Ask The Experts: Money Matters

By Mike Miles

TSP and Treasury Bills

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Q. How much public debt (Treasury Bills) does the Thrift Savings Plan have
in it’s investment portfolio?

A. I’m not sure I understand the question. What portfolio? If you’re referring to the total amount of TSP money invested by participants in Treasury Bills, I have no idea, nor do I care to spend the time to find out. If you mean your own TSP account, I’d estimate the amount to be somewhere between 10 percent and 20 percent of your F Fund holdings.

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TSP and passwords

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Q. How often must a TSP password be changed?  I cannot find the answer on the TSP site.

A. This is not a financial planning or retirement question and it should be posed directly to the TSP.

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TSP withdrawal

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Q. I am a federal worker, 51 years of age and am considering a withdrawal from my TSP account to pay off my substantial consolidated college student loans. If I pursue this plan what will be the tax ramifications  or any other penalties?  Another option for me is to take a loan out from my TSP account to pay the loans off and then begin to make payments back to the account. Is interest charged on these type of loans? Are penalties involved or any type of tax implications?  If I do not pay all the “loan” back before retirement, what penalties/taxes do I incur?

A. As long as you are an active employee covered by the TSP, you may not withdraw your money except in the case of demonstrable financial hardship. In this case you will be subject to income tax and the early withdrawal penalty. If you take a loan, you will be required to repay the loan in monthly installments, with interest. Keep in mind that the interest is paid into your TSP account, not to a third party. As long as you repay the loan, on time, there will be no tax costs or penalties. If you fail to repay the loan, the outstanding balance, including upaid interest, will be declared a distribution and you will owe tax and any penalty, if you do not roll over the distribution according to the applicable rules.

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TSP rollover

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Q: I will be retiring at the end of March 2011. I plan to roll over my TSP to an IRA. Can I roll it over before I retire? If not, how long does it takes to roll over to an IRA after I submit the form?

A: If you have reached 59 1/2 and have not already done so, you may take an in-service withdrawal and roll it over to an IRA. Otherwise, you will have to wait until you retire to roll over your account. I can’t tell you exactly how long the process will take, but I would allow two weeks, or so.

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TSP withdrawal

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Q: I turn 56 in December and I am retiring from the federal government. I would like to take the lump sum out of my TSP to buy a house. If I wait until my separation date of Dec. 7, I won’t get paid until January 2011. The Bush tax cuts expire at the end of December this year. Can I cash out my TSP a few months before to my last day without penalty because the cash out and retirement are in the same year and only a few months apart? Or must I wait until my actual separation date to access the full money? I really don’t want to claim the money next year in case the tax cuts aren’t renewed. My account has $273,000 in it right now.Can I cash out without penalty since I am 55 years old and will be 56 at retirement?

A: Before you can retire, at your age, you can access your TSP account through a loan or a financial hardship withdrawal. Otherwise you’ll have to wait until after you retire to do so. Once you retire, you will not be subject to the early withdrawal penalty.

With mortgage interest rates so low, you should consider taking a mortgage and using TSP loans and/or withdrawals to fund the payments over time, rather than paying it all up front.

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TSP withdrawal

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Q: I just got discharged from the Navy. I was told to look online to find out how to move my money out of TSP but I’m having trouble finding this information.

A: Visit www.tsp.gov.

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Required TSP withdrawl at 70

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Q: I retired from federal service on Jan. 3, 2008. With accumulated sick leave I had about 42 years of service. I was 67 years old when I retired. I had been investing in TSP on a regular basis. When I retired I left my funds in TSP. I will turn 70 on Sept. 12. Am I required to withdraw the funds when I turn 70? I have heard from a financial adviser group that former federal employees with TSP must move their funds into either a lump sum withdrawl or an annuity when they reach 70. Is this true?

A: While I’m sure that there are many sales reps who would love to get their hands on your TSP balance, that probably isn’t best option for you. Since you don’t need the money to live on, you should try to leave it in the TSP for as long as possible.

You can request that TSP begin sending you monthly checks that comply with the minimum distribution requirements that start when you reach age 70 1/2. Use Form TSP 70, which, along with more information about required minimum distributions, is available at www.tsp.gov. If you don’t need the money, you can just reinvest it in a taxable investment account.

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Maximizing TSP matching

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Q: I contribute to TSP. I am a little confused about the maximum amount per year. It’s $16,500 for 2010. I contribute 15 percent to TSP and have been doing so for some time. My understanding is that I should have been doing the math and updating my TSP deposit amount over 26 pay periods of the year. I have not done this for a while but want to get back on track.

My problem is that I’m not sure how to maximize. Is it as easy as dividing 16,500 by 26 pay periods? I don’t understand what that would do for my matching. I understand if I max out too early then I lose weeks of matching, so I would appreciate your advice on this subject. My base is $111,888 and as of Aug. 14 I had $13,525 TSP savings for the year. I think I’m done for this year and have to think about next. Do I need to reduce down from 15 percent?

A: It’s as easy as dividing the annual dollar limit by the number of paychecks in the year. Check with your payroll office for guidance on the exact number of checks you’ll be receiving.

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Irrational behaviors investors should avoid

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Experience and research show that investors consistently act irrationally in managing their investments — buying and selling the wrong things at the wrong times and for the wrong reasons. For the young investor, the cost of these mistakes will never be known, since there is rarely a clearly defined goal against which to measure performance. But, for retired investors, the mistakes can be painfully costly since they can result in unexpected, and unpleasant, changes in lifestyle.

It would be interesting to see how different your investment decisions regarding your Thrift Savings Plan account might be if you had make-or-break performance standards to live up to. For example: You must achieve a 9 percent average rate of return over the next 20 years without suffering a loss of more than 10 percent in any one year, or you will have to reduce your spending in retirement by $5,000 per year, for life.

Lots of investors shoot for the 9 percent, or better, return, but ignore the importance of managing their accounts to avoid the unacceptable losses, which can, in spite of great returns, cost them dearly. Or, they’re obsessed with avoiding losses, and consequently ignore the need to achieve a rate of return adequate to support their needs.

While not the complete solution, the first step toward achieving great investment performance is to avoid these common irrational behaviors:

Trying to rectify losses after they have occurred. Nothing seems to motivate investors to act like losses. You’ve just lost a bundle of value and you feel inspired — maybe even compelled — to respond. The problem with this approach is that once the money is lost, it’s too late to do anything about it. The time to avoid a potential loss is before it occurs. Rational investors mitigate their losses before they occur, when asset values are rising.

Selling a fund because the price has fallen. Think about it: When is the best time to buy real estate? When the price is high or when it is low? If you own a home and prices plunge, is your first impulse to think about selling? Probably not. But investors think this way about their TSP funds. A strategy of selling the recent losers and buying the recent winners is even sold to investors by certain TSP “gurus.” The rational investor is interested in buying the losers, when their prices are low, and selling the winners, when their prices are high.

Avoiding funds because they have not performed well. I hear it all the time: “I don’t want to own [name any fund] because it hasn’t performed well.” I’ve heard this statement about every single one of the TSP’s funds at some point over the past 10 years. Every fund has had its time in the sun, and will again in the future. The problem is that it’s impossible to know when. The solution is diversification — to own all of the funds, all of the time. Diversification is the key to maximizing risk-adjusted returns — returns with minimal risk.

Refusing to sell a fund because it has done well. As a wise investor once said, “All good things must come to an end.” Because one fund has outperformed another in the recent past does not mean it will continue to do so in the near future. Investments ebb and flow, rise and fall. Whenever a fund is outperforming the others, a rational investor will consider selling it. The most reliable way to do this is to regularly rebalance your account to an appropriate allocation. This will have you selling some of the recent winners and buying the losers — a completely rational approach.

Defining performance in terms of return alone. If maximizing potential gain is your only objective, why not invest your money in lottery tickets? For most investors, the answer is that the potential for gain is not the only objective. In fact, for most investors, gain is not an objective at all. It’s a means to an end. The real objective is future cash flow — having the money you’ll need or want to spend, when you need or want it. To this end, in addition to gains in value, the predictability of realizing those gains is critical. In other words, it’s not just the potential rate of return that matters, but the likelihood of realizing that rate of return over a given time that counts. Often, an investor’s success is more dependent on avoiding losses than on realizing gains. This is the reason, for example, that owning bonds is so important — not for their ability to produce superior rates of return, but for their ability to mitigate the downside risk of the portfolio by tending to rise when stocks fall.

TSP

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Q. I am under the FERS program.  Is the matching fund from the government included in my TSP balance now or will it be added when I retire?

A. It’s being deposited as you go.

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