It’s that time of year again! Whether you like to get your taxes done quickly because you expect a refund or you cringe at the thought of all the paperwork, it’s important to know what you’re getting into. There are several changes hidden in your taxes this year, from a standard deduction boost to new contribution limits for retirement accounts and more. Here’s what you need to know to make sure you’re ready to file for 2022—and a few tips for maximizing your tax savings for the coming year.  

What’s New?

If you’ve been feeling the pinch of inflation, there’s at least a little bit of good news on the tax front. The IRS has adjusted both the standard deduction and the income tax brackets themselves to account for this year’s sky-high inflation. Theoretically, this should result in a slightly lower tax bill for this year, all things being equal. 

Taxes are complex, and many factors will affect your personal tax rate. Here are some of the biggest changes to look out for as you prepare to file this year:

  • Higher Standard Deduction: The standard deduction for 2023 is going up by roughly 7%, depending on your filing status. That means less of your income will be taxed than last year. It also means that you’ll be less likely to itemize deductions, which can save you time on your filing.
  • Shifting Tax Brackets: While the marginal rates are staying the same, the IRS has adjusted the income level needed to hit each bracket. This means that more of your money will be taxed at a lower rate, slightly decreasing your tax burden.
  • Gift Tax Exclusions: For tax year 2022, you could give up to $16,000 as a gift with no tax liability. For 2023, this goes up to $17,000.
  • Student Loan Interest Deduction: This deduction is phased out for higher-income earners, but in 2023, you’ll be able to earn more while still getting this benefit. 
  • HSA Contribution Limits: You’ll be able to contribute more tax-free income to your Health Savings Account in 2023 as well, though the catch-up contribution limit remains the same.    
  • LTC Insurance Deductions: You’ll also be able to deduct more for long-term care insurance premiums in 2023. Exact amounts vary by age and filing status.
  • Increased Retirement Contribution Limits: All types of qualified retirement accounts (401k, 403b, IRAs, etc.) will have higher contribution limits next year, as well as higher catch-up contribution limits. That means you can save more! 

Looking for a cheat sheet to help you stay on top of the most important numbers? Download our 2023 Tax Guide today!

Tips to Lower Your Tax Bill This Year

If you haven’t yet filed your 2022 taxes, there are still a couple things you can do to lower your tax bill for the year. 

First, remember to max out your IRA contributions. You have until April 18 to make 2022 contributions, so contribute the maximum if you haven’t already done so. If you don’t have an IRA, you could open one and still contribute for 2022—just don’t wait too long, as it may take time to process your request.

Second, be sure to review your deductible business expenses. If you have a business or side gig, much of the money you pay out to do that work is deductible—just make sure you have receipts. In particular, don’t forget to consult with your CPA or tax preparer about the home office deduction if you work from home. There’s also an enhanced business meal deduction for 2022.

Smart Moves to Make for Next Year

Though there may not be a whole lot you can do about this year’s tax bill, you can definitely plan ahead to make the most of the changes for 2023! 

For starters, review your W-4 and your withholdings. If you owe taxes this year, consider increasing your additional withholding to eliminate that unhappy surprise. On the other hand, if you’re expecting a big refund, you may want to recalculate your withholdings so more of that money ends up in your pocket throughout the year—why not invest it for yourself, instead of lending it to the government interest-free? 

Next, increase your contributions to your qualified retirement accounts ASAP. Don’t forget that the limits are higher in 2023, so everyone can contribute more next year. If you’re over 50, you now qualify for catch-up contributions to give yourself an even bigger boost.

Finally, think ahead about your medical expenses. If you don’t already have one, you may consider opening an FSA or an HSA. These tax-advantaged medical savings accounts can help you cover health expenses and save on your tax bill at the same time. If you have some big health needs coming up, consider planning ahead to cover them all in the same year, which could help you bundle your extra spending to hit eligibility for the unreimbursed medical expenses deduction

The Bottom Line

Taxes are a fact of life, but it pays to make sure you’re being efficient with your money. Now that you know the numbers for 2023, you can adjust your retirement savings and tax planning to take advantage of the new rules. Not sure where to start? Talk to an expert! Tax planning can get tricky as you near retirement, and we’re standing by to help you develop a full financial plan that takes all of these moving parts into account. Get in touch to get started today!

With the new year comes a few important changes to the TSP—and understanding them will help you maximize your savings. Here’s what you need to know.

New TSP Contribution Limits

Because the TSP is a tax-advantaged retirement account, there are limits to how much you can contribute each year—the government still wants you to pay some taxes, after all! The good news is that the amount you can contribute has increased for 2023:

  • Annual Elective Deferral: $22,500
  • Catch-up Contributions: $7,500

Your annual elective deferral is the total amount you can contribute to your TSP for the year. This number is the combination of investments you make to a traditional TSP or a Roth TSP. You can do either or split your contributions, but the total cannot amount to more than $22,500 for the year.

Catch-up contributions are only available for people age 50 or older. You get to put an extra $7,500 into your TSP each year to give yourself a boost as you get closer to retirement. Again, this is the total across traditional and Roth contributions. Once you max out your annual deferral, the extra will automatically count as a catch-up contribution.

Pro Tip: Contribute at least what you need to in order to get your matching benefit, but do more if you can. Even a 1% increase in your contributions each year will make a difference.

Updated TSP Investment Options

When’s the last time you thought about how the money in your TSP was invested? There are five core funds, plus several Lifecycle Funds to choose from:

    • I fund: A high-risk, international stock index fund 
    • S fund: A medium-high risk, total U.S. stock market index fund
    • C fund: A medium risk, S&P 500 stock index fund 
    • F fund: A low-medium risk, broad U.S. bond index fund
    • G fund: A low risk, short-term government bond index fund
  • L fund: Age-based funds with a custom mix of core funds to become less risky as you near retirement. 

(More information can be found on the investment options at: TSP Funds)

Over time, L funds change, and new ones are added as younger employees enter service. 

The other big change? You now have the option to invest in additional mutual funds through the new TSP Mutual Fund Window. If you’re interested in broadening your options, this can be a great choice. But buyer beware: many mutual funds have additional fees and expenses. 

The Bottom Line

If you haven’t reviewed your TSP investments lately, it’s time to take another look! You can get this year off to a great start by increasing your contributions and reviewing your TSP funds to make sure they are the right balance of risk and reward for your situation. 

Not sure where to start? Call us! We’d love to help. 

Most people don’t plan to get divorced, so when it comes, it can be incredibly stressful. In addition to the emotional strain that such a change brings, divorce is also a complex legal and financial process. Dividing up your assets fairly is a huge challenge — and it can be even more difficult for federal employees.

That’s because federal employee benefits are on the line when it’s time to split assets. But these benefits are subject to different laws, which can make crafting a divorce settlement more complex. Here’s what you need to know about how divorce can impact your federal benefits.

FERS Annuities

Your pension is one of the biggest benefits of working for the federal government. This defined benefit plan guarantees income for the rest of your life once you retire from service — and as such, it’s a valuable asset to consider in any divorce settlement. Your FERS annuity can be considered in a divorce settlement, so you could end up paying a portion of this retirement income to your ex-spouse.

For an ex-spouse to receive annuity payments from FERS, it requires a court order to have the Office of Personnel Management (OPM) make these payments. The settlement can be structured as a flat sum or a percentage of your future pension payments, but the amount can’t be greater than what you will receive after taxes and other deductions. 

It’s also important to note the federal law prohibits any FERS pension payments to an ex-spouse until you retire from service. This differs from laws about non-federal pensions, which allows payments to begin once the employee reaches retirement age. You must actually retire and apply for FERS benefits to trigger payments to an ex-spouse.

FERS Survivor Benefits

Another aspect of your FERS pension is the spousal death benefit. When you’re married, your spouse is entitled to 50% of your salary plus a standard payment as a lump-sum death benefit. Your spouse may also be eligible for a survivor annuity of 50% of your pension upon your death.

When you divorce, your settlement could allow for your ex-spouse to receive this death benefit or survivor annuity—and if your ex-spouse is awarded a survivor annuity in court, your future pension payments will be reduced. This situation becomes even more complex when your and/or your ex-spouse remarries. If your ex-spouse remarries before age 55, they may lose survivor benefits eligibility. If you remarry, your new spouse is potentially eligible for these survivor benefits, but only if you elect to add them to the spousal benefit within two years of your marriage.

If this sounds complicated, it’s because it is! If you are facing a divorce, you will definitely want to seek advice from both a financial advisor and a lawyer who are familiar with all the ins and outs of federal retirement benefits to make sure you are well protected.

TSP Accounts

Another important benefit impacted by divorce is the Thrift Savings Plan (TSP). Depending on how much you contribute over the years, this account can be a significant asset. It is possible to divide the money in your TSP while you are separated and before the divorce is final if you wish. With the TSP, you are also free to change the name of the beneficiary who receives the money upon your death at any time — and you are not required to notify your spouse (current or former) of this change. 

Health and Life Insurance

Once your divorce is final, your ex-spouse cannot remain on your FEHB policy for health insurance. At that point, they have a 1-month grace period to either find different coverage or elect to pay for their own FEHB policy via Temporary Continuation of Coverage (TCC) procedures. TCC only allows an additional three years of coverage though, and does not apply to separate dental and vision benefits. 

For FEGLI life insurance benefits, it’s important to change the beneficiary of your policy if you do not wish your ex-spouse to receive these benefits. It is also possible for your divorce settlement to require you to assign your policy to your ex-spouse. The laws around this issue can be confusing, as state laws may conflict with federal laws governing FEGLI benefits. For this reason, you’ll want to make sure you work with a lawyer who is well-versed in federal benefits as you negotiate your settlement.

The Bottom Line 

Divorce is complicated, and it is even more so when you have federal benefits to divide. There’s no rule that says you must give a portion of your federal benefits to your spouse when you divorce if you can find another way to share your assets equitably. If you do end up splitting your TSP or pension, be sure to consult with legal and financial experts to male sure you understand exactly what you’re giving up — and how it may affect you in the future.

Need more advice about your federal retirement benefits? We’re here to help! Get in touch today to learn more about how we can streamline retirement planning for federal employees. 

A raise is always good news, but what can you do right now to ensure that you make the most of it? Try these ideas to stay mindful with your money in the new year.

Increase Your TSP Contributions

When’s the last time you looked at your TSP contributions? Getting a raise is the perfect time to review these amounts — and bump them up to take advantage of your extra income.

If you currently have no trouble making ends meet, consider putting your entire raise into your TSP. Raises have a tendency to disappear into thin air, with a latte here or a new pair of shoes there. Directing the funds into your TSP immediately is a great trick to make sure your money sticks around.

Pro Tip: TSP annual contribution limits may change each year. That means you may be able to save more this year than last — great news for anyone had maxed out!

Build Your Cash Reserves

Worried about inflation making everything in your life more expensive? You’re not alone. In case you missed it, inflation is up over 9.1% this year. If that keeps up, it basically wipes out your raise anyway. 

If you’re feeling unsettled by that news — or by your weekly grocery bills — consider pushing your raise into an easy-to-access savings or money market account. This will ensure that you can get to your money if you need it for an emergency or for unexpected expenses, while still earning a little interest on it.

You can also designate your savings for a future purchase, like a down payment on a house or new car. Opening a secondary savings account that’s purpose-driven can help inspire you to build your balance faster — and keep you from dipping into the extra money without thinking about it. 

Pay Down Your Debt

Got credit card bills to dispatch? You can also use your raise to increase your monthly payments on these bills to pay them off faster. This trick also works for paying off a car loan or mortgage. Instead of pushing your raise into savings, just add the monthly amount of your raise to one of your debt payments instead. 

If paying down debt doesn’t seem very exciting, try a debt calculator to see how you can save by paying a little each month. Not a bad way to put that raise to good use, especially if you’re already maxed out on retirement account contributions. 

New Year, New Goals

Using your raise well is all about staying mindful and really paying attention to where your money is going. The new year — and its new paycheck — is the perfect time to review your finances to make sure you know exactly what you’ve got coming in, and well as what your spending situation looks like. 

When you get your first paycheck, take the time to review your monthly budget, reworking it to reflect your new income. Then, take an honest look at your spending and update those line items as needed. This will give you important insight so you can plan your financial year accordingly.

If that planning feels overwhelming or complex, now’s the time to work with a financial advisor to get a clearer picture of where you stand — and what action steps you should take to get where you want to go. The right financial plan will help you make the most of income today and give you peace of mind about your future retirement plans. 

Need help understanding exactly how your TSP, pension, and benefits can all work together to fund your retirement? We specialize in financial planning for federal employees, and can’t wait to help! Get in touch today to learn more. 

Thinking of retiring from your job as a federal worker? Congratulations! You’ve put in a long career of public service, and now it’s time to reap the rewards of that great benefits package you’ve heard so much about over the course of your career.

Unfortunately, you do have to jump through some hoops to complete the retirement process and receive your pension. It’s a time-consuming process — and if you’re not careful, an expensive one. The truth is that the Office of Personnel Management (OPM) has a lot of paperwork to get through, and you won’t get your full retirement payments until they review it all. 

Though the OPM’s stated goal is to process retirement paperwork within 60 days, it often takes longer. Since the pandemic, the average processing time has been more like 90 days for retirees.

Why does it take so long? There are a lot of moving parts. 

Your Retirement Paperwork Timeline

Submitting your FERS retirement application is only the beginning. First, your department’s personnel office will have you sign off on several documents and begin the work of verifying your service — something that can take extra time if any documentation is missing. They also transfer your life insurance (FEGLI) and health insurance (FEHB) enrollment to the OPM. 

Then it’s the payroll office’s turn. When they receive your paperwork from personnel, they authorize your final paycheck and your payout of unused annual leave. They also forward records of your salary, retirement contributions, and service history to the OPM. 

Once OPM finally has your full paperwork packages from these other departments, they provide you a civil service claim number to keep track of everything. And then you wait for them to review your eligibility, calculate your annuity, and — finally! — send you that check.

So how long does all of this take? Here’s the general timeline as it stands today:

  • Day 1: Your retirement date. Congratulations! Throw away your alarm clock and start those hobbies you’ve been dreaming about.  
  • Day 30: TSP funds available for withdrawal. The payroll office will let TSP know you’re retiring automatically, and you should be able to access these savings without penalty within 30 days of retirement. 
  • Day 30-45: Annual leave lump sum payment sent. It takes at least two full pay periods after your retirement date to process this payment, and often up to six weeks to receive it. This is the responsibility of the payroll department.
  • Day 45-70: OPM sends first retirement letters. Somewhere between six and 10 weeks after your retirement date, OPM will send you your Civilian Service Annuity Number (CSA#), which you will need any time you contact them in the future. They will later send a letter with an online password for you to use to set up future communication.
  •  Day 45-70: OPM sends interim retirement check. After you receive your first letters, you’ll get your first annuity check — but this will only be for 60-80% of your expected annuity. This is just to tide you over while they process the paperwork and should get to you within six to 10 weeks of your retirement date as well. 
  • Day 90-120: OPM sends your full retirement check. Once they finally get through your paperwork, OPM cuts you a check for the full amount of your annuity. This catches you up on what you were owed from the interim check, minus insurance and taxes. It can take three to six months for this full check to arrive. 

Worth repeating: It can take up to six months before you receive your full retirement benefits. Because of this, it may be helpful to file your paperwork 60-90 days prior to your retirement date.

It’s also a good idea to have a financial plan in place to cover you while you wait for your annuity to kick in. You don’t want to fall into the OPM trap of using credit cards to get by for those months, so consider working with a financial planner to come up with a solid strategy to get you through this period.

Other Things to Remember

Although your life and health insurance premiums will eventually be deducted from your full retirement check and your coverage will continue as you await OPM processing, not all of your benefits will be covered automatically during the transition period. 

If you have additional FEDVIP Dental/Vision coverage or LTCFEDS Long Term Care insurance, you’ll need to contact those providers directly to make payments while you wait for your full retirement check to be processed. 

Likewise, any personal allotments you have set up through payroll will stop once you retire. You can resume these through the OPM once your final retirement check is processed. 

Finally, you will no longer be able to contribute to a Flexible Savings Account (FSA) once you retire. However, you can still access any remaining balance to get reimbursed for qualified expenses you made before your retirement date. 

Important Contacts

If you find that your retirement process is delayed past the dates on the timeline above, you’ll want to get proactive to find out what’s happening. You’ll also want to make sure you contact the right department for each issue you face: 

Thrift Savings Plan (TSP): (877) 968-3778 or www.tsp.gov

OPM: (888) 767-6738 or www.opm.gov

BENEFEDS (Dental/Vision): (877) 888-3337 or https://www.benefeds.com

LTCFEDS (Long Term Care): (800) 582-3337 or https://www.ltcfeds.com

FSA: (877) 372-3337 or https://www.fsafeds.com

Social Security: (800) 772-1213 or www.ssa.gov

Medicare: (800) 633-4227 or www.medicare.gov

The Bottom Line

Retirement planning for federal employees can feel overwhelming, but if you start early, you can make sure your paperwork is flawless for easier processing. You’ll also need to make sure you have a plan to cover your expenses while you wait for the OPM to process your paperwork and send that first full check. 

We’re here to help! We’re experts in the federal retirement system and can help you develop a wealth management plan that will let you enjoy your first days of retirement instead of running to the mailbox every day to look for that check. Get in touch to get started today. 

Life insurance can be a tricky subject. For starters, no one likes to talk about it — after all, discussing your own death isn’t exactly a fun conversation. Still, it’s incredibly important to take the time to figure out how much your family could lose if you died unexpectedly — and then take steps to get the right life insurance coverage to protect them.

As a federal employee, you’ve got some great options for life insurance as part of your benefits package. The Federal Employees’ Group Life Insurance (FEGLI) Program covers about 4 million people and the government picks up a third of the tab for Basic coverage, making it a great financial deal. 

But is the Basic plan enough? Here’s what you need to know to make sure your family is protected.

FEGLI Basics and Options 

Nearly all federal employees are eligible for FEGLI coverage, and you are automatically enrolled in the Basic plan when you are hired. That means that your cost comes out of your paycheck, and you probably won’t even notice.

Basic FEGLI coverage will pay your designated beneficiary one full year’s salary plus $2,000 when you die. However, there is an extra benefit for younger employees. If you are age 35 or under at the time of your death, the FEGLI benefit is 200% of your annual salary. Between the ages of 35 and 45, this extra benefit decreases by 10% each year until it disappears at age 45. At that time, you’re back to the standard benefit of 100% of your salary.

If you’d like to provide more for your family, there are three optional FEGLI plans to consider:

  • Option A: Pays out an additional $10,000 upon your death.
  • Option B: Pays out an additional multiple of your annual salary. You can choose coverage from 1 to 5 times your annual income. 
  • Option C: Pays out up to $25,000 for the death of a spouse and up to $12,500 for the death of a child if you choose to cover immediate family members.

It’s important to note that you’ll be paying the full premium for any additional coverage you choose: the government doesn’t subsidize FEGLI options, only the basic coverage.

The cost of optional coverage also rises as you get older. By the time you are in your 60s, the premium will be more than 10 times what you paid when you were 30, so it’s a good idea to review your financial plan regularly to make sure you aren’t paying for coverage you no longer need as you get older.

How Much Life Insurance Do You Need? 

This is a highly personal question, and a tailored answer will depend on many factors, including your age, your assets, the size of your family, whether you’re their primary source of income, and more. But in general, you can get a sense of your family’s needs by looking at your annual income and expenses.

For starters, how much money would your family lose if you died, and how many years of replacement income would they need? One easy calculation is to take your annual income and multiply it by the years you have until retirement. This amount would provide your surviving family members the money you would have provided until you stopped working.

But this might be more money than your family actually needs. If your house is paid off, you have no debt, and your spouse is working full time, full income replacement probably isn’t necessary. So as you fine-tune your number, consider how much your family may require. You can get an idea based on your annual spending right now, but make sure to consider additional expenses such as:

  • Childcare costs
  • College costs
  • Mortgage payoff costs
  • Consumer debt
  • Funeral costs
  • Health insurance costs (if your family loses coverage when you die)

Once you have a good idea of how much your family would need to survive without your income, you’ll need to decide how long they’ll need any replacement income to last. If you have young children, you’ll want to multiply their annual “need number” by as many years as your children will need support. For most people, that’s until they graduate from college at age 22 or so.

How to Get Help When You Need It

If this feels overwhelming, you’re not alone! It can be very challenging to estimate your family’s need when so many unknowns will affect the equation. Fortunately, a life insurance calculator can help take some of the guesswork out of your calculations and give you a better sense of the right amount of coverage for your family. It’s also a great way to fine-tune your coverage after major life events and as your needs change based on age.

When you begin to run the numbers, one thing is clear: most people will need more than just FEGLI Basic coverage to help their loved one through a difficult time. One year’s salary may simply not be enough. If that’s the case for you, explore your FEGLI options and comparison shop private rates as well. 

Finally, if you need additional help deciding what coverage is right for you, please get in touch. Life insurance is just one part of a comprehensive financial plan, and we’re here to help make sure you’re on the right track for a good life and a great retirement. Contact us for more help navigating your federal benefits today.

The whole point of a Thrift Savings Plan (TSP) is to put away extra money, little by little, to add up to big savings by the time you retire. When it comes to retirement savings, the first rule is not to touch that money until you retire, no matter how tempting it might be to dip into those funds for other purchases (or in case of emergency).

That’s sound advice, but there are exceptions to every rule. When it comes to the TSP, did you know that you’re allowed to take money out — penalty-free! — before you retire? And that it can actually be a good idea under the right circumstances?

Welcome to the wonderful world of age-based withdrawals. Here’s what you need to know to make them work for you.

What Is an Age-Based In-Service Withdrawal?

Generally speaking, your TSP money is off-limits while you’re still working in your government position. However, an age-based in-service withdrawal allows you to take money out of your TSP while you’re still working as long as you have reached age 59½. 

In addition to being old enough to qualify, you also need to meet a few additional requirements:

  • You can only withdraw from funds in which you are fully vested (i.e., you have enough years of service to do so).
  • You must withdraw at least $1,000.
  • If you have less than $1,000 in your TSP, you must withdraw the entire amount.
  • You can make a maximum of four age-based withdrawals per year.

What’s the Catch?

Keep in mind your withdrawal is subject to a 20% federal income tax unless you roll it over into another eligible retirement plan such as an IRA.

So if you plan to spend the money, you’ll be taxed on the portion that came from traditional TSP funds, but not Roth funds.

On the other hand, you have the opportunity to roll your TSP funds into an IRA account totally tax- and penalty-free.

Change your mind after you have moved money into an IRA? You can move your money back to the TSP as long as you keep your account open by maintaining a minimum balance.

What’s the Advantage?   

The TSP is a great benefit, but your investment options are pretty limited. Right now you can only choose from five different index funds, and you’re stuck managing that money yourself. This means that when you retire, it will be all on you to make sure your investments are well-balanced and that you time selling shares and taking distributions to minimize your taxes and make sure your money is invested as wisely as possible.

That’s a tall order, especially if you’d rather relax during your retirement than worry about your money. 

If you roll over your TSP funds into a private IRA, though, you can let an investment fiduciary take charge of managing your money. For many people, this comes as a huge relief. It allows you to streamline your retirement management and get great advice so you don’t have to worry about your TSP money in an economic downturn. It also gives you the freedom to invest in a much broader range of ETFs, mutual funds, stocks, bonds, annuities and more — anything that you and your advisor decide is right for your plan is now available outside the confines of the TSP.

An age-based withdrawal also provides you the opportunity to convert a traditional TSP to a Roth IRA. A Roth conversion will require you to pay taxes on the money you roll over, but once you do, you’ll never have to pay taxes on it again. Additionally, Roth IRAs are not subject to Required Minimum Distributions (RMDs) once you reach age 72. This is a huge advantage for anyone who is happy to live on their pension and would like to keep their IRA intact to pass on to their heirs — or just to keep it for as long as possible before spending it down. 

What’s Next?

To make an age-based in-service withdrawal, you’ll need to log into your TSP account and click on the withdrawals section. From there, you can complete your request for the withdrawal online. Funds are delivered via direct deposit, electronic transfer, or paper check. From there, you can transfer the money to your IRA — just make sure to hang onto the paperwork as you do so to show the IRS that your withdrawal was actually a rollover. 

Age-based withdrawals are often a “hidden” benefit of TSPs, and many people never take advantage. If you’d like to learn more about rolling over your TSP funds into a professionally managed IRA or making that Roth conversion to avoid RMDs, we’re here to help! Please get in touch to learn more about our specialized financial planning for federal employees today. 

Did you know that the Thrift Saving Plan is about to change? 2022 is poised to bring about significant adjustments for federal employees. While the new rollout isn’t ready yet, the latest reporting has these changes coming your way midway through 2022. TSP updates are still several months off, but it’s never too early to plan. Here’s what we know so far.

The New Mutual Fund Window

As a current TSP holder, you’re probably well aware of the limited investing options you have in this fund. Right now, there are just five options: 

  • C fund: An S&P 500 index fund 
  • S fund: A total U.S. stock market index fund
  • I fund: An international stock index fund 
  • F fund: A broad U.S. bond index fund
  • G fund: A short-term bond index fund

You can also choose from a series of L funds that automatically allocate your money among the above five funds and reduce your risk as you age. These funds are tied to the anticipated decade of your retirement (2030, 2040, 2050, and so on). More information can be found on these options at the TSP website www.tsp.gov/funds-individual/.

But later this year, the TSP will add a new mutual fund window, which is expected to offer 5,000 new mutual fund investment options for TSP investors. This is an enormous change, and one with the potential to provide investors exponentially more freedom to invest as they see fit. 

For example, it’s expected that many of these new mutual funds will provide ESG (environmental, social, governance) offerings to investors. These funds are built to help investors make socially conscious choices with their money (i.e. avoiding fossil fuels and the like). 

But there is an important caveat here. More choice also means more risk, and actively managed mutual funds tend to be more volatile than index funds like the ones currently available in the TSP. That’s because index funds are designed to mirror the market overall, while other mutual funds actively try to time the market for bigger returns. If you find yourself uncertain about your new options, it’s best to consult with an expert. 

What We Don’t Know Yet: It’s not yet clear whether there will be any limits on the dollar amount or percentage of investments that can go toward this new window, or if there would be any additional fees for the new investment options. 

New Management of Old Funds

There are also investment management changes coming to the old fashioned TSP funds as well. Instead of being managed by a single company, the C, S, I, and F funds will now have a primary and secondary manager. BlackRock will take charge of 80% of these funds assets, while State Street will be responsible for the other 20%. This is to reduce risk across the board. 

It’s important to note that in this case, risk isn’t to the money in the fund, but is more about operations. For example, if one company experienced downtime or delays that took them off line for a few days, TSP investors wouldn’t be left entirely in the lurch. This is all pretty deep into the inner workings of the TSP, and the average investor would never notice this change.

Modern Upgrades and Features

Finally, the changes to the TSP are designed to bring service into the twenty-first century. Here are some of the features expected to launch this year, thanks to a new vendor coming on board:

  • A mobile app for smartphones
  • Customer service online chat
  • Virtual assistant powered by AI
  • Online forms
  • Electronic signatures
  • Concierge service for common issues
  • Increased security and fraud protection
  • Biometric data (thumbprints and facial recognition) to log in
  • Updated record keeping

Any time your retirement savings plans change, it’s a good time to review your investments to make sure they’re working for you. Whether you’re wondering how to pick the best new mutual funds or need help developing an investment strategy that balances risk and reward, we can help. Get in touch for help with your federal retirement benefits today.  

Federal employees enjoy some of the best benefits packages around. In addition to a robust pension plan and health insurance to name a few, you also have the option to invest in a Thrift Savings Plan (TSP) to help fund your retirement.

Whether you’re a new employee or have been working government jobs for years, it’s always a good idea to review your TSP contributions and allocations to make sure you’re investing your money in the ways that will work best for you. Here’s what you need to know.

TSP Basics

When you begin your first eligible job at a government agency, you are automatically enrolled in the TSP plan, and 5% of your salary is pulled out of your paycheck to fund the account. This is the minimum amount you can contribute to remain eligible for matching funds from your agency. That’s free money, and it can make a real difference over time, so it’s a good idea to maintain this minimum contribution to take advantage. You can also increase your contributions at any time if you’d like to save even more.

Your TSP account functions like a 401(k) in the private sector and is subject to many of the same rules. For example:

  • Unlike a standard brokerage account, the TSP is a tax-advantaged account that lets your money grow tax-deferred or tax-free if the Roth TSP is selected.
  • There’s an annual maximum contribution limit of $20,500.
  • If you’re age 50 or older, you can contribute an additional $6,500 each year as a “catch-up” contribution.
  • TSP funds can be designated as Traditional or Roth contributions.
  • You can begin to take distributions from your TSP account at age 59½ without penalty.
  • You must begin taking required minimum distributions by age 72.

TSP Investment Options

One way in which the TSP differs from a 401(k) or IRA is the way in which you can invest your money. Instead of having unlimited mutual funds and investment vehicles to choose from, this government-sponsored plan has just five individual funds to choose from and several L Funds.

C Fund

The C Fund is the Common Stock Index Investment Fund, which is an index fund designed to match the performance of the S&P 500. This means that when the 500 companies in the S&P 500 do well, your investment gains money. You may also lose money if this index drops in value. Investing in the stock market always comes with some risk, though this fund’s focus on well-established U.S. companies mitigates that risk somewhat. The C Fund is considered a medium risk investment.

S Fund

The S Fund is the Small Cap Stock Index Investment Fund, which tracks the performance of the Dow Jones Industrial Average. This fund covers a broader range of domestic stocks, so while the fund is well-diversified, it also comes with greater risk. The S Fund is considered a medium-high risk investment.

I Fund

The I Fund the International Stock Index Investment Fund, which consists of stocks from Europe, Australasia, and the Far East. Investing in international stocks adds plenty of diversity to your portfolio, but also greater volatility. The I Fund is considered a high risk investment.

F Fund

The F Fund is the Fixed Income Index Investment Fund, which is a bond fund. Because bonds are generally backed by government entities, they are much safer investments. You won’t generally lose money in bonds, though the rate of return is often lower than the rate of return in the stock market. The F Fund is considered a low-medium risk investment.

G Fund

The G Fund is the Government Securities Investment Fund, which invests in short-term U.S. Treasury securities. Because these bonds are backed by the U.S. government, they are a very safe investment. When interest rates are low, the rate of return isn’t great, but it’s very reliable. The G Fund is considered a low risk investment.

L Funds

The L Funds are Lifecycle Funds that are designed to take the guesswork out of investing. These funds automatically divide your contributions among the five funds listed above, allocating your investment in a way that makes sense for your age. You simply choose the fund with the year closest to your target retirement rate, and the fund manager adjusts your allocations so that the fund becomes less risky as you age.

Choosing Your Allocations

Employees are automatically enrolled in an L Funds to begin, and it’s an easy way to manage your investments — you don’t have to worry about changing your allocations, as this is done automatically over the years.

However, if you would like to exercise more control over your investments, you can choose to divide your contributions among the other funds listed above. Because stock investments generally have a far greater rate of return than bonds, you’ll want to have at least some of your money in the stock market to allow your wealth to grow. But finding the right balance is key: if all your eggs are in one basket and the stock market crashes, your retirement could be at risk.

In general, younger people invest more heavily in stocks because they have many years to ride out the risk. Over time, the balance between stocks and bonds should be adjusted to rescue risk as you get closer to retirement age.

Of course, some people have very low tolerance for risk, while others can stomach the ups and downs of the market just fine. Consider taking a risk tolerance assessment to get a sense of your comfort zone when it comes to investing.

If you’d like to learn more about the best allocation of your funds to meet your personal goals, we’re here to help! Contact us today to walk through your TSP investing options and develop a wealth management plan that’s right for you.

 

If you’ve heard it once, you’ve heard it a thousand times: “Wow, you work for the federal government? Must be nice to have such a great benefits package!”

What people outside of public service don’t realize is that those great benefits come with a few strings attached — namely, the fact that sometimes you have to navigate some bureaucracy to access all those benefits.

This is particularly true when you’re ready to retire. Retirement isn’t just something you can decide to do one day and expect everything to fall into place in a few weeks. To maximize your benefits — and even just to get your pension payments in a timely fashion — you need to plan ahead.

Here’s what you need to know to avoid falling into the OPM Trap.

OPM Retirement Basics

The OPM is the Office of Personnel Management, and they hold the keys to the kingdom when it comes to getting your pension payments. This is the massive human resources department for all federal employees, so you’ve almost certainly dealt with them at some point during your career.

When you’re ready to retire, there are plenty of forms to fill out and decisions to make. To ensure that you have time to get all your financial ducks in a row, the OPM encourages federal employees to begin retirement planning as early as five years ahead of their proposed retirement date. Getting an early start lets you:

  • Plan ahead to maintain your FEHB health insurance for the five-year period before you retire, so that you can continue coverage into retirement before Medicare picks up the slack
  • Plan ahead to maintain your FEGLI life insurance coverage
  • Gain a clear understanding of your FERS Annuity (aka pension) eligibility and how your TSP retirement funds, annuity, and Social Security checks will work together to fund your retirement

When you get to a year out from your desired retirement date, it’s time to get serious about planning and applying. At this point, you’ll need to:

  • Review your Official Personnel Folder (OPF) to check dates or service, raises, and more for accuracy
  • Tell your supervisor about your plans
  • Choose an official retirement date
  • Attend a pre-retirement counseling session  to understand your benefits and the process
  • Elect survivor benefits
  • Get an annuity estimate to help you with your planning

Finally, you should apply for your FERS Annuity at least 2 months ahead of your planned retirement date. This allows time for your personnel office to review your files and complete their own round of paperwork verifying your service — this goes faster when your OPF has already been reviewed and is in good order. Your payroll office also has forms to complete, and then they will finally send your application off to the OPM. This all takes time, but the sooner you complete your paperwork, the sooner these offices can complete theirs.

When the OPM receives your file, they will send you a civil service claim identification number for reference — don’t lose it! It’s how you’ll be able to track progress and get any questions about your pension answered.

The OPM Trap

Once the OPM has your application, approval isn’t exactly instantaneous. They have to review all of the submitted paperwork, calculate your FERS Annuity, and finish final processing. This can take a long time.

Though the OPM’s stated goal is to process pension applications within 60 days, the reality is that it usually takes much longer. In July of 2021, average processing time was over 90 days. Since that’s an average, it’s possible that your application could take anywhere from two to six months to complete — or even up to a year.

So what’s the OPM trap?

While you wait for your pension to be fully processed, you aren’t receiving your full pension. Instead, you receive an interim payment, which can be anywhere between 60 and 85% of the actual value of the FERS annuity you’ve earned. These checks begin coming your way within 6 to 8 weeks after you retire. 

The OPM trap gets people when they retire without realizing that their full pension checks could be many months away. First, you’ll wait for up to two months without any pay until your interim check comes through. Then, you’ll wait several more months with partial pay until your pension is finalized.

If you don’t have a plan in place to get you through this dry spell, the OPM trap can be a painful reality check on your first year of retirement.

Strategies to Cover the Interim Payment Period

Clearly, you need to have some cash reserves saved up and ready to go to get you through this period of partial annuity checks. This is definitely a “better safe than sorry” situation.

There are several ways to do this:

  • Savings accounts and money markets: A simple, easy-to-access savings vehicle may be all it takes to see you through, especially if you began planning for the OPM trap a few years in advance. 
  • Your traditional TSP account: If you retire in the calendar year you turn 55 years old, you can begin to take distributions from your Thrift Savings Plan. This is money you’ve been saving for retirement, so it may make sense to begin accessing it while you wait for your pension to be complete.
  • Annual Leave Lump Sum Payment: One of the best ways to keep cash on hand as you wait for your full pension is to use your Lump Sum Payment of Annual Leave. You’re entitled to be paid for your unused leave time at your regular hourly rate, so this can be a great windfall that gives you cash without forcing you to raid your other accounts. This check usually arrives within a month of your retirement. Keep in mind that annual leave lump sum payment will have taxes withheld.

In fact, you can plan ahead to maximize your annual leave payment by taking fewer or shorter vacations in the last years before retirement. 

Pro Tip: Retiring on December 31 will ensure that your lump sum check comes in a fresh tax year, which may help reduce your total taxable income for your final year of employment.

The OPM Trap is real, but it doesn’t have to derail the beginning of your retirement. When you plan ahead for a long delay, you’ll ensure that you can sail through the waiting period without too much trouble.  And if you’ve over prepared, and your interim payment period is shorter than expected, even better!

Need help with your retirement planning? We can help! Federal benefits and retirement planning is what we do, so contact us for a consultation today.

Services offered by Thompson Wealth Management