By Mike Miles
November 25th, 2013 | Uncategorized
Q. I understand that a federal civilian employee under FERS can make $52,000 a year to the Thrift Savings Plan. I know that the $17,500 regular contribution and the $5,500 catch-up contribution totaling $23,000 can be put into the Roth TSP. How much of the overall $52,000 limit can be put into the Roth TSP, and how would one contribute to the Roth TSP above the $17,500 and $5,500 limits?
A. You misunderstand the limits. The $17,500 and $5,500 limits are the total deferral limits to either the regular or Roth TSP.
November 17th, 2013 | Uncategorized
Here are the five basic Thrift Savings Plan funds in order from the highest to the lowest rate of return for the month of October: C Fund (4.60%), I Fund (3.38%), S Fund (2.94%), F Fund (0.89%), G Fund (0.19%). And here are the year-to-date results: S Fund (31.13%), C Fund (25.34%), I Fund (19.43%), G Fund (1.52%), F Fund (-0.78%).
Interesting? Maybe to some. Useful? I don’t know how.
As an investment manager — or TSP participant, as you are more commonly known — you are responsible for making, or delegating the making of, a massive series of decisions. Some of these decisions, like whether you contribute to the Roth or the Traditional TSP accounts, will most likely wind up being relatively insignificant. Others, like the distribution of your money among the available funds, will be instrumental to determining your financial future. As I’ve written before, making sure that the important decisions are the best they can possibly be is your primary objective as an investor. If you’re not sure which are the critical decisions, you’d be safe to make sure that every decision you make is the best it can be.
This brings me back to the question about the usefulness of historical performance data for the TSP, or any other, investment securities. Is it of any real value? I don’t believe it is. There is no strong evidence that this information, at least in the short run, is useful for predicting future results. You can’t go back and make decisions based on it. So, what good is it? Really, it’s no good at all. In my experience, it causes problems and leads to bad decision-making.
Two wrong-headed mistakes are often made. The first is the incorrect belief in the “due theory.” This is the fallacy that the probability of an independent event occurring goes up as the event does not occur: “I’ve just flipped 10 heads in a row, so the odds of flipping a tail on the next try are greater than 50 percent.” Not true!
The second, and I think more common, mistaken belief for investors is the momentum of inertia theory. This is belief that an independent series of events is likely to continue on its current path: “I just flipped 10 heads in a row, so the odds of flipping a head on the next try is greater than 50 percent.” Wrong again.
Sure, you can find historical records that support either of these theories, but that doesn’t mean they make any sense. You can find support for just about anything through back-testing large, randomly generated data sets, and a series of unpredictable events often shows surprising runs of luck, good or bad. Patterns appear to show up just about anywhere you look for them, even in random data.
Finding a pattern in history and predicting one in the future are two very different things.
As an investment manager, your job is to be concerned with two things: Where you are today and how best to get where you want to be in the future. While the past has put you where you are today, you don’t need to know anything about the past to assess your current position. And the kind of historical data published for specific investment securities, like funds, is not needed for use in making decisions about how to proceed in the future. In short, this information is useless to you in managing your TSP account or any other investment account.
Even the effect historical data tends to have on investors is unreliable, if not outright dangerous. Many of the investors I’ve talked with over the years tell me they feel great when their account values have risen quickly or steadily to a new high. Likewise, they feel bad when their account values have fallen. These effects tend to make them want to invest more, or more aggressively, on the heels of good market results and withdraw their money from risky assets after bad results. Data on investor behavior confirms this behavior. Unfortunately, it is irrational and harmful. It is rational to become more cautious as prices and values rise, and more confident in your investing as they fall. The key to successful investing lies not in tracking the price history of investment securities, but in understanding and accommodating the probabilities of their future prices. Done right, it is a prospective, rather than a retrospective, exercise. So, it’s OK to be entertained by what happened yesterday. Just don’t make the mistake of confusing this with what will most likely happen tomorrow.
November 13th, 2013 | Uncategorized
Q. I withdrew the bulk of my Thrift Savings Plan account a couple of years ago and rolled it over to an IRA, thinking I could get better earnings on my investment. It has not worked out that way. Can I put this money back into my TSP account? I have not yet retired and am still contributing 5 percent of my earnings to my TSP.
A. As long as the IRA contains only untaxed money, you can and should transfer the money back into the TSP. Use Form TSP-60 to do this.
November 11th, 2013 | Uncategorized
Q. I want to know what you think of two services widely advertised to federal employees. One is the Thrift Savings Plan pilot that claims to help one allocate TSP contributions in good and bad financial times with extraordinary success, and the other is a full service company offering financial and estate planning called Federal Navigator.
A. I won’t review the specific services you’ve mentioned, but I will make a couple of general comments:
Read the disclaimers for any advisory service you’re considering. A newsletter is for informational purposes only, so the publishers won’t take responsibility for the results their recommendations might produce for you. Why would you take advice from a source that abdicates any and all accountability for the results of their advice? Professionals who are licensed and paid to sell you insurance or investment products are salespeople, not advisers. Their interests are in conflict with yours, and you never know why they are recommending this or that product. Why would you trust advice from a conflicted source? I generally don’t believe that it’s smart to trust recommendations from sources without accountability or with conflict of interest, particularly not when there are more trustworthy sources available. You’ll have to do your diligence and decide for yourself, however.
October 22nd, 2013 | Uncategorized
Q. I am fairly new to investing in the Thrift Savings Plan, having been active in it for about three years. I am 31, with about $3,800 and contribute about 13 percent of my pay into the L2040. When I started, I had 60 percent G Fund/40 percent C Fund. Am I going the right direction when I moved into the L Fund?
October 21st, 2013 | Uncategorized
Q. I retired from the Postal Service on Jan. 31 with a Voluntary Separation Incentive Pay of $15,000. The VSIP was paid out as $10,000 this year and $5,000 in 2014. I know I can contribute to an IRA for 2013 since I had earned income during the month of January. Now that I’m retired, will I still be able to contribute to an IRA in 2014 because of the $5,000 in “income” that I’ll receive from the Postal Service?
A. A VSIP is not considered a basis for contribution to an IRA.
October 3rd, 2013 | Uncategorized
Q. I was first employed by the Defense Department in October 1982 and placed in CSRS. During a reduction in force, I lost my position in July 1994. In 1996, I withdrew my CSRS contributions and had them rolled into an annuity with American Express (now Ameriprise).
In November 1998, I was rehired by DoD and became a FERS employee. When I was rehired by DoD, I took the funds I had earned at my previous (1994-1998) job’s 401(k) and rolled them into the same annuity with Ameriprise.
I am now nearing retirement age and plan to buy back the CSRS time I lost by withdrawing my funds.
Can any of the annuity I have with Ameriprise be rolled into repaying my CSRS without any penalty or tax burden? I would think that, at the least, the amount that I withdrew in 1996 and rolled into the annuity could be rolled back into the CSRS. I am not trying to increase the amount of the CSRS, only to repay what I withdrew, plus interest due.
A. You made your original CSRS contributions with after-tax dollars and the money was not taxed when it was withdrawn. Your redeposit must again be made with after-tax dollars, so you can’t do what you’re asking about.
September 23rd, 2013 | Uncategorized
Q. I’m an active-duty Army officer who finally this July got around to transferring 100 percent of my funds (all in G) into the L2040 lifecycle funds given that they have a much better rate of return and reasonable amount of risk. The total value of my G Fund before transfer was $133,700, composed of $126,468 of contributions and only $7,232 of unrealized gain.
After transfer, the total value of my account remained the same — approximately $133,700. However, it showed that only $91,368 had been used to buy shares in the L2040 fund. Presumably, the difference of $42,332 would be unrealized gains, which doesn’t make much sense to me since I’ve only had my funds there for two months.
I’m wondering why the total value or at the very least, the total amount of contributions (more than $126,000) were not used to invest in the L2040 fund instead? Could you explain, please? I’m still awaiting a response from TSP.
A. The term “unrealized gain” doesn’t apply to the Thrift Savings Plan. I can’t tell you why the numbers used in the transaction are what they are. The TSP will have to explain that.
September 18th, 2013 | Uncategorized
Q. I am almost 47 years old and have applied for disability retirement from my federal job. I have 27 years of federal service and am covered under FERS. It was my understanding that upon disability retirement, I will not be able to contribute to my Thrift Savings Plan account any longer and the funds would basically sit in TSP until I’m 59½ years old. For that reason, I’m considering rolling over my TSP to a traditional IRA, in which I can then make contributions to until I reach 59½. I’d like to know why leaving the funds with TSP would be better than rolling over to an outside IRA, upon which I can then continue to make contributions? I have six figures in my TSP and have no other retirement accounts. My objective obviously is to continue growing the funds.
A. The TSP has lower expenses and access to the G Fund – two advantages you won’t find anywhere else. The benefit of these advantages is the ability to create a portfolio with better risk-adjusted returns than you’ll find in an IRA.
You don’t need to roll your TSP over to an IRA to contribute to an IRA, however. Open an IRA at a discount broker and make your contributions to it. You can invest in low-cost index funds in the IRA and then, when you’re done contributing, you can transfer your IRA balance into your TSP account. That would be the smarter move.
September 18th, 2013 | Uncategorized
Q. I’m 68 years old (under FERS) and have a Roth IRA that’s external to the Thrift Savings Plan and has been open and funded for more than 10 years. I started contributing to my TSP Roth IRA this year. When I retire in 2015, I want to be able to roll over my TSP Roth IRA into my external Roth IRA without any tax consequences. I understand that I’ve clearly met the age requirement (older than 59½), but I want to make sure I also meet the five-year rule.
Does the five-year rule apply to the time that funds were first contributed to the TSP Roth IRA or to the time that I first starting contributing to my external Roth IRA? In other words, I will only have contributed to my TSP Roth IRA for two years (not five) but will be transferring the funds into an external Roth IRA that’s been open for 10 years. Would that create any type of problem?
A. The five-year clock started running on Jan. 1 of the year in which you made your first Roth IRA contribution, so there should be no penalty on withdrawals from either the original IRA or the rolled-over money. The rules are complex, however, and your tax preparer should oversee any moves you make.