As you’re planning for your retirement, you want to use whatever resources you have available to help you achieve your goals. That includes the TSP.
The TSP has made a lot of changes, but did they fix everything?
Here are eight things that the TSP still did not fix.
If some of these things outlined below are significant for you and your retirement plans, then you may want to make other arrangements.
Eight Things That The TSP Still Did Not Fix.
1) Unlimited Reallocations and Fund Transfers
The first thing that would be nice if you could do in the TSP is to have unlimited reallocations and fund transfers.
Here are the rules straight off the TSP website.
- Each calendar month, you can use your first two reallocations or fund transfers to redistribute money in your account among any of the TSP funds.
- After the first two of either transaction type, you can only move money into the G fund.
- This means you can only really make two transactions a month and the only way to get a third transaction a month would be to move it to the G fund.
Now does this come up a lot? Possibly not.
But it would be nice to have control of your money and be able to allocate it however you want and as many times as you may need. I think so.
2) Limited Investment Options
The next problem is one we have always talked about with the TSP. Even with this new update, they still didn’t fix it even though they probably think they did.
So what is it? It’s limited investment options.
You may say, “Wait, with the new changes, we now have access to the mutual fund window. That window was set up to provide greater investment flexibility.”
Here are some of the details straight off of the TSP website.
- If your account meets eligibility criteria, (still not sure what that is) you can choose to access a selection of more than 5000 mutual funds.
Well, that sounds good.
- But there will be a $55 annual fee to use the window.
- There’s already a $95 annual maintenance fee.
- There’s a $28.75 per trade fee and other fees, and expenses specific to the chosen mutual funds will also be applied.
Your initial investment would have to be at least $10,000.
And here’s the fine print…you may not invest more than 25% of your total account in the mutual fund window.
That’s right. That is what limits your number of investment options.
If you have a $400,000 TSP balance, then you can only invest $100,000 of it through the mutual fund window.
You’re still limited in your investment options for the majority of your money, even after this fix.
3) The Ability to Choose Which Fund Your Distributions Come From
The next problem that still was not addressed is the fact that you still are not able to choose which fund your distributions come from.
If you set up a $1000 a month distribution from TSP, the money will come pro rata from the different funds.
There are situations and scenarios where you would not want it to come out pro rata.
One is the benefits of a buy and hold strategy: you buy the stock market fund like the C fund for instance, and you hold onto it.
- If the stock market goes down, it is unfortunate but it’s not the end of the world, because you haven’t sold it yet.
- The idea is that it will rebound and come back by the time you have to sell it.
- But if you’re taking distributions on a monthly basis, and the distributions are coming out proportionately from each of the funds, then you will be selling when the market goes down if you’re taking a monthly distribution from the TSP.
There again, does this problem show up every month? No.
But during the Covid crash of a couple of years ago, this rule of taking distributions out proportionally would have cost you some money.
Depending on what the distribution size was, it could have cost you a large amount of money.
This makes the TSP very cumbersome to manage distributions in retirement. Being forced to sell the stock market when it is down, can lower your overall returns.
Over the long haul, that can be costly.
- Now is any account perfect?
- Is any 401(k) out there perfect?
- Is there any IRA out there perfect?
Nothing out there is perfect but there are a handful of things that make the TSP not ideal when facing retirement.
You have eight things that make the TSP not ideal. Each of them on their own is not that big of a deal, but when you group them together, it can make the TSP burdensome.
If you’re 59 1/2 and over or if you’ve retired, you can move money out into an IRA and avoid these issues.
Now do IRA’s have some issues? I’m sure they do. You need to find what will work best for you.
Some view potential higher fees in an IRA as an issue.
I view proper planning and the ability to avoid these 8 problems worth the fees.
And keep in mind, that the new mutual fund window has extra fees associated with it.
- What features are you looking for?
- What help do you want?
It may be that the TSP is not the best place to manage your retirement. Let’s move on with the rest of the list.
4) How the Government Manages the G Fund
The next issue deals with how the government manages the G fund.
Here’s a quote from an article dated August 4, 2021, entitled Treasury Suspends Investments into TSP‘s G Fund and More.
The article states:
“The Treasury Secretary Janet Yellen informed Congress this week that her department would cease its investment into the three federal retirement programs as part of its extraordinary measures intended to delay running into the debt ceiling.”
It goes on to say that they would suspend investments into the civil service retirement and disability fund, the Postal Service retiree health benefits fund, and the TSP plans G fund which is made up of government securities, to avoid breaching the debt ceiling.
Yellon stressed that these measures were temporary.
Now it does say “by law, the G fund, will be made whole once the debt limit is increased or suspended, federal retirees and employees will be unaffected by these actions.”
The government has done this many times in the past. Now to their credit, they’ve always paid the money back. But most people that are investing in the G fund are doing so because they want to be conservative with the money.
- Do you really want your money that’s earmarked for being conservative to be going to fund government activities because they can’t manage the debt ceiling?
If this is a problem for you, you can move money out into an IRA and invest it however you want to with confidence knowing that the government is not going to be dipping into your account to fund its spending.
5) No Dedicated Advisor
Now another problem is you don’t have a dedicated advisor that you can work with to help in planning for your retirement.
Now on tsp.gov, where they’re going over the new features, they talk about personalized support for rolling over money to your TSP account.
But they still do not have any advice on:
- How you should invest.
- How you should plan for taxes.
- How are you should plan for the untimely death of your spouse.
None of that.
The TSP is set up for the do-it-yourselfer. For someone who is self advised.
If you don’t understand finances or you don’t understand investments, then the TSP is not tailored to you.
You may benefit from working with someone individually, that knows your needs and knows the goals that you want to accomplish. Someone who can help lead you down that path to accomplishing those goals.
6) You Cannot Make Immediate Trades
Now another shortcoming of the TSP, and the mutual fund window, in fact, is that you can’t make immediate trades.
When you put in a trade, you have to wait until 4 PM, after trading has ended, for your request to go through.
- If the stock market is crashing…
- and you want to get out…
- and it’s 10 o’clock in the morning…
You are out of luck.
Any trade you put in will not be carried out that day.
This is the same for mutual funds. Whether you’re in an IRA or the TSP, mutual funds have the same problem. If you use ETF funds, exchange-traded funds, they act like mutual funds, yet they give you the flexibility to sell them during the trading day.
You don’t have to wait till 4 PM.
The same theory works when you want to buy. If you put in a buy order, it doesn’t happen until 4 o’clock.
Is this a problem every day of the year? No.
But a couple of times a year could this be a big deal, it probably could.
7) Doing Roth Conversions Inside of the TSP
Another problem the TSP did not fix with this new update was giving you the ability to do Roth conversions inside of the TSP.
At Christy Capital, we talk a lot about tax planning and shifting money to Roth.
- Roth converting is when you choose to go ahead and pay the tax on a portion of your traditional IRA balance and shift it to Roth IRA.
- Once you do the shift, the money that’s in the Roth IRA can now grow tax-free.
If you think taxes are going to get worse in the future, this is a way to pre-plan and offset higher taxes.
The TSP does not give you that option.
If you realize that you have more traditional money than you need to have, and you want to have more Roth money than you have now, you’re limited in how you can fix that inside the TSP.
As you approach retirement, this can be a big issue. To me, this one item is a deal breaker.
Let’s assume the stock market continues to grow at the long-term average that it has done in the past.
Would you rather pay taxes on your current balance, or would you rather pay taxes on whatever your balance is going to be 10 years from now?
If you see the value in paying taxes on today’s potentially smaller balance as opposed to 10 years from now potentially larger balance, then you would want to do a Roth conversion. But you can’t do it in the TSP.
If this is important to you, you will need to roll your money out of the TSP and into an IRA. You can do this once you turn 59 1/2 years old if you are still working or you can do this once you’ve retired at any age. We frequently help clients do this.
We help them roll the money out of TSP and into an IRA. We help them pick out investments that are suitable for them. In an IRA, there are tons of potential investment options.
We can help you by getting a copy of your tax return and estimate where on the tax bracket you’ll end up this year. We will be able to show you how much room you have in the tax bracket, where you could Roth convert and stay in the tax bracket that you’re in.
Roth converting is a year-by-year process that doesn’t happen overnight. But over a five or six-year period, you can move a large amount of money to a tax-free account. This can make a big difference.
8) Qualified Charitable Distributions
Another problem that wasn’t fixed was your ability to execute a qualified charitable distribution from the TSP. It’s simply not allowed.
So what is a qualified charitable distribution?
This is where you can give money to a church or charity directly from your IRA without paying taxes on those funds.If you are charitably minded and you are giving to charity already, you may not be getting the tax deduction for it.
The standard deduction has increased over the years. In 2022, for a single filer, it is $12,950 and for married filing jointly, it’s $25,900.
You are still able to itemize your deductions if they add up to more than $25,900 for a married couple. If they are less than that, then you would just take the standard deduction.
For a lot of people, the standard deduction ends up being more than their itemized deductions. But then that means that your charitable giving is no longer tax deductible.
So would there be a way where you could take the standard deduction AND be able to write off your tithe or charitable contribution?
Well if you are 70 1/2 years old or over, you can do a qualified charitable distribution where you give money directly from the IRA to the church or charity. That amount would go directly to the church or charity and not be taxed.
There is a $100,000 a year limit on this.
What if you’re 70 1/2 and all of your money is in the TSP? Well, you would be out of luck. They don’t allow you to do this.
Is this a problem that will affect everyone? Probably not. But if you’re charitably minded, if you consistently donate money, this is something that you can take advantage of once you’re 70 1/2 if you plan well.
Most people who are self-advised, probably don’t know this rule and would not take advantage of it.
One of the goals we have a Christy Capital Management is to help our clients free up money so they can give it away to causes that are important to them.
This is a way to take advantage of how the tax code is written. The TSP doesn’t let you take advantage of it.
No Plan is Perfect
And just as a reminder, no plan is perfect. Every investment or strategy has advantages and drawbacks. But this is YOUR retirement.
If you find some of these things troubling and want to talk to someone about a different way to manage your money then please reach out to us here at Christy Capital Management.
For over a decade we’ve worked with federal employees and federal retirees planning for retirement.
If you want to hear what your other options could be and how they compare with what you have available at the TSP, click the Talk with an Advisor button above.
We would love to connect and see how we can help.