Another crippling problem with the TSP, when compared to independent accounts, is related to the Big R. The inability to convert Traditional "IRA" type TSP amounts into Roth TSP at a time like now is a real penalty to those who began investing in their TSP prior to when the Roth TSP began in 2012. Taxes are the lowest they will likely be for the foreseeable future AND a lot of Feds have spouses whose income took a hit in 2020 so their family income is lower this year so they may be in a lower tax bracket.
Think about it...if you could have converted that taxable TSP balance to non-taxable Roth TSP when your account was at the bottom how much would have that saved you, in both taxes and headaches, when you retire some time after taxes have to go up to pay for all the money getting printed?
On Sat, 13 Mar 2021 09:06:52 -0800, "sarah_oz via groups.io" <sarah_oz=yahoo.com@groups.io> wrote: What's Not To Like About the TSP By Tammy Flanagan
March 11, 2021
Last week, we looked at what makes leaving your money in the Thrift Savings Plan after retirement attractive to many federal employees and former feds. But as good as the TSP is, there are things that some retirees don't like about it.
These include:
The inability to withdraw from specific funds, such as taking payments only from the G Fund while allowing the money in the other funds to continue to be invested. Limited investment choices: There are only five core TSP funds: C, S, F, S, and I. The inability to contribute to the plan after government service ends. Delays in receiving funds after making a withdrawal request. These can be due to lengthy processing times, but also are often caused by participants' mistakes in filing request forms. According to the TSP , it generally takes seven to 10 business days to process a request once it's properly completed and submitted. I recently received an email from "Mark," who pointed out two additional TSP requirements regarding post-retirement withdrawals that he doesn't like:
It is important to address two reasons to consider leaving the TSP, one which I'll call "little r" and the other "BIG R." The "little r" is the requirement for married Federal Employees Retirement System participants to obtain the notarized consent of their spouse for all withdrawals, changes in withdrawals, etc. While this probably is not a big deal when relatively young, I see it being a huge hassle when older. My dad was wheelchair bound in his later years. If he had to go to a notary with my mother every time he wanted to execute a change in withdrawals, it would have been a nightmare. With an IRA, this issue disappears (after getting spousal consent for the initial rollover). All transactions can be executed with simply a mouse click or a phone call. [Note: This is due to an IRS rule that also applies to 401(k) plans requiring a participant to obtain spousal consent for any withdrawal other than an annuity that provides a life annuity to the participant and a survivor annuity for the spouse's life following the participant's death. The survivor annuity must be no greater than 100% and no less than 50% of the annuity paid during the participant's life.]
The "BIG R" is the potential tax bomb downstream for the beneficiaries of a TSP beneficiary participant account. For a surviving spouse whose share of the balance is $200 or more, the TSP will establish a beneficiary participant account in their name. A non-spouse beneficiary (or trust) is eligible to take a lump sum distribution and the payment is also eligible for a rollover distribution into an "inherited" IRA as long as the account balance is at least $200. The Roth earnings portion of a death benefit payment is paid tax-free if five years have passed since January 1 of the year the participant made his or her first Roth contribution. The TSP must withhold federal income tax from taxable death benefit payments we make unless a beneficiary transfers the payment to an inherited IRA. Non-spouse beneficiaries would be subject to the 10-year payout requirements dictated by the SECURE Act passed in late 2019.
The problem arises upon the death of the spouse who owns the beneficiary participant account. There is no option to continue in the TSP and there is no option to roll over the account to an inherited IRA. This is a huge problem because of the resulting tax issue. That lump sum distribution will be taxed in full in the year of distribution. So, as an example, suppose a participant has a $1 million TSP balance at the time of his/her passing, with a surviving spouse and two children. The surviving spouse leaves the money in the TSP beneficiary participant account and dies with the balance still around $1 million. Each child will get a $500K distribution taxed in full in the year of distribution. A solution to this problem is for the spouse to do a partial withdrawal into an IRA that can be used without penalty after age 59 ½. If they are under age 59 ½ at the time of their spouse's death, they can calculate what is needed to cover her expenses until age 59 ½ and leave that sum in the TSP.
To help clarify issues like these, the TSP has begun producing webinars for participants. For withdrawal options and details, consider attending the TSP's "To Retirement and Beyond." This two-part presentation is most relevant for employees within five to 10 years of their planned retirement. The focus is on determining how much someone needs to save in their TSP account so they can retire at their desired standard of living with a nest egg that will last for the rest of their lives.
There's also a course called "TSP Pre-Separation," which is designed to give late-career federal employees and military service members the tools they need to make smart decisions about their TSP savings. The course covers TSP withdrawal options and death benefits, and provides several retirement scenarios to get attendees thinking about how to best turn their savings into income.
By Tammy Flanagan
March 11, 2021
https://www.govexec.com/pay-benefits/2021/03/whats-not-about-tsp/172604/
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