The Best Place for Your TSP once You Retire

ladies and gentlemen federal employees today we're going to be talking about what you need to do what what you should do with your tsp once you retire because while you're working the tsp is an incredible tool it is very good at a few things like helping you invest in a simple way to build wealth over time but once you retire is that really the best place for your money for the needs that you have in retirement which is a different life stage we're going to talk about that today and really there are three three different things that are the core choices of what to do with your tsp in retirement we're going to talk about the pros the cons of each one of these three so you can figure out for you what makes the most sense so let's dive right in so i'm going to go over the three so the first one is you can buy an annuity okay you could take a piece or all of your tsp and go buy annuity basis basically that's saying hey you give your money to an insurance company and they come back and say hey i'm going to guarantee a monthly payment for you to you for the rest of your life and potentially your spouse's life depending on what you pick that's one option option number two you can keep the tsp right where it's at and option number three you can roll your tsp over to an ira and and manage it from there in retirement so again we're gonna talk about the pros and the cons of each one of these three so let's go ahead and start with the annuity option now the annuity option is by far by a huge distance is by far the most restrictive option of the three and that is because once you make this election well you're stuck you've made the election and your money is locked up in this annuity where you're going to get your monthly check which is nice but the downside is hey what if you need money for a new roof or your plans change and maybe the needs are different ones you've already made the election and it it's often it's impossible to get out or in some cases you can but it can be very expensive depending on where you get the annuity from you can get annuity straight from the tsp metlife is the insurance company that provides it for the tsp if you want to do it straight from there you can do it with other insurance companies as well there's a number of options but long story short is you give up flexibility you give up control of your money in return for a fixed income source now as a federal employee you have fixed income sources so actually let me back up as someone retiring there's two types of income that are crucial to have number one you want fixed income that is your pension social security uh rental income fixed income that's going to come in every month regardless of what you do regardless of the stock market right that's so crucial to having it lays the foundation for your retirement but at the same time we don't want too much of that right and and you may ask like what do you mean too much fixed income well what i mean is if you all had 100 fixed income and no variable income so no investment i would be slightly worried i mean obviously it's great to have fixed income but you want to have somebody you have control over that you have flexibility with so if something comes up and if plans change well you could adapt you have the flexibility to do so so that is why honestly in working with federal employees i have never worked with a federal employee and seen in their situation where an annuity made sense never never never never because what you do is you give up all the potential growth of your tsp and you give that to the insurance company now let me actually let you in in a secret you can go out and find people that sell annuities and they get paid massive commissions to sell annuities and that is because insurance companies make massive amounts of money when people buy annuities and so i would much rather you keep that money in your pocket to have the control and flexibility over time so as a general rule annuity is an option i'm not a fan of that option maybe you can go find other people that are more fans of it in my opinion it does not make sense especially for federal employees it is not a very good option but now let's talk about the second option which is you can just keep your money in the tsp and i get this question all the time when people ask okay why don't i just keep it where it's at what's this talk of doing an annuity or an ira why the tsp has worked great for me why don't i just keep it exactly where it's at and that's a phenomenal question and really there's a couple reasons to keep it there and there's a couple reasons not to number one the tsp is simple that's one of the core strengths of the tsp it's simple there's five core investment funds now now there's some male funds and of course the mutual fund window so it's getting more complicated and a little more fee heavy but still as a general rule it's d still relatively low fee it's simple you're familiar with it so for many federal employees where they really aren't in the position to go and research and learn about iras and other things sometimes i tell hey just keep it in the tsp you're better off just by keeping it simple because sometimes when you start messing around with other things you make mistakes now there are some disadvantages though for example when you know when you're earning money during your credit getting money into your csp the csp does a great job it's very automated there's very few things it can't do that you would want it to do once you retire it changes a little bit for example when you take money out your money always comes out pro rata from whatever investments you're in so what does that mean let's do an example let's say 50 of your money is in the c fund the other 50 is in the g fund now if you're not familiar the c fund is an aggressive fund that overtime is going to bounce around a lot but the g fund on the other hand is much more conservative where it's going to grow slowly over time so guess what when the market's down for example right now the market is having trouble when the market's down if we can pick do we want to take from our c fund bucket or our g fund bucket well i would take from the g fund bucket so we could allow the c fund to grow you don't want to sell when the market's down that's the worst time to sell you want to sell when the market's up you want to give it time but the tsp does not allow you to do that they don't allow you to choose which funds to take your withdrawal from they take a pro rata but personally based on how you're invested so that's one downside where administratively it's hard to manage that way trying to only take out money from the places you want to it's not possible well in an ira it would be now another disadvantage of the tsp is the fact that there are very few tax reduction strategies that you can actually do within the tsp for example a very common one i use for my clients every year basically every year for most of my clients is a roth conversion basically what that means is you take money from a pre-tax account like i assume most of you as federal employees have most of your money in the pre-tax traditional tsp and that's great but once you pull money out of there you have to pay taxes on it and we'd much rather get money over to a roth account meaning after tax when you take money out of there then it's completely tax free we love not paying taxes when we can so in an ira you have an option to do roth conversions basically getting money over from a pre-tax side to the the raw side and over time it can be very very powerful to build an after-tax bucket to have give you more control in retirement unfortunately the tsp does not allow you to do that so tsp is great at a number of things at doing a little more complicated strategies well no it's not designed to do any of that which can be detrimental for some situations now another little nuance there is if you do have money in the roth tsp the after tax tsp one thing you have to know is that the roth psp is still subject to rmds or required minimum distributions basically you got to take money out of it you're forced to take money out of it starting at age 72. now if you were just to move that roth tsp over to a roth ira you would no longer have to do that at 72 you'd get you'd have more control you could let it sit in that roth ira for the rest of time without having to worry about for as long as you live you can keep it there in a roth ira so that's another advantage of on the ira side is that you have more control on how you how you use things and when so that is the pros and cons of keeping in the tsp or moving it out now the last option that you have with your tsp is moving your tsp to an ira now this is a very popular option it happens all the time but again there's pros and cons a huge advantage is like we were just talking about the cons about the tsp often in an ira has more flexibility you can invest in more things you can do roth conversions with a roth ira you're never subject to rmds we love that so there's a lot of advantages there are tons of flexibility but whenever there's more flexibility there's also some more complexity so meaning for example in the tsp there's five core funds and they're all relatively low fee now on the ira side can you find funds that are actually lower fee yes you can but there's also thousands of options that are hierarchy and so if you know what you're doing you can definitely find the good ones but often people make mistakes when they're not familiar with the funds they pick funds that they're paying massive fees in which they could be keeping that money for themselves and their retirement but because they just don't know what they're looking for they you know there's more complexity now there actually is one more con of an ira now this applies for you especially if you retire in between age 55 and 59 and a half right if you're retiring right in there you want to definitely pay attention here and this is the tsp has a rule called the rule of 55 so what this means is if you retire in the year you turn 55 or later then you can actually access your tsp without an early penalty now let me put that in perspective most retirement accounts you have to wait till 59 and a half to get to your money without a 10 penalty with the tsp again if you retire in the year you turn 55 or later that is way now for example let's say you retire at 56 so that would be waves if you kept your money in the tsp what if you moved all your money to an ira well in that case you'd then be again subject to the 10 penalty because an ira it doesn't have the benefit of taking advantage of that rule so there's some nuances there so you may want to at least keep your money in the tsp until you can get access to it without penalty in an ira so food for thought but again it depends on what you value if you really want to take advantage of the best tax strategies and invest in more things and have more control over where you take your money and ira's a great spot and honestly when actually when we're helping clients an ongoing basis that is normally where we end up because there's just so many advantages in doing that where we can help them save and make way more money on the ira side because we have more control over what's actually going on in the tsp it's simple it's really good at being simple but over time you do lose of course some flexibility so there's pros and cons either way and again the annuity side i'm not a huge fan especially for you as federal place so i hope that was helpful if you have any questions about this but in the comments below we do our best to make future content answer the questions we get in the comments and if you have any questions about how our firm works with clients and helps them make this decision helps them get the most out of their retirement retire confident there's a link below to actually schedule a meeting with our firm we'd be happy to talk about it and good luck with everything i hope this is helpful and i'll see you next time

Channel: Haws Federal Advisors

Views: 62,113

Keywords:

Id: PwMvAoTBAGs

Length: 11min 28sec (688 seconds)

Published: Thu Jun 30 2022