TSP Withdrawal Strategies: Getting Money Out Safely

hello hello federal employees welcome back to another episode with me your host my name is down it is great to be with you again today and like i am starting to do i'm going to start this episode off with an inspirational quote to remind all of us that there is so much good in this world and we're going to jump right in so serena williams coming to us with she said i decided i can't pay a person to rewind time so i might as well get over it right and i'm not sure what serena was referring to when she said this but i think it applies to all of us because i talk with a lot of federal employees all the time actually basically every day about financial decisions about what they should do about what they did what they've done things like that and oftentimes i hear people say oh man if i only would have known you or known let's say my youtube videos my podcast a few years ago if i only would have known x or y or z whatever it is a few years ago i would have done something different right i think this quote by serena williams is a great reminder to hey we can't rewind time it doesn't at this point as of today it doesn't matter what happened because at this point today we can't control what happened before but we what we can do is educate yourself now on what the future's going to hold and what things are going to look like so that you can get the most out of your retirement your benefits and start today you can start planning today and let's say you are in are in retirement i'm sure there's tons of things that you can do to optimize to improve to make sure that you your spouse your family all everything's taken care of really just in order in order and organized that can be a great thing to start so today i haven't you know talked about it yet but today the topic is strategies when it comes to taking money out of your tsp and other investments to get the most out of them because there is a major difference depending on when and how you take money out of these retirement accounts that will affect definitely how much money you're going to have now and through the course of your retirement because of taxes tax is one of the major differences that people will see depending on when they take money out and how okay so without further ado hopefully you're inspired by serena williams let's jump right in so the first thing that we have to really nail down when we're talking about taxes and taking money out of accounts is there's really three types of retirement accounts or accounts that people have when it comes to saving for retirement so the first one as many of you federal employees are very well aware is traditional accounts or pre-tax accounts so for example your traditional tsp is a great example another example is let's say a traditional 401k or traditional ira okay those are great examples of traditional accounts that are pre-tax meaning when you take money out all of that is going to be taxable okay that's number one number two and many of you are very familiar with this as well is roth account so roth tsp roth ira roth 401k right so basically the money that's in these accounts the taxes have already been paid and when you take the money out assuming you you follow all the rules that are associated with ross then you don't have to pay taxes which is a great great benefit right now the third option that doesn't get talked about very often is non-retirement accounts or just brokerage accounts right you can go down to schwab or vanguard or fidelity and you can invest money just in an individual account that's not a retirement account and you could earn money you can invest in things you can earn money and many people have a good amount of money in these accounts as well and these accounts are not taxed when you take money out necessarily but when you earn money when you when gains are earned okay so there's a number of ways that these things are taxed but basically i'll break it down to two simple categories first if you hold investment for more than a year you can be taxed as long-term capital gains which stereotypically and as the law stands today those tax rates are going to be lower than just your ordinary income tax rate so if you ever can hold things for longer than a year in a normal brokerage account it generally makes a ton more sense to do that now if you hold things for less than a year then you're going to be subject to short-term capital gains which is basically just subject to your ordinary income tax rates right so whatever your tax bracket is that is what that income is subject to so again those aren't talked about very often and so i don't want to dig into the weeds too much but it is good to know especially if you have some of those investments okay how is this thing taxed and in retirement what's the best way to use it so i wanted to mention it so that those of you that that applies to you can dig a little deeper and make sure that you are prepared so the first question now that we kind of have the base of how things are taxed is okay what should i use first right let's say i retire i'm 62 whatever age i need some money above and beyond my social security above and beyond my pension what bucket of money should that come out from should it be traditional should it be roth should it be just a brokerage account where should i take that money out first right and taxes are very individual thing but if i had to put a general rule on which accounts you should touch first i would probably recommend your traditional accounts meaning your traditional tsp or traditional ira those accounts when you take them out as you know are going to be taxed now there's a number of reasons why i may recommend that people touch those accounts first and and there's a few reasons first we want often to allow other accounts that are a little better when it comes to taxes to grow more right let's say a roth ira or the roth tsp we know that if that account doubles that entire growth that we saw the doubling that we saw all that money is going to come out tax free if we decided hey we're actually going to use our roth early in our retirement and let our traditional tsp grow our traditional ira grow then that account is going to grow it may double whatever it is but then all of that money coming out is going to be taxed right so if we have to pick to let one of these grow and one one to be able to take out of early on we want the roth accounts the roth ira the roth tsp to be able to sit and to grow for as long as possible that can be a great benefit now again there's some nuances depending on your tax situation and maybe based on your income in the early parts of retirement it may it may not make sense to do that but in many cases it does to use your traditional tsp early and to save these other types of investments for later and many of you may say hey i don't have roth investments how does this apply to me well if you don't that's not the end of the world but it may make sense i'm gonna i'm gonna talk about a little later to maybe get some roth assets once even once you are in to retirement now another reason to potentially use traditional money first is because rmds are going to kick in later in retirement and rmds are required minimum distributions basically at age 72 starting at 872 the government says hey you've had your money in these traditional accounts these retirement accounts for a long time and now it's time to take this money out right you've you've had tax deferred growth for a long time it's time to start paying taxes on this money and start taking it out and these rmds apply to most retirement accounts the only retirement account that it does not apply to is a roth ira okay and so by using let's say traditional let's say our traditional ira or traditional tsp early in retirement will come age 72 then the rmds are going to cause less of it's going to force us to remove less from these accounts because there's less in them right and there's going to be more potentially in a roth ira which is not subject to rnds right because the worst case is let's say someone doesn't use much of their traditional assets early in retirement they hit 72 and then what happens is they're forced to take a much larger portion of their their traditional tsp or traditional ira out every year than they actually need and so it actually bumps them up into some high tax brackets they never intended to be in or wanted to be in just because those accounts were left to grow when other accounts maybe weren't and so a couple things to think about again taxes are very unique thing there can be a lot of nuances but these are some general principles that could apply to you okay now i mentioned this just a couple minutes ago but the more roth money and of course we all know this intuitively the less taxes we can pay the better right none of us want to pay more taxes and so the more roth money we can have in retirement the better right it can be a great thing but obviously we want to balance that with okay we don't want to pay too many taxes now but we also want to get as much money into a roth as possible so how do we do this okay well many of our clients as they transition into retirement then we look at the look at their situation every year to see if it makes sense to do what we call a roth conversions okay so basically what a roth conversion is is we take some money that's in a traditional account so a traditional tsp or traditional ira we say hey is there any wiggle room in your tax bracket so that we can move some of that money into a roth ira okay and so let's do a quick example and these aren't exact numbers these aren't actual tax brackets but let's use an example let's say right now you have sixty thousand dollars of taxable income okay for example and but we know that you're not actually going to get bumped up to the next tax bracket until you have seventy thousand dollars of taxable income so you have ten thousand dollars of taxable income that you could have before you even touch the next tax bracket okay so what we can say is hey we don't want to pop you up to the next tax bracket but let's do a roth conversion or or basically move ten thousand dollars of traditional money into a roth ira and yeah your taxable income is going to go up that year but guess what that ten thousand dollars is going to get into a roth account and it's going to be able to grow tax-free from then on right and so we often do this year by year say hey is there any wiggle room it doesn't make sense this year to do a roth conversion to get as much money into the roth as possible right and if it doesn't make sense awesome sometimes it doesn't make sense and that's okay but it's worth looking at especially if you are in retirement or approaching retirement to think about okay i don't want to get killed in taxes today either but how do i get money into a roth without getting killed now right there's a balance there's a there's a fine line to walk to make sure we have as much roth assets as we can but also we get some tax benefits down so something to think about now the last strategy that can be really really helpful in retirement is basically being more aggressive in roth investments than traditional investments and let me kind of walk you through that so this strategy doesn't work very well in the tsp it's very hard to do and so often when the strategy is used it's used with iras okay traditional iras and roth iras so basically what it is is we know and people in the tsp know this pretty intuitively where there can be a vast difference in the performance of let's say the g fund and the c fund right we know that the c fund is going to grow significantly more over time than the g fund but also it's going to be more volatile right so if we had to pick do we want our let's say roth ira or our roth dsp to grow faster or slower than a our traditional major traditional tsp right and most people say hey i want both of them to grow fast of course we do but if we had to pick one hey i want my roth money to actually grow faster than my traditional money because if the the roth money is a lot that if that account is much higher what all that money comes out tax-free that's what i want right so when your money is in iras you have the flexibility to allocate or choose the investments of those individually okay and so for example let's say in retirement you say hey for me in my situation it makes sense to have 50 of my money in conservative investments okay let's say that the other 50 is going to be in more aggressive investments okay perfect well if we had to pick depending on how much money you have in each bucket then put the more aggressive pieces into your roth accounts your roth ira and your more conservative pieces in your traditional ira your your traditional accounts and so over time the roth accounts are going to grow faster you're still going to have the good mix the good portfolio that you want that makes sense for your situation but depending on where you put it what account you put it in it's going to affect which one grows faster and how many taxes you're going to have to pay down the road so again when it comes to taxes it may or may not make sense for you there's there's some nuances right and in some situations these strategies just don't make sense but they are good principles and good ideas to know about so that in retirement you can think about it and you can decide hey what makes sense for me so that first i can get the most out of my benefits and the most of my income you've worked hard you've worked hard for your money and we want to make sure that you can get the most out of it that is our goal right and so i'm trying to empower you with the ideas information and the hopefully inspiration to look at things a little differently and to know what opportunities are out there so that you can get the most out of your retirement so i hope this was helpful have an incredible rest of your day and i'll see you next time

Channel: Haws Federal Advisors

Views: 24,925

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Id: s2b82ww3hy4

Length: 14min 26sec (866 seconds)

Published: Tue Apr 20 2021