By Mike Miles
TSP contribution increase
October 26th, 2011 | Uncategorized
Q. I read that the IRS changed the 2012 maximum contribution to 401(k)s to$17,000 from $16,500. However, I haven’t found any update on the TSP website or the Federal Times saying whether this will also apply to TSP contributions. Have you heard any news on this?
Tags: contributions, maximum contribution, TSP
F Fund investors should move some funds to G Fund
October 24th, 2011 | Uncategorized
It’s often said that it doesn’t pay to try to time the investment markets. However, we are in a situation now that makes one particular timing move a good bet for Thrift Savings Plan investors: moving some money out of the F Fund and into the G Fund.
The G Fund, a unique investment fund available only to TSP participants, guarantees to give you back whatever money you put into it, on demand, without risking the loss of your principal — like a money market fund. In other words, it’s liquid. But unlike a money market fund, which typically pays a relatively low variable interest rate in exchange for the principal guarantee and liquidity, the G Fund pays a variable rate of interest that is equivalent to the weighted average yield on all outstanding government debt — typically a much higher rate.
So, while most market funds are currently paying an interest rate of approximately zero percent, the G Fund is currently paying about 2.5 percent. It seems low, I know, but it’s better than zero. At least in the G Fund, you’re not standing still as inflation takes its toll. With the current distribution of federal debt, the G Fund’s interest rate makes it equivalent to a midterm Treasury bond, without the risk.
The F Fund, on the other hand, is a diversified bond fund. Its performance represents the aggregate return of the U.S. bond market, including government and corporate debt. Many investors incorrectly believe that bonds, particularly those backed by the U.S. government, don’t pose a significant risk to principal. While this is true if you hold individual bonds to maturity and then redeem them, it is not true for bonds along their path to maturity.
The market value of a bond rises and falls in response to interest rates demanded or offered for similar bonds. The bonds held by the F Fund are valued at the end of every day. Generally, if market interest rates rise, the value of your F Fund shares will fall, and vice versa. The effect of rising interest rates is offset, to some extent, by the interest payments that are periodically received from the bonds and credited to the shares’ value.
The differences between the G and F funds, considered within the context of the current bond market environment, lead me to recommend that you break the prudence against market timing. With short-term interest rates near zero and long-term rates near their historical lows, there isn’t much room for further reductions in interest rates. While rates might go lower, there is much more room for them to rise than to fall. Most observers seem to agree, and some downright fear, that interest rates will eventually begin to rise again.
When rates do rise, the value of your F Fund shares will fall if the loss in principal value exceeds the inflow of interest payments. Even without a rise in interest rates, the future rate of return for the F Fund is somewhat muted by the current circumstances.
For most Americans, this is not a good reason to abandon bonds as part of their asset allocation. Safer to stick with the appropriate allocation and rebalance to it periodically. But, that is because most Americans don’t have access to the G Fund. Since the G Fund eliminates the risk of loss in value and promises rates of interest that are similar to medium-term Treasury bonds, it’s essentially like holding a risk-free midterm Treasury bond fund.
The F Fund tends to hold about 20 percent of its assets in short- and medium-term Treasury bonds. Since you have a fund that is likely to equal or outperform those bonds with less risk of loss, I recommend that you consider substituting the G Fund for about one-fifth of your usual F Fund allocation until interest rates rebound to more typical levels — say, when three-month Treasury bills yield something closer to 3 percent.
This timing move will likely improve your portfolio’s performance over the coming few years with virtually no downside risk.
TSP vs. IRA
October 21st, 2011 | Uncategorized
Q. What are the advantages of moving my entire TSP into an IRA when I retire?
A. The only good reason is that you MUST withdraw the money in ways not permitted by the TSP – multiple lump sums, for example. I regularly counsel my clients to leave their money in the TSP as long as possible.
TSP withdrawal
October 20th, 2011 | Uncategorized
Q. 1 will turn 70 in July 2012 and would like to know when I must begin
withdrawing from my TSP and is there a certain amount that I must withdraw?
A. Since you will not be 70½ until 2013, your first withdrawal will be due by April 1, 2014, the year after the year in which you reach age 70½. This withdrawal will be for 2013, and your subsequent withdrawals will be due by Dec. 31 each year beginning with 2014. The minimum amount due each year is a moving target based on your life expectancy. Fortunately, the TSP will calculate the amount for you and send the payments as part of a monthly full withdrawal requested using Form TSP-70. The distributions are not required until after you have left TSP covered service.
Tags: 70 1/2, TSP withdrawal
Moving funds from IRA to TSP
October 20th, 2011 | Uncategorized
Q. You suggest in one of your responses that you can move funds from your IRA to the TSP. What are the limitations and rationale for doing so?
A. The money must be all pretax money – no nondeductible contributions. The rationale is that you will enjoy fully diversified, nonoverlapping investment funds at ultra-low cost, and the G Fund. Using these funds will enable you to implement an investment strategy that will produce superior risk-adjusted expected rates of return.
L funds
October 20th, 2011 | Uncategorized
Q. I was in the 2010 Fund. Then when that date came and went, I was at a loss as to which fund to go to. There is the plain L, and then it goes up from there. I plan on retiring in or about 2013. Which fund should I be in? One that is aggressive yet safer than the one above the 2010 fund?
A. I can’t tell you which L Fund you should be in, but once the L 2010 fund “matured,” your money was moved into the next more conservative fund: the L Income fund. Now the L 2020 fund is more aggressive fund from the L Income fund.
RMD and Roth IRA and taxes
October 18th, 2011 | Uncategorized
Q. I will be retiring in 2012 and must also take a required minimum distribution from my TSP in 2012. I would like to do a partial withdrawal in the amount of the RMD prior to the date I retire, to be followed by monthly payments upon retirement. My question is whether I can rollover the RMD into a Roth IRA, so that I would be paying income tax on the Roth IRA withdrawals as the withdrawals are being done, rather than on the entire amount of the RMD.
If I read the TSP material correctly, it appears that this can’t be done, and that the partial withdrawal of the RMD amount from TSP has to be done in a separate step, with taxes withheld, prior to my setting up the Roth IRA and my transferring the RMD (minus the taxes withheld) into the Roth. If this is what I have to do, is there any limitation upon the amount of the Roth IRA?
A. This is really a question for a CPA, but I’ll take a stab at it. First, your age-based, in-service withdrawal will be subject to mandatory 20 percent withholding. Second, all Roth IRA contributions must be made with after-tax money, so you can’t defer taxes on Roth IRA contributions until the money is withdrawn. Third, I’m not sure that you’ll be allowed to consider an amount converted to a Roth IRA as your RMD for the year – in fact, I doubt it. In short, I don’t think that what you’re planning will work, but you should consult a CPA to be sure.
Tags: Required Minimum Distribution, retirement, Roth IRA, taxes, TSP
TSP monthly withdrawals
October 18th, 2011 | Uncategorized
Q. I’m a FERS employee with the U. S. Postal Service and plan on taking a monthly TSP withdrawal when I retire at 64. I assume that the dollar amount can be changed either up or down at the beginning of each year. Is my assumption correct?
A. Yes.
Tags: TSP, TSP withdrawal
Withdrawal from 401(k) or TSP
October 18th, 2011 | Uncategorized
Q. Is there a way to withdraw money from my 401k or TSP without paying a tax penalty, in order to use the money to pay for college tuition for a child?
Tags: 401(k), taxes, TSP withdrawal, withdrawal penalty
Federal tax on lump-sum TSP withdrawal
October 18th, 2011 | Uncategorized
Q. I am retiring Nov. 30 and considering using a lump-sum withdrawal from my TSP to pay off my mortgage. I have read material at the TSP website and Googled my questions but not found a clear answer about the tax withheld. What is the federal tax percentage on a lump-sum withdrawal? I am 63 ½ and not withdrawing all funds. I would be making one withdrawal, leaving the balance to continue the investment, and no intention of future withdrawals.
A. The TSP will withhold 20 percent of the distributed amount for federal taxes.
Tags: IRS, TSP withdrawal