what to do with tsp if you dont want to manage investments
What Non to Do with Your TSP: viii Thrift Savings Plan Mistakes to Avoid
Many federal workers saving for retirement in TSPs get tripped up past these common pitfalls. To help maximize your own savings, brand sure you steer clear of these viii mistakes.
For federal employees, participation in the TSP (Thrift Savings Plan) can greatly increase your chances of financial security in retirement, notwithstanding some of the folks you work with aren't making the almost of their TSP.
By participating in your TSP, you can salvage office of your income for retirement through automated payroll deductions. Yous can also receive matching contributions from your agency, perform some forwards-looking taxation planning for retirement by considering using the Roth option, and potentially grow your money for the time to come tax-free. But to help maximize your TSP, you should avoid these viii TSP pitfalls:
i. You are not contributing at least 5%
If y'all aren't putting at least 5% of your income into your TSP, to maximize the matching contributions from your agency, y'all're turning down complimentary money.
You may already be at five% and non know information technology. On Oct. 1, 2020, the automatic enrollment percentage for TSPs increased from three% to v% of bones pay. So, if you enrolled with the default option, on or after that date, yous're at 5%.
Merely, if you're enrolled at a lower percentage (either past pick, or by default because you enrolled earlier), you might want to increase your contribution back to 5%. And you don't have to stop at 5% either. Nearly financial directorate, including me, recommend saving far more than just 5% of your income (depending on your financial situation).
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ii. You are 100% invested in the 1000 Fund
Lots of federal employees like the Government Securities Investment (G) Fund because it feels safe. The fund is invested in short-term U.S. Treasury securities that are specially issued to the TSP, and so principal and interest payments are guaranteed by the federal government. When the stock market is volatile (and isn't it always?), the G Fund appears to be a safe selection.
Unfortunately, if yous put all your money into the Chiliad Fund, you're exposing your retirement savings to a different challenge: aggrandizement adventure. Instead, splitting your coin between two or more than funds (there are five to choose from) could offer both increased diversification and a greater growth potential, which you're very likely to need to gainsay the corrosive effects of inflation and help protect your purchasing power in retirement.
3. You assume a Lifecycle Fund is the correct fit
Lifecycle funds take a retirement "target date" approach to investing. They're based on the idea that younger federal employees tin handle more hazard than federal employees who are closer to retirement.
TSP Lifecycle funds are fabricated up of a combination of all 5 TSP funds, and they automatically shift to a more conservative asset allocation as you approach your planned retirement date.
Many federal employees have chosen a Lifecycle fund because it sounded similar "autopilot." When you fly on an airplane, the middle of your flight is set to autopilot. Only you all the same need a airplane pilot for a prophylactic landing. Autopilot without a pilot is dangerous, not condom.
Lifecycle funds make the assumption that all federal employees who program to retire in the same year have the aforementioned risk tolerance. Of course that'due south non the case.
If yous're using TSP Lifecycle funds, delight "seek professional person aid," and encounter with a financial adviser to brand sure y'all're on course. Nigh financial advisers will offering you a costless appointment.
4. You're choosing your TSP funds based upon by functioning
You lot've probably heard information technology before, but information technology bears repeating: "Past performance is no guarantee of hereafter results." Enquiry the funds available to you in your TSP and y'all'll find by performance for each fund. But you lot're investing for the time to come, not the past, and none of those funds can guarantee to repeat what they've washed in the past. Instead: Focus on your risk tolerance, and your goals, to notice the TSP funds that will best suit your needs for retirement.
5. You are taking loans from your TSP
Taking a loan from your TSP is a bad thought. The money you lot're putting into your TSP is for retirement, not for buying a new machine. If yous leave federal employment with an outstanding TSP loan you lot have to pay back the full loan residual within 90 days. If yous don't, the IRS will consider the entire outstanding loan corporeality as a taxable distribution, taxing the sum as earned income. In addition, TSP borrowers who are younger than 59½ can too get hit with an boosted 10% early-withdrawal penalisation.
6. Y'all fail to update your beneficiaries
If y'all pass away without a Designation of Casher form (TSP-iii) on-file, your TSP will be distributed in the "statutory order of precedence," which starts with your spouse and goes through a variety of other "potential beneficiaries." If that's OK with y'all, you don't have to bother with this form. Just if y'all've already filed a beneficiary course, and something has changed (maybe a divorce, a new marriage or perhaps new grandkids), or the statutory order of precedence just doesn't give you a warm fuzzy, file an updated Designation of Beneficiary form.
7. You don't empathize all of your withdrawal options
When you get out federal employment, you have a few choices for how to take the money from your retirement account. Yous tin:
- Withdraw all of the money as a taxable lump sum.
- Withdraw the money in equal monthly payments based on the dollar amount or actuarial tables.
- Take the TSP buy a life annuity for you lot.
- Work with a financial adviser to perform a rollover to a Traditional IRA and/or Roth IRA, and for avant-garde income planning, nugget allotment, investment management, forwards-looking tax planning, health care planning and legacy planning.
The get-go option listed higher up — withdrawing all your money as a lump sum — exposes 100% of your Traditional TSP residuum to federal income taxes (and possibly state income taxes) in 1 tax twelvemonth.
The 2nd choice is probable too simplistic for nearly separated federal employees, and likely won't work as well as other retirement income options. Consider coming together with an independent retirement financial planner and so that you lot tin at to the lowest degree consider other income options that may work meliorate for you. It's always all-time to accept choices.
The third choice gives the TSP the task of purchasing a life annuity for yous. This is kind of like when I was in Navy boot camp and they told me the exact underwear I was going to wear for the next two months. No choices. No argument. Do as you lot're told. Yes, sir.
If you're going to consider a life annuity for retirement income, I recommend y'all meet with an contained retirement financial planner and accept them come across if the TSP's life annuity is your best pick. It may non exist.
The quaternary option may exist a good choice for you if you'd similar broader — and perhaps better — options than simply the five funds that are available to you in your TSP, and if advanced income planning, asset resource allotment, investment direction, forward-looking taxation planning, health intendance planning and legacy planning are of import to you.
8. You don't have a clear strategy for your TSP
Often, when federal employees enroll in the TSP, it'due south done without thinking most how the TSP volition complement (or complicate) other retirement accounts and retirement income sources, such as Social Security benefits, pensions, IRAs, 401(k)southward, 403(b)s, Deferred Comp, non-qualified accounts, bank accounts, etc.
Enrolling in the TSP is great, only don't just enroll in it and settle for the "default settings." See with a retirement fiscal planner and qualified tax professional person to run into what forwards-looking taxation planning and advanced retirement income planning options might be in your best interests.
Rather than just enrolling in the TSP and turning off your encephalon, find qualified professionals — fifty-fifty if information technology's but for ane meeting, because y'all don't know what you don't know.
They can help you evaluate your TSP choices within the context of a holistic, tailored retirement plan. How much will you demand to take saved for a comfortable retirement? Volition your TSP fund choices, and your contribution pct, get y'all to that goal?
Wait for independent financial professionals who are knowledgeable in TSPs, and work together to build a retirement financial plan that'southward based upon your specific needs, wants, and goals.
Kim Franke-Folstad contributed to this commodity.
This commodity was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You lot tin can check adviser records with the SEC or with FINRA.
Appearances on Kiplinger.com were obtained through a paid PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Source: https://www.kiplinger.com/retirement/retirement-planning/602593/what-not-to-do-with-your-tsp-8-thrift-savings-plan-mistakes
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