You're listening to Operation veteran finance, where veterans receive unbiased and expert advice to help them achieve their money mission. Here's your host, Army Veteran and CERTIFIED FINANCIAL PLANNER professional. Garrett Sorensen.
Garrett Sorensen 0:23
Hello, and welcome to Operation veteran finance. I'm your host, Garrett Sorensen. We've got some big changes for you guys with the podcast. We're going to talk all about those changes why they came about what happened. But we're not going to do that in this video, we're actually going to do that in another video down the line. So make sure you guys are subscribed, tune in, make sure you get notifications on wherever you get your podcasts for Operation veteran finance, we're going to be talking about those changes in the future. But right now, I want to talk about the changes that are coming up with the TSP, the Thrift Savings Plan, as most of you guys might have already seen. There are a lot of changes coming with the TSP here in the next couple of weeks. And so I want to take this time to talk about those changes, and also talk about the five things that you need to know about your TSP account.
Kicking it right off topic number one, initial contributions are automatically set to the G fund. A lot of you guys may already know this, but you'd be surprised how many people I see and talk to you that have been contributing to their TSP account for a few months, maybe even a few years. And they never change that initial contribution going directly to the G fund, which matches the government securities investing fund. It's not a bad fund, it's just that if you have a lot of time, you're not maximizing your potential for growth inside of the TSP by staying inside of the G fund. So you definitely want to go and change that to align it with your overall strategic asset allocation. There's two things that you need to change inside of the TSP, this change is made inside the TSP. The first one you need to change is your current allocation, the funds that you've already contributed to the TSP to put them into the other investment options available inside the TSP. After you've done that, separately, you need to go and change your future contributions. This is where you're going to decide where you want your future dollar bills to be saved and invested to choosing among those funds that are available in the TSP. So you have to make both those changes in order to maximize the potential for growth within your TSP.
Topic number two, selecting your asset allocation within the TSP. Now in a previous video, we talked about the five family funds, you've got the G fund, which again tracks the government securities investment funds as a short term US Treasuries, you have the F Fund, which is a fixed income index investment fund that closely tracks the Bloomberg us aggregate bond index. Next you have the C Fund, which is the common stock index Investment Fund. This is going to be something that closely tracks the s&p 500 or large cap Investment Fund. Then you have the S fund the small cap stock investment fund. This says it tracks and again, this is according to tsp website, the Dow Jones total market index, you have the I Fund, which is your international stock index investment. This tracks the MSCI Europe, Australia and Far East index. So this is your typical International Investing option. Now, aside from those five funds, you also have the 10 lifecycle funds, and those are broken out over years. It's supposed to be determined based on when you're looking to retire, or when you're going to start using those funds. As we've talked about before, the important thing to keep in mind with the L funds, the lifecycle funds, they are just a different weighting of the five investment funds that we just talked about. These are not different investments, they're not using a different strategy. All they're doing is changing the weightings of those five investment funds inside of the TSP depending on when those funds are supposed to be used. So if you have a really far one out 2045 2050 You're gonna be more aggressive inside of that lifecycle fund compared to if you're in the 2025 or the 2030, which is going to be more based on asset preservation, making sure that we're saving more of those dollars compared to looking for high levels of growth in there. Now one of the big changes and this change is said to be coming out in June of this year is the TSP is going to be adding a mutual fund Window option. This is supposed to be a selection of over 5000 different mutual funds available to people within the TSP. Now this is exciting for a lot Other reasons for a lot of us, we've just been dealing with those same five family of funds plus the lifecycle funds for a long time. And that's been a big complaint. So now that should be opening up to new investments based on this mutual fund window. Some of the downsides, here are the fees that are associated to use this mutual fund window. The first one that sticks out is a $55 annual administration fee. This is a separate fee, just for people using the mutual fund window. And this is to ensure that the cost of using this mutual fund window does not interfere with the regular tsp participants that aren't using mutual fund window. On top of that, you have a $95 annual maintenance fee. Now a lot of people might be used to paying a fee with a brokerage account, I've seen some of these with, if you have a lower dollar amount in there, they might charge you an annual fee, whatever it might be. That's not that absurd. $95 plus $55. To use the brokerage window does seem high. But that's also depending on your contribution level and your overall account balance right now, for a lot of people that might not be that much. And it might be a good opportunity for them to go out and explore new mutual funds for them to help maximize their potential for growth. On the downside, this is where fees can really start to come in and eat away at your overall gains. And you have to look at is it part of your strategic asset allocation to go in and have these new mutual funds? Or can you create that same potential growth strategy just using those same five family funds inside of the TSP. Another fee that I saw that really stood out to me is the trade fee. This is a $28.75 cent per trade fee. So one thing to keep in mind with this trade fee, you are not going to be doing a lot of trading of these mutual funds, maybe some rebalancing, maybe making sure things aren't overweighted in one area or another based on market movements. But you're not going to be day trading these mutual funds within just inside your TSP by any means. Now, fees are not necessarily a bad thing. What I tell everyone is we just want to make sure that if we're paying a fee, we're being rewarded for paying that fee, the one thing that we don't want to do is turn down dollar bills, because we have to give away a dime, if it's going to reward us then those fees are going to be worth it. But for a lot of people, you might be able to to have that same success with your strategic asset allocation without going into this high fee mutual fund window. The other thing to keep in mind with mutual funds, mutual funds already caught a carry and net expense ratio fee. So if you invest in these mutual funds, you're still going to have the fee that that mutual fund charges so that that manager can keep the lights on pay the employees to continue to manage that mutual fund. So there are going to be fees associated with using this investment strategy.
The third thing that you need to consider is should you do traditional or should you do a Roth. Now, we've talked about this a little bit in the past, the one thing to keep in mind here is that with your TSP contribution, this change is not made inside of the TSP, this change is made inside of my pay. So you have to actually go into my pay change the percentage contribution, you're going to have either traditional or Roth. Now, depending on your retirement plan, whether your high pay or high three is going to determine whether or not you have already been or excuse me, if you've been receiving contributions are a match for your contribution instead of the TSP. Hi pay high three, you guys already know you have not been receiving any kind of match for your contribution contribution inside the TSP. But the Blended Retirement System, the BRS the new system, those people already know they have an automatic contribution plus a match to the dollar bills instead of the TSP. Why does this matter? Well, regardless if you're on that Blended Retirement System, and you are receiving that 1% automatic contribution and a match those funds, that matching dollar that you receive is always going to go into the traditional tsp. Even if you're contributing on a Roth basis, you're going to have to account balances, you're going to have your traditional for your match and your automatic contribution. And then you have your contribution for the Roth. There's nothing wrong with that. That's just the way that the TSP is going to work with this. If you've been contributing to the traditional your entire time in the military, it's not too late. If it fits with your financial plan to switch over to the Roth again, much like the Blended Retirement System, folks are going to have two separate accounts, you're going to have two different counts as well, your traditional and then your Roth. Now, you'll just have to maintain the investments within those two strategies. But if you decide to change your contribution over to a Roth or from a Roth to a traditional whatever it is, you'll do that in my pay, change the percentage of application you want. And then again, going back to our topic, one, make sure you change that future contribution and current asset allocation inside of the new account that you're going to start contributing to, so that you are maximizing the potential for growth in that. If you're sitting there saying, Garrett, should I do traditional, Should I do a Roth, these are questions that you're really going to have to sit down and talk about with a financial professional, either myself or somebody else that you know, and trust that can look at your overall financial plan, and tell you what the best way for you to be saving today would be, without knowing your financial plan, I couldn't tell you which ones are going to be best. They are taxed differently. tax deferred the traditional right, you're not paying taxes on those dollars you're putting in right now. It grows tax deferred, and then when you go to take out those funds, you're going to be taxed on them. Whereas with a Roth, you pay the tax on the dollars that you're saving right now. But you don't have to pay tax on the earnings. And when you go to take out those dollar bills in retirement, you're not paying a tax on them. There's a lot of other nuances that go in with the traditional Roth debate. Again, if this is a question you have, reach out to me reach out to another financial professional, make sure that you are asking them those questions so that they can give you their recommendation.
Topic number four, do you have tax exempt funds in your TSP, if you're like me, you ever deployed, you were in a tax deferred or excuse me a tax exempt situation like Iraq or Afghanistan, then you and you are contributing to your TSP, you have tax exempt funds inside of your TSP? Why are these different? These are not like your traditional contributions where you didn't have to pay a tax on them now, but you're going to pay a tax on them, when you take them out in the future, you will never have to pay tax on these funds inside of the TSP. Now the TSP keeps tax exempt funds separate, they're still in there, they're still growing, you don't have to worry about that. But they allocate those specific dollar bills so that when you start taking money out, you don't have to pay the tax on that on those dollar bills. Why is this important? Right now, your tax exempt funds are just sitting in that separate account saying we'll never be taxed, but any dollar that we earn is going to be taxed in the future. If you had the opportunity, and this is the benefit of where you get working with somebody that really understands the military retirement understands the TSP is that when you go to leave the service, you can actually roll your TSP out, and you can move that tax exempt amount into a Roth IRA. The benefit you have on that as a triple tax savings, meaning these tax exempt funds were never taxed. The growth is the growth on those earnings grow tax free. And there's no tax when you take out those funds. At triple tax saving is huge. It's one of the very few times when you're saving that you get that and enjoy that benefit. And so if you have tax exempt funds, when you start to take those dollar bills out, make sure you remember you can find those on your TSP statement. It's usually on the second page, you'll see a little portion, it's kind of small, it's but it says tax exempt fund amount, you can see that dollar amount there.
And that takes us into Topic number five, what to do with your TSP when you leave now, while you're still wearing the uniform, you have to leave the funds, then tsp, you cannot take those funds out of the TSP. But once you leave, you've got a couple options. The first option would be when you go and find a new job. And you start with your employer's 401k or four, three B you can actually transfer your 401 K, or excuse me that your TSP into that 401 K or four three B. Now the benefits of this is that it makes tracking your money super simple. It's all in one place, right? Unless you've been saving to a traditional brokerage account or an IRA, all of your savings from an employer sponsored plan are going to be in one place makes it super easy. The downside to this is that it does continue to lock your funds up while you're employed. Now, that's a good thing. These are retirement funds. So not having direct access to them might save a lot of people from getting in trouble dipping into their nest egg when they shouldn't be. But if there is an emergency, if there's something that comes up these funds are completely off the table you can't get to him unless your plan offers some type of in service withdrawal or you being able to take out a loan then you're paying an interest on it, things can get a little bit messy. So having that locked up there can be a little bit scary. You want to make sure that you you're according to your financial plan. It's got a good nest egg or a good level of emergency savings for you if anything like that was to happen. Another thing that you can do with your TSP accounts you can actually roll it over into an IRA now did pending on where you've been contributing, whether it's a traditional tsp or the Roth TSP is going to determine which one you're obviously going to open. And so rolling that into a rollover IRA, or Roth IRA, and then putting those funds to work in that level. Now, if you've already been contributing, some of you might already have these accounts. And you can just roll your TSP directly over to that. The benefit here is it opens up the investment opportunity world to you, you can really start to get a little bit more strategic with your asset allocation, dive into some other investments that you may not have had available to you inside the TSP or 401k. And really start to maximize those dollars. The downside here is that you do have to make sure you stick with that investment strategy, the risk falls on you, you have to go out, you have to choose those investments, you've got to make sure that you're selecting the right funds based on the fundamentals of what's taking place in the economy today, making sure you're not overpaying on fees underperforming on some of these investments, when there's a better way to maximize out there, that falls on you when you move things into that type of account. And then the other option is leave it where it's at, leave it at the TSP, it's absolutely nothing wrong with you leaving your funds inside of the TSP. And for a lot of people, that makes a lot of sense, these are low fees, these investments are very easy to track and manage it's it might make a lot of sense for people to leave their money inside of the TSP. Honestly, one of the main reasons I would ever tell anybody to take their funds out of the TSP is just to just to maximize the benefit with those taxes and funds. If you've got low tax exempt dollars, or you have no tax exempt dollars, you might be a benefit to you to keep those funds inside of the TSP, pay very minimal fees on them. And then you already know where they're at. Not to mention the TSP is already coming out. They're increasing the options you have for distributions when it comes to retirement ways that you can access your money. And this is something that some of these changes here in the next couple of weeks are looking at as well just movement of money in and out of the TSP. So it might be a great option for you to just park your funds there inside of the TSP.
Now the TSP can be very complex. And we do see a lot of people making mistakes within their TSP account. So if you're looking for help, if you want somebody to take a second look at what you have, I'm more than happy to do this. Give you some of our basic ideas, let you know what we think. Make sure you're not making any of the mistakes that we talked about in here. And you can always reach out to us on our new website. Guys. If you haven't checked out our new website, please do it is www.operationveteranfinance.org You can contact us from there. We put a lot of resources up as we're going through rebuilding these episodes so that you guys can continue to grow and learn about your finances. Thank you.
Thank you for tuning in to this episode of Operation veteran finance. You can listen to this episode or all other episodes by visiting the website www dot operation veteran finance.org or wherever you get your podcasts. information contained in this episode is for education and entertainment purposes and should not be considered financial or investment advice. Be sure to consult with your financial professional for any information pertaining this episode. Garrett Sorensen is an employee of Markham wealth. The information discussed in this episode is not an endorsement or owned by Marcum Wealth or its subsidiaries. A full detail of this episodes disclaimer warnings can be found in the description notes below.
Marcum Wealth, LLC is an SEC-registered investment advisory firm with its principal place of business in Ohio. Registration is not an endorsement of the firm or its representatives by securities regulators, nor is it an indication that the adviser has attained a particular level of skill or ability. This discussion is intended to be general and educational in nature and is not tailored to any listener’s individual circumstances or financial situation. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice. All investment strategies have the potential for profit or loss. This communication should not be construed as a recommendation or solicitation to take, or refrain from taking, any particular course of action. Due to various factors, including changing regulations and market conditions, the information discussed may no longer be reflective of current positions or recommendations. While information presented is believed to be factual and up-to-date as of the date of publication, Marcum Wealth does not guarantee its accuracy, and it should not be regarded as a complete analysis of the subjects discussed. The subjects discussed herein are general in nature, provided for informational purposes only, and should not be construed as legal, tax, or investment advice. Listeners should consult with the professional(s) or his or her choosing regarding their specific legal, tax, or financial situation.