As you’re planning for your retirement, you want to use whatever resources you have available to help you achieve your goals. That includes the Thrift Savings Plan (TSP).
The TSP has made a lot of recent changes, but did they fix everything? These are eight things that I believe the TSP should fix.
1. Unlimited Reallocations and Fund Transfers
The first thing that would be nice if you could do in the TSP is to have unlimited reallocations and fund transfers.
Here are the rules from the TSP website:
- Each calendar month, you can use your first two reallocations or fund transfers to redistribute money in your account among any of the TSP funds.
- After the first two of either transaction type, you can only move money into the G fund.
This means you can really only make two transactions a month, and the only way to get a third transaction in a month would be to move it to the G fund.
Does this come up a lot? Perhaps not, but it would be nice to have control of your money and be able to allocate it however you want and as many times as you may need.
2. Limited Investment Options
The next problem is one I have often talked about with the TSP. Even with this new update, they still didn’t fix it even though they probably think they did.
So what is it? It’s limited investment options.
You may say, “Wait, with the new changes, we now have access to the mutual fund window. That window was set up to provide greater investment flexibility.”
Here are some of the details from the TSP website:
- If your account meets certain eligibility criteria, (still not sure what that is) you can choose to access a selection of more than 5,000 mutual funds.
That sounds good, however:
- There will be a $55 annual fee to use the mutual fund window.
- There’s already a $95 annual maintenance fee.
- There’s a $28.75 fee per trade as well as other fees and expenses specific to the selected mutual funds.
- Your initial investment must be at least $10,000.
And here’s the fine print…you may not invest more than 25% of your total account in the mutual fund window. That is what limits your number of investment options. If, for example, you have a $400,000 TSP balance, then you can only invest $100,000 of it through the mutual fund window.
Consequently, you are still limited in your investment options for the majority of your money even after this fix.
3. The Ability to Choose Which Fund Your Distributions Come From
The next problem that still was not addressed is the fact that you still are not able to choose which fund your distributions come from. If you set up a $1,000 a month distribution from TSP, the money will come pro rata from the different funds.
There are situations and scenarios where you would not want it to come out pro rata.
One is the benefits of a buy and hold strategy is that you buy the stock market fund, such as the C Fund, and you hold onto it. If the stock market goes down, it is unfortunate, but it’s not the end of the world because you haven’t sold it yet. The idea is that it will rebound and come back by the time you have to sell it.
However, if you’re taking distributions on a monthly basis, and the distributions are coming out proportionately from each of the funds, then you will be selling when the market goes down if you’re taking a monthly distribution from the TSP.
There again, does this problem show up every month? No.
But during the Covid crash a couple of years ago, this rule of taking distributions out proportionally would have cost you some money. Depending on what the distribution size was, it could have cost you a large amount of money.
This makes the TSP very cumbersome for managing distributions in retirement. Being forced to sell the stock market when it is down can lower your overall returns. Over the long haul, that can be costly.
If you’re age 59 1/2 or older or if you’ve retired, you can move money out into an IRA and avoid these issues.
Now do IRA’s have some issues? I’m sure they do. You need to find what will work best for you.
Some view potentially higher fees in an IRA as an issue. I view proper planning and the ability to avoid these 8 problems as worth the fees.
And, keep in mind that the new mutual fund window has extra fees associated with it.
4. How the Government Manages the G Fund
The next issue deals with how the government manages the G fund.
Here’s a quote from an article dated August 4, 2021, entitled Treasury Suspends Investments into TSP‘s G Fund and More. The article states:
“The Treasury Secretary Janet Yellen informed Congress this week that her department would cease its investment into the three federal retirement programs as part of its extraordinary measures intended to delay running into the debt ceiling.”
It goes on to say that they would suspend investments into the civil service retirement and disability fund, the Postal Service retiree health benefits fund, and the TSP’s G Fund, which is made up of government securities, to avoid breaching the debt ceiling.
Yellen stressed that these measures were temporary.
Now it does say, “by law, the G fund, will be made whole once the debt limit is increased or suspended, federal retirees and employees will be unaffected by these actions.”
The government has done this many times in the past. To their credit, they’ve always paid the money back, but most people that are investing in the G Fund are doing so because they want to be conservative with the money.
Do you really want your money that’s earmarked as a conservative investment to be used to fund government activities because they can’t manage the debt ceiling? If this is a problem for you, you can move money to an IRA and invest it however you want with confidence knowing that the government is not going to be dipping into your account to fund its spending.
5. No Dedicated Advisor
Another problem with the TSP is that you don’t have a dedicated advisor that you can work with to help in planning for your retirement. On the TSP.gov website, they talk about personalized support for rolling over money to your TSP account.
But they still do not have any advice on:
- How you should invest.
- How you should plan for taxes.
- How you should plan for the untimely death of your spouse.
The TSP is set up for someone who is self advised. If you don’t understand investments, then the TSP is not tailored to you.
You may benefit from working with someone individually who knows your needs and goals and can help lead you down the best path.
6. You Cannot Make Immediate Trades
Another shortcoming of both the TSP and the mutual fund window is that you can’t make immediate trades. When you put in a trade, you have to wait until 4 PM, after trading has ended, for your request to go through.
If the stock market is crashing, and you want to get out, and it’s 10 o’clock in the morning, you are out of luck since any trade you input will not be executed that day.
This is the same for mutual funds. Whether you’re in an IRA or the TSP, mutual funds have the same problem. If you use exchange-traded funds (ETF), they act like mutual funds but give you the flexibility to sell them during the trading day.
The same theory works when you want to buy. If you put in a buy order, it doesn’t happen until 4 o’clock.
Is this a problem every day of the year? No, but a couple of times a year, this could be important.
7. Doing Roth Conversions Inside of the TSP
Another problem the TSP did not fix with this new update was giving you the ability to do Roth conversions inside of the TSP.
At Christy Capital, we talk a lot about tax planning and shifting money to Roth. Roth converting is when you choose to go ahead and pay the tax on a portion of your traditional IRA balance and shift it to Roth IRA. Once you do the shift, the money that’s in the Roth IRA can now grow tax-free. If you think taxes are going higher in the future, this is a way to pre-plan and offset future higher taxes.
The TSP does not give you that option. If you realize that you have more traditional money than you need and you want want more money in Roth, you’re limited in how you can fix that inside of the TSP.
As you approach retirement, this can be a big issue. To me, this one item is a deal breaker.
Let’s assume the stock market continues to grow at the long-term average that it has in the past. Would you rather pay taxes on your current balance, or would you rather pay taxes on whatever your balance is going to be 10 years from now?
If you see the value in paying taxes on today’s potentially smaller balance as opposed to a potentially larger balance 10 years from now, then you would want to do a Roth conversion, but again, you can’t do it in the TSP.
If this is important to you, you will need to roll your money out of the TSP and into an IRA. You can do this once you turn 59 1/2 years old if you are still working, or you can do this once you’ve retired at any age.
Roth converting is a year-by-year process that generally doesn’t happen overnight, but over a five or six-year period, you can move a large amount of money to a tax-free account. This can make a big difference.
8. Qualified Charitable Distributions
Another problem that wasn’t fixed was your ability to execute a qualified charitable distribution from the TSP. It’s simply not allowed.
What is a qualified charitable distribution?
This is where you can give money to a church or charity directly from your IRA without paying taxes on those funds. If you are charitably minded and you are giving to charity already, you may not be getting the tax deduction for it.
The standard deduction has increased over the years. In 2022, it was $12,950 for a single filter and $25,900 for married filing jointly. You are still able to itemize your deductions if they add up to more than $25,900 per couple. If they are less than that, then you would just take the standard deduction.
For a lot of people, the standard deduction ends up being more than their itemized deductions, but then that means that your charitable giving is no longer tax deductible.
Would there be a way to take the standard deduction AND be able to write off your tithe or charitable contribution? If you are age 70 1/2 or older, you can do a qualified charitable distribution where you give money directly from the IRA to the church or charity. That amount would go directly to the church or charity and not be taxed. There is a limit of $100,000 per year on this.
What if you’re 70 1/2 and all of your money is in the TSP? You would be out of luck.
Is this a problem that will affect everyone? Probably not. But if you consistently donate money, this is something that you can take advantage of once you’re 70 1/2 if you plan well.
If you find some of these aspects of the TSP troubling and want to talk to someone about a different way to manage your money, then please reach out to us here at Christy Capital Management.
Mel Stubbs is a Financial Planner and educator at Christy Capital who works with federal employees all over the country, teaching them how their retirement system works and how to plan for retirement using their available benefits.