[TSPStrategy] IRS announces two-year delay to TSP catch-up contribution changes

https://www.govexec.com/pay-benefits/2023/08/irs-announces-two-year-delay-tsp-catch-contribution-changes/389792/

IRS announces two-year delay to TSP catch-up contribution changes

New rules requiring high-income 401(k) participants to make catch-up contributions only to Roth accounts will not take effect until 2026.

AUGUST 28, 2023 04:16 PM ET

• THRIFT SAVINGS PLAN
• RETIREMENT BENEFITS

ERICH WAGNER

The Internal Revenue Service last week announced that it would delay implementation of new rules governing catch-up contributions in 401(k)-style retirement savings programs, including the federal government's Thrift Savings Plan, until 2026.

Last December, Congress passed the SECURE 2.0 Act, a bill aimed at making it easier for people to save for retirement. Among the law's provisions are reforms to expand automatic enrollment in employer-sponsored retirement plans and increasing the age at which people must begin taking required minimum distributions from their 401(k)-style retirement plans from the current 72 years old to 75.

The law also sets up new guard rails for catch-up contributions, the method by which people who are least 50 years old can contribute additional money toward their retirement accounts above the normal annual cap. By 2024, retirement plans, including the TSP, were set to require all participants making at least $145,000 per year to make catch-up contributions only via Roth—post-tax—accounts.

But employers and retirement program managers warned that they would not be able to implement the provision in time, citing the complicated nature of setting up a system that would funnel high income employees into only making Roth catch-up contributions.

In guidance issued Friday, the IRS clarified that it will set up a two-year "administrative transition period" for the new Roth catch-up contributions requirements, effectively delaying their implementation until 2026.

"The administrative transition period will help taxpayers transition smoothly to the new Roth catch-up requirement and is designed to facilitate an orderly transition for compliance with that requirement," the IRS wrote. "The notice also clarifies that the SECURE 2.0 Act does not prohibit plans from permitting catch-up contributions, so plan participants who are age 50 and over can still make catch-up contributions after 2023."

That means, at least for now, federal workers who make at least $145,000 annually and are eligible to make catch-up contributions through the TSP can continue to make them either as Roth contributions or as standard 401(k)-style contributions. And the TSP and other retirement program managers have an additional two years to develop and implement systems to ensure that all catch-up contributions from high income employees are Roth.

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[TSPStrategy] TSP contribution limits will increase again next year, consultants predict

https://www.govexec.com/pay-benefits/2023/08/tsp-contribution-limits-will-increase-again-next-year-consultants-predict/389755/

TSP contribution limits will increase again next year, consultants predict

This would mark the third straight year that the federal government's 401(k)-style retirement savings plan and similar private sector programs see a boost in their annual contribution limits.

AUGUST 25, 2023

• THRIFT SAVINGS PLAN
• RETIREMENT BENEFITS

ERICH WAGNER

Participants in the federal government's 401(k)-style retirement savings program may once again be able to contribute more toward their retirement next year, according to consultants' projections.

Mercer, an HR and financial services consulting firm, announced last week that it believes that the annual contribution limit for 401(k) and related retirement plans, including the federal government's Thrift Savings Plan, will increase by $500 from $22,500 in 2023 to $23,000 next year.

If true, it would mark the third straight year that the contribution cap would increase, and would amount to a $3,500 jump since 2020.

The Internal Revenue Service announces contribution limits to retirement plans in the fall. Changes in limits are calculated based on the annual increase in the Consumer Price Index for All Urban Consumers, or CPI-U, as measured in September each year.

On its website, Mercer said it based its projections on the July CPI-U data, along with estimates for August and September. The Bureau of Labor Statistics this month said that the price index increased 3.2% between July 2022 and last month.

Although Mercer projected that most retirement program caps, including the defined benefit annuity and the annual addition limit—the total amount that can be contributed to a 401(k) by both employer and employee—will increase next year, catch-up contributions would remain flat under the firm's model. According to the firm's projections, catch-up contributions, an additional avenue by which 401(k) and TSP participants may make extra contributions provided they are at least 50 years old, will be capped at $7,500 in 2024.

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Re: [TSPStrategy] Solving the phased retirement puzzle

The reason phased retirement isn’t used more is because management doesn’t understand it and therefore can’t explain it to the employees.  It makes management’s job harder trying to manage full and half-time employees; ergo, management doesn’t want to do it.  IMHO

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[TSPStrategy] Solving the phased retirement puzzle

https://www.govexec.com/pay-benefits/2023/08/solving-phased-retirement-puzzle/389707/

Solving the phased retirement puzzle

What can you expect in actual income?

AUGUST 24, 2023 01:58 PM ET

• RETIREMENT PLANNING

TAMMY FLANAGAN

Retirement Counseling and Training www.retirefederal.com

For almost a decade, federal employees have had the option of entering phased retirement, a status in which they work half time and receive half of their annuity. But only a relatively small number of experienced feds take advantage of the opportunity.

According to the Office of Personnel Management, 294 employees covered by the Civil Service Retirement System are currently in phased retirement status, along with 761 Federal Employees Retirement System workers. That adds up to only 1,055 employees. Another 839 former employees are in composite retirement status, meaning they are fully retired after a period of phased retirement.

Part of the reason for the low participation rate may be a lack of knowledge of just how much a phased retiree receives in compensation. So let's look at some hypothetical examples.

CSRS

Suppose Pat, a 60-year-old CSRS employee with 40 years of service and a salary of $100,000, wants to shift to half-time employment. If Pat retired completely, her annuity would be approximately $74,000, or 76.25% of her high-three average salary. Under phased retirement, if Pat went to half-time service, her annuity would be computed as if she were fully retiring. However, she would be paid half of it, or $37,000 per year, plus $50,000 per year in salary, for a total income of $87,000.

Let's assume Pat found this a desirable arrangement and continued it for two years before deciding to fully retire. During this time, suppose Pat's annuity increased through cost of living allowances to $39,000 per year, and her salary went up to $108,000.

Pat would then have a composite annuity computed based on her retirement if she had been working full time for the two years of phased retirement. That would yield a benefit of approximately $84,000 (80% of her high-three plus credit for unused sick leave). However, at that time Pat would be paid half of that amount ($42,000), plus the original annuity (increased by COLAs) of $39,000, for a total of $81,000 per year.

FERS (Under 62)

Suppose John, a 60-year-old FERS employee with 40 years of service and a salary of $100,000, wanted to take the phased retirement option and go to half-time employment. If he retired completely, his annuity would be $38,800 (40 x 1% of his high-three average salary) and he would be entitled to a FERS supplement of about $24,000 (approximately the same as his estimated Social Security benefit at age 62). That adds up to $62,800.

If John were fully retired, he could also make withdrawals from his Thrift Savings Plan account (which includes agency matching contributions) to provide a total retirement income comparable to Pat's CSRS benefit. However, if John enters phased retirement, his salary would be $50,000 and his retirement would be 50% of his FERS basic retirement benefit, or $19,400. That makes a total income of $69,400. During phased retirement, he would not receive the FERS special retirement supplement. Since John is over age 59 ½ when he enters phased retirement, he would be old enough for an in-service age-based TSP withdrawal if he needs to supplement his income.

Let's assume John still found this acceptable and continued the arrangement for two years before fully retiring. Since he was under age 62 during his period of phased retirement, his annuity did not receive any cost-of-living adjustments, but his salary went up to $108,000. John's annuity would be computed as though he had been working full time during the two years and would add up to $48,400 (42 x 1.1% of his high-three average salary). He would be paid half of that amount, $24,200, plus the original annuity $19,400, for a total of $43,600.

Since John is now age 62, he can apply for his Social Security retirement benefit. If he were still under 62, he would be able to receive a FERS annuity supplement when the composite annuity begins. Now that he is 62 and fully retired, his entire composite annuity will begin receiving COLAs every year. John will add to his income the amount of his Social Security retirement and whatever distributions he takes from his TSP account.

FERS (Over 62)

Let's say Jim is 66 and still loving his federal job. He has 30 years of service and a salary of $100,000). His high-three average salary is $97,000 when he begins phased retirement. His retirement would be computed as 1.1% x 30 years of service x $97,000, or $32,010 per year (before any reductions for survivor benefits). Under phased retirement, Jim can collect half of his salary ($50,000) and half of his FERS retirement ($16,005) for a total income of $66,005. Plus, he has the option to file for Social Security benefits when he reaches his full retirement age.

Here are factors Jim should consider as he weighs phased retirement:

• COLA: Jim is over 62 when he enters phased retirement, so his phased retirement will be increased by annual COLAs,  along with annual adjustments to his salary.
• Social Security: Because Jim is (or soon will be) over the full retirement age for Social Security and is no longer subject to the earnings limit, he could begin to draw benefits (let's say $24,000 a year). That would increase his total phased retirement income to around $90,000. But he also could choose to delay his application for Social Security until he turns 70, when it would increase by 8% for every year he delays. Either way, his Social Security benefit will be adjusted if the earnings Jim had during phased retirement increase his average lifetime earnings and result in a higher benefit.
• TSP: Jim can continue to contribute to his TSP account and will continue to receive matching agency contributions based on his salary. Of course, if he continued to work full time, his matching would be based on his full time pay rate.

If Jim applies for his Social Security retirement benefit, he will more easily be able to afford to live in phased retirement.

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[TSPStrategy] Do you know what your TSP is for?

https://www.govexec.com/pay-benefits/2023/08/do-you-know-what-your-tsp/389585/

Do you know what your TSP is for?

When you were first hired, your retirement benefit may have been described to you as a three-legged stool: pension, Social Security, and TSP savings. One financial planner advises feds not to shortchange the last leg.

AUGUST 23, 2023

• PAY & BENEFITS WATCH
• RETIREMENT BENEFITS
• THRIFT SAVINGS PLAN

LISA WHITLEY

Undoubtedly, one of the most important perks of federal employment is access to a pension benefit –an annuity– in retirement. Combined with Social Security, most, if not all, of your must-have essential expenses can be covered by guaranteed income. So, what role does TSP play in your retirement plans?

In short, a healthy TSP balance can be the difference between a retirement that is characterized by worry and "just getting by," and a retirement that looks like a television commercial. (You've seen them: the happy gray-haired couple cruising the rivers of Europe…)

Determining your TSP goal begins with quantifying how much of your nonnegotiable spending can be covered by your pension and Social Security; the remainder of your spending must be addressed by your savings. The nuance that I would like to introduce is that the "remainder" — an unfortunately pejorative term — deserves every bit as much consideration as the so-called "essentials." It will define your happiness in retirement.

There are the obvious nonessential costs that come immediately to mind, such as travel and hobbies. Will you want to go further, perhaps purchase a second home? Is leaving a substantial legacy to your heirs a priority that you want to account for in your savings plan specifically?

Medical and long-term care costs are somewhat tricky in this formulation. On the one hand, they are clearly compulsory. On the other hand, because these costs can be extremely hard to quantify with any degree of precision, it is difficult to plan for them within the context of your guaranteed streams of income. You would not be the first person to throw their hands up in frustration and leave it to chance. 

But a more useful approach would be to conceptualize your TSP savings goal as consisting of two buckets: one bucket that is truly discretionary, and another that is a reserve for non-insured health needs.

According to the most recent Fidelity Retiree Health Care Cost Estimate, an individual should aim to save $157,000 to fund out-of-pocket medical expenses over the course of a typical decades-long retirement; for a married couple, $315,000. That is a shocking number. Of course, you know your own medical history best. Some readers will consider that estimate to be almost implausibly high; others will find it lower than their expectations. Nevertheless, dividing that number over the 30 or so years you expect to live in retirement can be a way to gauge if the annual income that you expect from your federal pension and Social Security will be sufficient for this need, or if you will have to account for this from your "medical care TSP" bucket. (If you have saved money in a Health Savings Account, you can, of course, adjust for that.)

Similarly, long-term care costs vary greatly. While, according to PwC research, the average cost is $172,000 for an individual, the dispersion of experiences is wide: a quarter of the time, an individual experiences long-term care costs of less than $26,000 while an unlucky 25% of the time, costs exceed $240,000. As with medical costs, your own and your family's health history may be your best guide to how to think about this expense. But it must be part of your TSP savings plan, most especially if you do not have long-term care insurance, or if you have elected to carry insurance at a level that still leaves room to "self-insure."

There is yet another reason — a much more uplifting one — that may inspire you to power-save in your TSP despite your pension. Many opt to leave federal employment when they are pension-eligible, but long before they are eligible to draw their full Social Security benefit. This may be a true early retirement or a downshift to part-time employment. Your ability to make this choice will be predicated on the ability of your TSP to support you as you wait to turn on Social Security. For younger federal employees who are decades away from retirement, the prospect of having this option in the future may be all the motivation needed to contribute as much as possible, as early as possible.

A final note: Federal employees now have the option to use a traditional or a Roth TSP. The decision of which to choose is multi-faceted. However, it should be evident from this discussion that your withdrawals from your TSP may be "lumpy"; that is, much higher in some years than others. This has the potential to create significant swings in your tax liability from year to year if all your TSP savings are in a traditional-type account. For that reason alone, you may want to "tax-diversify" your TSP holdings, allowing you to manage your taxable income from year to year.

What's the bottom line? When you were first hired, your retirement benefit may have been described to you as a three-legged stool: pension, Social Security, and TSP savings. Don't shortchange the last leg!

Financial coach and planner Lisa Whitley retired from the federal government in 2019. Her practice, MoneyByLisa, is a registered investment advisor.

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[TSPStrategy] How phased retirement works

https://www.govexec.com/pay-benefits/2023/08/how-phased-retirement-works/389498/

How phased retirement works

The ins and outs of a program that a lot of feds are curious about.

AUGUST 17, 2023 03:00 PM ET

• RETIREMENT PLANNING

TAMMY FLANAGAN

Retirement Counseling and Training www.retirefederal.com

It has been a little more than 11 years since Congress enacted the Moving Ahead for Progress in the 21st Century Act, creating a new phased retirement option for certain employees covered by the Civil Service Retirement System or the Federal Employees' Retirement System. 

Federal employees have been able to apply for phased retirement since November 2014. The number who have done so is still small, but for those who have taken advantage of this two-step retirement, it can be a way to ease into the next chapter of life. And it provides an opportunity to serve as a mentor to the next generation of employees. 

In phased retirement, an employee works half time and receives half of their full-time pay, while also getting about half of their annuity. Phased retirees (except for those at the Postal Service) must spend 20% of their working time in mentoring activities.

Eligibility

To take advantage of phased retirement, employees must meet certain criteria:

• They must be employed full-time for three years immediately before entering phased retirement.
• CSRS employees must have at least 30 years of service at age 55 or older, or at least 20 years of service at age 60 or older.
• FERS employees must have at least 30 years of service at their minimum retirement age (55-57, depending on year of birth) or older, or at least 20 years of service at age 60 or older.
• Employees subject to mandatory retirement (such as law enforcement officers, firefighters and air traffic controllers) are not eligible for phased retirement.

Schedule and Limits

Employees who enter phased retirement continue to work at 50% of a full-time work schedule.Their gross pay is cut in half, and is still subject to the employee's withholdings. Health and life insurance premiums are the same amount that is withheld from an employee working a full-time work schedule.

Agencies can put a time limit on how long an employee can remain in phased retirement. FERS phased retirees do not receive an annuity supplement.

Service Credit

The employee's annuity is based on the total creditable service they have performed up until the effective date of phased retirement and their highest three years of average salary. Deposits for post-1956 military service must be paid before the phased retirement begins. Any deposits owed for civilian service must also be paid. An employee in phased retirement status will not be able to pay these deposits when they fully retire.

Thrift Savings Plan

Phased retirees continue to be eligible to participate in the TSP. They can contribute to TSP accounts and are subject to the normal restrictions regarding TSP loans, financial hardship withdrawals and age-based in-service withdrawals.

Employees in phased retirement status are not eligible for post-employment withdrawals from the TSP. They are not subject to required minimum distributions or the TSP withdrawal deadline.

All sources of contributions to the TSP (employee contributions, agency automatic 1% contributions, and agency matching contributions) are determined using the employee's basic pay. If an employee has elected a TSP contribution based on a whole dollar amount, and if the amount is greater than the available pay after other mandatory deductions have been subtracted, no employee contribution will be made for the pay period. In this situation, a FERS employee would not receive an agency matching contribution for the pay period.

Return to Full-Time Work

Under a phased retirement, the idea is for the employee to go through a three-stage process: full-time employment, half-time employment while receiving half of a retirement benefit, then full retirement. It is possible, however, for the employee to end a phased retirement and return to full-time work with their agency's permission.

In this situation, phased retirement would be treated as a period of part-time employment. The phased retirement annuity would immediately terminate.

Composite Retirement

When an employee in phased retirement status decides to fully retire, their full annuity (known as a composite retirement annuity) will equal the sum of: 

• The phased retirement annuity, updated by any cost-of-living adjustments.
• The amount of the final phased portion of the full retirement annuity. This is the percentage of the full annuity the employee would have received had they not entered phased retirement.

Next week, we'll look at some examples of how phased retirement can play out. In the meantime, the Office of Personnel Management has more information on phased retirement and the forms needed to apply.

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