides. 2. Diversification, Dollar Cost Averaging, and Rebalancing do not insure a profit or guarantee against loss. Investors should consider their financial ability to continue their purchases through periods of low price levels. This strategy may or may not be suitable for you and you should consult with a professional to establish the strategy that is best suited for your risk tolerance. 3. The information on the slides is provided as a service of Innovate Financial, Inc. We do our best to maintain accuracy. However, you should consult a financial professional and the Thrift Savings Plan to confirm the provided information is accurate to your situation. The TSP can be reached at or by phone at (877) The information on these slides is a compilation of information from the TSP website ( from calling the TSP, and from assisting multiple federal employees with their TSP s. Innovate Financial, Inc. is not in any way associated with the federal government. This information is provided to assist you with your retirement planning. You should consult the Thrift Savings Plan for the most accurate information.

6 TSP Funds 2015 Innovate Financial, Inc. G Fund (Government Securities) Fixed Rate of Return, Established Monthly, Backed by the US Government F Fund (Fixed-Income Index) Looks to replicate performance of Barclays Capital U.S. Aggregate Bond Index C Fund (Common Stock Index) Looks to replicate performance of S&P 500 Index I Fund (International Index) Looks to replicate performance of MSCI EAFE Index S Fund (Small-Cap Index) Looks to replicate performance of Dow Jones U.S. Completion Total Stock Market Index L Fund (Life-Cycle Funds) Model portfolios utilizing the G Fund and the 4 Index Funds Asset Manager: The Federal Retirement Thrift Investment Board currently contracts BlackRock Institutional Trust Company, N.A. (BlackRock) to manage the F, C, S, and I Fund assets. Source:

7 TSP Contributions Limits $18,000 (2015) Catch-Up Contribution $6000 (2015) Catch-Up available the year you turn 50 and after. If you are turning 50 in August you could start doing Catch-Up Contributions as early as January the same year. Source:

8 FERS: Matching Contributions FERS Contributes 0% 1% 2% 3% 4% 5% Government Contributes 1% 2% 3% 4% 4.5% 5% Source:

9 CSRS: No Matching Contributions CSRS/CSRS Offset Contributes $0 to $24,000 Government Contributes 0% Source:

10 TSP Options After Retirement

11 TSP Options after Retirement (Slide 1) 2015 Innovate Financial, Inc. At retirement you are allowed different options from the TSP. - You can do a Partial Withdrawal, a Full Withdrawal, take Monthly Distributions or if you are under 70 ½ you can do nothing. You can roll all, or a portion of, the TSP to an IRA Rollover - One Partial Withdrawal is allowed during your lifetime from the TSP. - If the IRA Rollover is done correctly it will be a tax free transfer of assets. - A Trustee to Trustee Transfer is recommended for the least amount of tax reporting. You can take monthly distributions. - Once started, you eliminate your option for a Partial Withdrawal. - You can change the monthly distribution amount once annually. You usually have to notify the TSP by early December. - You cannot turn off monthly income once started unless you do a Full Withdrawal to either yourself (taxable) or to an IRA (non-taxable if done correctly). Sources: and

12 TSP Options after Retirement (Slide 2) 2015 Innovate Financial, Inc. PLEASE SEE PREVIOUS SLIDE At 70 ½ years old Required Minimum Distributions (RMD s) are mandated by the IRS. You must start taking distributions if you are retired from the federal government. - If you are working for the federal government past age 70 ½ please consult the Thrift Savings Plan about your RMD rules. If you are working and age 59.5 years old: - You are allowed an In-Service Withdrawal and can move all or a portion of the TSP to an IRA Rollover. An In-Service Withdrawal will count as your One Time Partial Withdrawal. The year you turn 55 or older you can retire and take monthly distributions from the TSP without the 10% IRS Penalty. - You will still have to pay Federal, and potentially State, Ordinary Income Taxes on your distributions that are sent to you. - A 72(t) withdrawal allows you to avoid the 10% Early Distribution penalty if you retire prior to age 55. Check the IRS for rules. You can annuitize the TSP. By taking this option you will give up control of the asset and will be provided different options for guaranteed payments. This is usually an irrevocable decision. See for more information. Sources: and

13 Partial Withdrawal and Full Withdrawals Rules One Time Partial Withdrawal Rules: You are allowed one Partial Withdrawal during your lifetime. If you start taking monthly distributions you will forfeit your One Time Partial Withdrawal If you leave a small balance at the TSP you can always move your IRA money back to the TSP. You can have the one time partial withdrawal sent to a new IRA Custodian, to you, or to both you and the new custodian. If you send the money to a new IRA Custodian as a tax free transfer of assets it should qualify as a tax free exchange. Distributions sent to you will be taxable. Generally speaking, a direct Trustee to Trustee Transfer from your TSP to the new IRA will be the cleanest way to transfer the money. Full Withdrawal Rules A Full Withdrawal after seperation/retirement will result in the TSP closing your account. A Full Withdrawal is allowed at any time after retirement even if you are taking monthly distributions. A Full Withdrawal can give you money, transfer money to an IRA, and you could still keep some money in the monthly income bucket.

14 A Case Study for Diversification, Rebalancing and Dollar Cost Averaging

15 Case Study of a TSP Participant Carl, age 40 Moderate approach to risk. He can deal with volatility over the long term. Develops plan to Diversify, Rebalance and Dollar Cost Average Note: Dollar Cost Averaging and Rebalancing do not insure a profit or guarantee against loss. Investors should consider their financial ability to continue their purchases through periods of low price levels. This strategy may or may not be suitable for you and you should consult with a professional to establish the strategy that is best suited for your risk tolerance.

16 Diversification Carl meets with his financial planner and they discuss his TSP and other investments. They decide on a diversification model for his TSP. Diversification By choosing a US Large Cap Index (C), a Large Cap International Index (I), a Small Cap Index (S), a Bond Index (F), and the G Fund Carl is spreading his risk across multiple asset classes. C Fund: 20% I Fund: 10% S Fund: 20% F Fund: 20% G Fund: 30% Note: this may not be a good diversification model for you and is not a recommended portfolio.

17 Contribution Allocation & Interfund Transfers Interfund Transfers: by doing an Interfund Transfer in the TSP you are moving your account balance. Contribution Allocations: when you update your Contribution Allocation you are changing how your new money is invested. If you do an Interfund Transfer you are moving your account balance. When you change your Contribution Allocation you are telling your future, new money, how to be invested.

18 Rebalancing Every year you will find that some funds outperform the other. As a result your portfolio balances will drift from your initial allocations. To keep your portfolios properly diversified you should rebalance your portfolio back to your initial allocations monthly, quarterly, semi-annually or annually. You should also review your diversification model annually to make sure it is appropriate for your risk tolerance and age.

19 Interfund Transfer & Contribution Allocation Assumption: at the beginning of the quarter he did an Interfund Transfer to 8% G, 7% F, 40% C, 23% S and 22% I to match his Contribution Allocation. You can see the percentages in his Distribution of Account fluctuated from his Contribution Allocation because of market performance. Which funds are performing better?

20 Rebalancing Example* 2015 Innovate Financial, Inc. STEP #1 January 1 Update the Interfund Transfer & Contribution Allocation Percentages G Fund: 20% F Fund: 20% C Fund: 20% S Fund: 20% I Fund: 20% April 1 REVIEW Review Distribution of Account G Fund: 21.9% F Fund: 22.4% C Fund: 19.6 % S Fund: 18.9% I Fund: 17.2% STEP #2 April 1 Update Interfund Transfer Percentages G Fund: 20% F Fund: 20% C Fund: 20% S Fund: 20% I Fund: 20% Carl Quarterly Rebalances on Jan 1, April 1, July 1, and Oct 1 by doing an Interfund Transfer and putting 20% into each of his five funds. He also sold a small amount of G and F (the bond funds) and bought a small amount of C, S, and I Funds (the stock funds) to get his TSP rebalanced. * This rebalancing example is for illustration purposes only and is not a recommended platform or investment strategy.

21 Dollar Cost Averaging may lower your price per Share Carl and his financial planner discuss his new contributions to the TSP. Every two weeks Carl contributes to the TSP. The strategy of buying shares at different prices over a period of time is known as Dollar Cost Averaging. Federal Employee owns 100 Shares of C with Average Price: $14.00 Federal Employee Purchases 100 Shares of C at $10.00/share Federal Employee will need the C Fund to be worth $12.01 to be in the money for those 200 Shares. Note: Dollar Cost Averaging does not insure a profit or guarantee against loss. Investors should consider their financial ability to continue their purchases through periods of low price levels.

22 Interfund Transfers For each calendar month, the first two Interfund Transfers can redistribute a participant s account among any or all of the TSP funds. After that, for the remainder of the month, participants may only move money into the Government Securities Investment (G) Fund (in which case the participant will increase the percentage of the account held in the G Fund by reducing the percentage held in one or more of the other TSP funds). Source:

23 The Lifecycle Funds Select Time Horizon L or later L or later L through 2034 L through 2024 L Income Today / Near Future If you hold the L 2020 fund in the year 2020 it will convert to the L Income Fund in year 2021.

24 L July 2009 July 2009 G Fund: 33.40% F Fund: 7.6% Source:

25 L July 2020 July/ % Fixed Income 20% Stock Portfolio July 2020 F Fund: 6% G Fund: 74% Source:

26 The Roth TSP More Tax Flexibility in the TSP The TSP is now offering all active Federal employees and members of the uniformed services the option to designate some or all of their contributions as Roth contributions. The TSP Roth feature will give participants flexibility in the tax treatment of their contributions now and in the future. Earnings grow tax-deferred. Contributions are made with after-tax money. Qualified distributions are tax-free upon retirement when an account has been open for at least five-years and/or certain requirements have been met. Non-qualified distributions of earning are taxed as ordinary income and prior to age 59 ½, a 10% federal penalty tax may apply to the taxable amount.

27 How does Roth TSP compare to Traditional TSP? Roth contributions are taken out of your paycheck after your income is taxed. When you withdraw funds from your Roth balance, you will receive your Roth contributions tax free since you have already paid taxes on the contributions. You also won t pay taxes on any earnings, as long as you re at least age 59½ (or disabled) and your withdrawal is made at least 5 years after the beginning of the year in which you made your first Roth contribution. Traditional (pre-tax) contributions, which lower your current taxable income, give you a tax break today. They grow in your account tax-deferred, but when you withdraw your money, you pay taxes on both the contributions and their earnings.

28 Electing Roth contributions is not an all-ornothing decision. You can contribute to both your Roth and traditional balances. The Roth gives you the opportunity to diversify the tax treatment of the money in your account.

29 Can Roth benefit you? Everyone s situation is different. Whether you would be better off making traditional or Roth contributions depends on your income tax rate now and in the future. For example, you might benefit from making Roth TSP contributions if: You are in a low tax bracket now, but think your tax rate may be higher in retirement. With a Roth, your contributions are taxed at your current lower rate, and you avoid paying taxes at the expected higher rate in the future. Earnings grow tax-deferred. Contributions are made with after-tax money. Qualified distributions are tax-free upon retirement when an account has been open for at least five-years and/or certain requirements have been met. Non-qualified distributions of earning are taxed as ordinary income and prior to age 59, a 10% federal penalty tax may apply to the taxable amount. Eligibility to participate depends on adjustable gross income amounts.

30 Tax rate 2015 Innovate Financial, Inc. 100 Where are income tax rates headed? U.S. federal income tax rates, (%) This chart reflects the maximum federal income tax rate at each year-end. Source: Internal Revenue Service, 2010.

31 How does Roth TSP work? Money already in your account when you begin making Roth contributions will remain part of your traditional balance. You will not be able to convert it to a Roth. The combined total of your Roth and tax-deferred traditional contributions in 2014 cannot exceed the elective deferral limit of $17,500, or the catch-up contribution limit of $5,500. Agency contributions will always be part of your traditional (non-roth) balance. Any contribution allocation or interfund transfer will apply to the investment of both your Roth and traditional contributions or balances. You will be able to transfer Roth 401(k), Roth 403(b), and Roth 457(b) (but not Roth IRA) money into the Roth balance in your TSP account. Pre-tax transfers will continue to be placed in your traditional balance.

32 How does Roth TSP work? You will be able to take loans, in-service withdrawals, and partial withdrawals from your account as before. They will come out of your account on a pro rata basis with a proportional amount from your traditional and Roth balances. When you withdraw your account, you will be able to separately transfer any portion of your Roth and traditional balances to IRAs or other eligible employer plans.

33 Roth TSP is similar to a Roth 401(k), not a Roth IRA. There are no income limits for Roth TSP contributions.

34 How will you sign up? You will elect to make Roth contributions in the same way as you have always elected traditional contributions. using either the electronic system of your agency or service, or Form TSP-1, Election Form (TSP-U-1 for uniformed services). If you are eligible for catch-up contributions, you will use your agency or service electronic system or Form TSP-1-C (TSP-U-1-C for uniformed services). Check with your agency or service to find out whether your TSP elections should be made electronically or by using a TSP form.

35 Electing Roth TSP and TSP Contributions

36 You may want to consult a qualified tax or financial advisor to help you decide if Roth is for you. You should reassess your decision anytime your tax or income situation changes.

37 Questions and Answers About the Thrift Savings Plan

38 Resources 2015 Innovate Financial, Inc. Innovate Financial, Inc & Michael Nakashima Financial Updates, News, Calculators Life Insurance Calculators Financial Industry National Regulatory Authority (FINRA) Office of Personnel Management & FEGLI Thrift Savings Plan Federal Long Term Care Insurance Program Vision Plan Dental Plan Contact Innovate Financial, Inc. for additional information about our services: (612) This power point presentation offers links that operate outside Innovate Financial, Inc., is not responsible for the validity, completeness, or accuracy of any information provided on those sites.

39 Thank you for attending this training session today! For more information about Mike Nakashima please visit our website at Our website has this training manual available for printing, upcoming retirement and federal benefit web training events, and other retirement planning information. Adilyn & Emma s 1 st Day of Preschool Need financial planning assistance? Please contact us toll free at (866)