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TSP Participants Move Out of Stock Funds Right Before Record Highs

By | Benefits, Federal Pay, Retirement, TSP | No Comments

The participation rate in the Thrift Savings Plan (TSP) for federal employees has leveled off in the last several months. That is a normal change for this time of year.

The TSP notes that participation in the TSP for federal employees under the Federal Employees Retirement System (FERS) is still up two percentage points above last year.

Implementing the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed on March 27, 2020. The Federal Retirement Thrift Investment Board (FRTIB) created the CARES Act project to implement key provisions of the law. The project included four key provisions to enable TSP participants and beneficiaries to respond to their financial management needs during the COVID-19 pandemic.

These four provisions were:

  • Changes in 2020 Required Minimum Distributions
  • Loan Payment Suspensions
  • An increase in the maximum loan amount to $100,000
  • CARES Act withdrawal provisions.

CARES Act Loans, Suspensions and Withdrawals

CARES Loans

DateCountAmount
June, 20202,462$61,429,570.22
July, 20204,990$115,588,460.67
MTD – Aug 12, 20201,704$37,803,631.74

CARES Loans Over $50,000

CountAmount
499$37,018,575.68
825$61,766,534.20
267$19,935,382.67

CARES Loan Suspensions

DateCountAmount
June, 2020245$ 12,514,932.41
July, 2020354$ 16,419,035.09
MTD – Aug 12, 202041$ 1,958,857.50

CARES Withdrawals

DateCountAmount
July, 202021,296$ 554,831,990.61
MTD – Aug 12, 202011,621$ 277,567,169.17

TSP Participants Move into Bonds

In July, many TSP participants decided to transfer money from stock funds and into the TSP’s G and F Funds.

The G Fund took in more than $1.1 billion dollars in transfers in July and the F Fund took in more than $1.6 billion. The Lifecycle Funds received more than $933 million in transfers in July.

Also during July, more than $2 billion was transferred out of the C Fund and almost $1.7 billion from the S Fund.

After the transfers into the G and F Funds, the asset allocation in funds for TSP participants breaks out in this way:

FundAllocation Percentage
G Fund33.3%
F Fund4.6%
C Fund28.5%
S Fund9.3%
I Fund3.5%
L Funds20.9%

The latest month shows a change in direction for TSP investors. As of December 30, 2019, 30.7% of asset allocation was in the G Fund, 29.7% was in the C Fund, 3.8% was in the F Fund and 21.6% was in the L Funds. In effect, participants are moving away from stocks and putting more of their assets into the bond funds.

If you would like some help navigating your TSP, or some safe options with your TSP, you can use our Contact Us form and someone will be in touch with you.

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USPS Restructured and VERA

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In an effort to operate in a more efficient and effective manner and better serve customers, Postmaster General Louis DeJoy today announced a modified organizational structure for the U.S. Postal Service.

The new organizational structure is focused on three operating units and their core missions:

• Retail and Delivery Operations — Accept and deliver mail and packages efficiently with a high level of customer satisfaction. This organization will be led by Kristin Seaver.
• Logistics and Processing Operations — Process and move mail and packages efficiently to the delivery units, meeting determined standards. This organization will be led by David Williams.
• Commerce and Business Solutions — Leverage infrastructure to enable growth. This organization will be led by Jakki Krage Strako.

“This organizational change will capture operating efficiencies by providing clarity and economies of scale that will allow us to reduce our cost base and capture new revenue,” said DeJoy. “It is crucial that we do what is within our control to help us successfully complete our mission to serve the American people and, through the universal service obligation, bind our nation together by maintaining and operating our unique, vital and resilient infrastructure.”

As part of the modified structure, logistics and mail processing operations will report into the new Logistics and Processing Operations organization separate from existing area and district reporting structures. This includes all mail processing facilities and local transportation networks offices. Splitting operations into the two organizations of Retail and Delivery Operations, and Logistics and Processing Operations, is designed to allow for improved focus and clear communication channels. The transition to this new organizational structure will take place over the next several weeks. Transition coordinators have been identified to assist in the process.

These organizational changes do not initiate a reduction in force, and there are no immediate impacts to USPS employees. However, to prepare for future changes, the Postal Service has implemented a management hiring freeze and will be requesting future Voluntary Early Retirement Authority from the Office of Personnel Management for non-bargaining employees.

We want to hear your feedback of these new changes, or if you need help deciding if this VERA is right for you, Contact us to schedule your retirement review.

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USDA IT Shop Freezes Hiring and Offers Early Retirement

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The CIO Office at the Department of Agriculture has instituted a hiring freeze and plans to offer early retirement options to IT workers in an effort to optimize the agency’s tech investments and update the skillset of its workforce, according to a report on Federal News Network.

Voluntary Early Retirement Authority options will be offered to eligible IT specialists – excluding cybersecurity professionals — with 20 years of service at age 50, or those with 25 years of service at any age. Those staffers may voluntarily retire and earn an immediate annuity. Eligible employees can apply for VERA through mid-August, the department said.

USDA said it plans to accept as many VERA requests as it can, but early retirement offers will be extended on a first-come, first-serve basis, and those who have been accepted are expected to retire by Sept. 30.

The hiring freeze was instituted June 30 and will extend through fiscal 2021. It only applies to IT professionals who “report directly or indirectly to the mission area chief information officers or program executives,” the USDA spokesperson told Federal News Network.

If anyone is needing assistance or has any questions, please feel free to contact us at (877) 733-3877 x 1 or on our Contact Form.

COVID-19, TSP, And Your Retirement

By | Retirement | No Comments

Planning for, investing in, and safeguarding your retirement nest egg during normal conditions can be a challenging task.

Add a global health crisis with COVID-19, economic recession, and record unemployment to the mix – thinking about your financial future can be downright scary.

Not to worry. There’s good news to ease your fears when it comes to your TSP and retirement savings strategy.

If you have a TSP, you may have noticed that several temporary changes started under the CARES Act at the end of March. These changes give you options to reduce possible financial loss and risk during these difficult times.

Required minimum distributions (RMD) and COVID-19

The negative impact of COVID-19 on both the economy and individual finances led Congress to pass a benefit in the CARES Act.

The change doesn’t require you to take the previously mandated RMD withdrawal in the 2020 calendar year. Plus, automatic RMD payments have been suspended for 2020. You’re eligible for this benefit regardless of your age or employment status.

There are specific rules about stopping the life-expectancy RMD installment payments and rolling 2020 disbursements back into any eligible retirement plan. Plus, there are also particular rules about repayment terms for non-RMD withdrawals and loans.

How federal employees can qualify for COVID-19 relief

To qualify for a loan and withdrawal program, you must meet these eligibility requirements:

  1. You, your spouse, or dependent have been diagnosed with COVID-19 by a CDC-approved test.
  2. You, your spouse, or a member of your household are experiencing adverse financial consequences from COVID-19 as a result of:
    • Being quarantined
    • Having work hours reduced
    • Being furloughed or laid off
    • Experiencing a reduction in pay
    • Being unable to work due to lack of childcare availability
    • Having a job offer rescinded or a delayed job start date

TSP loans and withdrawals in the CARES Act

Federal employees signed up for a TSP and qualified for COVID-19 relief can take advantage of temporary loan and withdrawal programs offering tax deferment and repayment options.

Suspension of notarized documents

If you decide to take advantage of a COVID-19 loan or withdrawal program, you don’t have to get any forms notarized until further notice.

Keep in mind…

This info can change as new info and guidelines become available. It can also change as new and revised options are included in the HEROES Act which is planned to be enacted in August.

Your retirement options

Not sure how COVID-19 may impact your retirement? Or, not sure which option may be best for you and your retirement goals? Send us an email at info@MyFederalRetirementHelp.com , give us a call at 877-733-3877 x 1 or Contact Us

Should I Have a Traditional or Roth Thrift Savings Plan?

By | Benefits, Federal Pay, Retirement, TSP | No Comments

Should I Have a Traditional or Roth Thrift Savings Plan?

If you are a federal employee and planning for retirement, you must carefully consider whether to contribute to a Thrift Savings Plan (TSP) and what type of TSP you should get. This article will set forth the pros and cons and explain how an effective TSP strategy can best supplement your other retirement income sources.

What is a Thrift Savings Plan?

A Thrift Savings Plan (TSP) is a retirement and savings plan available to both civilian federal employees and members of the military. It is similar to the 401(k) plans offered by employers in the private sector.

Federal Agency Contributions

One aspect of TSPs that cannot be overlooked is that a federal employee may be eligible for matching contributions from their agency. If you are a federal employee you must look into whether matching contributions are available and whether there is a limit.

Once you have that information, plan on contributing at least the amount that will be matched. If you don’t, you are leaving free money on the table.

For many federal employees, their agency will contribute 1% of income to a TSP even if the employee contributes nothing. If the employee contributes 5% of income, the agency will contribute another 4%.

Traditional TSP

In a traditional TSP, your contribution is deducted from your pre-tax wages, and taxes are deferred until you make withdrawals. This reduces your present taxable income, and your contributions are taxed at the rate that applies to your income in retirement, which should be lower.

Roth TSP

You make contributions to a Roth TSP with after-tax income. While this does not reduce your present taxable income, it does render your withdrawals in retirement tax-free.

What if I Worked in the Private Sector and have a 401(k) or Roth IRA?

You can roll an IRA from a private employer into your federal TSP. However, reach out to a Federal Retirement Consultant to ask about some other ways to manage these as well.  Keep in mind also that if you are 50 or older you can make additional catch-up contributions, however, they will not be eligible for matching contributions from your agency.

Can I Convert a Roth TSP to a Traditional TSP?

No, and you can’t convert a Traditional TSP to a Roth or vice versa.

Which Type of TSP Should I Get?

Consider having one of each and varying the contributions according to how much money you are making. This allows you to strategically allocate retirement savings throughout your career to save the most in income tax.

For example, if you are just starting your career, you might open both a Roth TSP and a Traditional TSP, and contribute most to the Roth and just a bit to the Traditional. As the years pass and you presumably make more money, you can gradually increase contributions to the Traditional and decrease contributions to the Roth.

This way you are taking advantage of both the tax-free withdrawals of a Roth TSP, and the tax-deferred withdrawals of a Traditional TSP, and reducing your taxable income when you are making more, later in your career. Don’t forget to always contribute at least the amount that your agency will match.

What About Other Retirement Income?

You will have Social Security benefits when eligible, and if you are a civilian federal employee you will have an annuity from the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). If you are a member of the uniformed services, you will have Social Security benefits and your military retired pay.

The amount of income you have in retirement will vary according to the amount you contribute to your TSP, the amount that is taxable to you in retirement, and how you allocate your TSP contributions to the various funds and the return that your choices get. Even considering market variables, strategically contributing to your TSP is sure to maximize your income in retirement. 

About the Author

Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.

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Three Great Reasons to Take Social Security Benefits at 62

By | Benefits, Federal Pay, Retirement | No Comments

There’s no such things as the perfect age to sign up for Social Security. You get an eight-year window to claim benefits that begins at 62 and ends at 70, financially speaking, and each age within that window has its pros and cons.

Now it just so happens that 62 is the most popular age to sign up for Social Security, but it also comes with consequences. You’re entitled to your full monthly benefit based on your wage history once you reach full retirement age, or FRA. That age is either 66, 67, or somewhere in between those two ages, depending on your year of birth.

If you claim Social Security at 62 with an FRA of 66, you’ll shrink your monthly benefit by 25%. And with an FRA of 67, you’re looking at a 30% reduction by filing at 62. But despite that tremendous hit to your retirement income, here’s why it could pay to land on 62 as your Social Security filing age.

1. You’ll get to retire sooner

Many people dream of early retirement. If you’ve spent the bulk of your career at a grueling job, you may want nothing more than to leave the workforce on the early side. And while you’ll generally need a healthy level of retirement savings to make that possible, claiming Social Security could provide the financial push you need to feel comfortable ending your career a bit sooner than most.

2. You have to retire sooner

An estimated 48% of workers are forced to retire earlier than planned, according to the Employee Benefit Research Institute, and the COVID-19 outbreak — and unemployment crisis it’s produced — could drive that percentage up even higher. These days, a lot of older Americans are out of work, and those struggling to return to a job may have no choice but to retire ahead of schedule instead. Furthermore, some older workers may be voluntarily leaving their jobs due to health concerns, and it’s these same people who are apt to need an income source like Social Security once their paychecks go away.

But even outside of the pandemic, it’s clear that early retirement often isn’t a choice, but rather, a side effect of unwanted circumstances. Older workers get pushed out of jobs all the time to make room for younger, less expensive employees, and health issues can make continuing to work impossible. If that’s the scenario you’re in, whether it’s related to COVID-19 or not, you may have to claim Social Security at 62 so you can pay your bills. And to be clear, that’s a much better option than racking up debt just to exist.

3. You’re not willing to take chances

Technically, Social Security is designed to pay you the same total lifetime benefit regardless of when you file. The logic is that while filing early lowers your monthly benefit, you collect benefits for a greater number of months. When you file on time or even after FRA, you grow your benefit, but collect fewer individual monthly payments. You should therefore, in theory, break even if you live an average lifespan.

But what if you don’t? Even if your health is great at age 62, you never know when a medical issue might pop up out of nowhere that suddenly shortens your lifespan. And if you’re unlikely to live an average life expectancy, you’re better off claiming Social Security early, as that will result in a greater amount of money in your lifetime.

Though claiming Social Security at 62 isn’t the right choice for everyone, it may be the best bet for you. Weigh the pros and cons, and with any luck, you’ll land on a solid choice.

The $16,728 Social Security bonus most retirees completely overlook

If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.

We also conduct Free Federal Retirement and Benefits review, if you would like to take advantage of one via phone call, please reach out and call (877) 733-3877 x 1 or on our Contact Us Page fill out the simple form.

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OPM Implements New Locality Pay Area and More

By | Benefits, Federal Pay | No Comments

The Office of Personnel Management last week proposed regulations that would implement one new locality pay area and expand the boundaries of an existing pay area as authorized by the president’s pay agent last year.

In a proposed rule filed to the Federal Register last week, OPM officials formally began the final implementation process for establishing Des Moines, Iowa, as a locality pay area and adding Imperial County, Calif., to the existing Los Angeles-Long Beach locality pay area, effective with the first full pay period of 2021.

The Federal Salary Council, an advisory group made up of federal employee groups and White House appointees, recommended adding Des Moines and Imperial County to the General Schedule locality pay area system in 2018, and the president’s pay agent advanced the measure last December.

According to data from the Bureau of Labor Statistics, private sector employees in Des Moines on average made 10 percentage points more per year than their federal worker counterparts.

And although Imperial County, Calif., does not meet the admittance standards for any one locality pay area, those in its federal worker population, primarily U.S. Customs and Border Protection employees, commute to both Los Angeles and San Diego. Taken together, the number of commuters to both cities exceeds the threshold needed to be pulled into an existing pay area.

Although the two regions will officially be part of the locality pay tables beginning next year, employees there currently are not slated to see the benefits of locality pay. President Trump’s proposed pay raise for federal civilian employees in 2021 is 1% across the board, with locality pay remaining at 2020 levels.

On Wednesday, the House Appropriations Committee declined to override Trump’s pay plan when it advanced the fiscal 2021 Financial Services and General Government appropriations bill. Although the bill blocks a series of benefits cuts and includes other federal worker protections, the lack of a provision on federal compensation in 2021 effectively endorses the president’s proposal.

In addition to provisions blocking the controversial proposal to merge most of OPM’s functions with the General Services Administration and blocking nearly all collective bargaining agreements in the federal government that have been implemented since April 2019, appropriators have included a number of policy directives toward OPM.

The bill “encourages” OPM to reexamine rules governing how federal agencies hire and fire people to account for the fact that in some states, marijuana is no longer illegal.

“The committee encourages OPM to review its policies and guidelines regarding hiring and firing of individuals who use marijuana in states where that individual’s private use of marijuana is not prohibited under the law of the state,” the committee wrote in a report summarizing the bill. “These policies should reflect changes to the law on marijuana usage and clearly state the impact of marijuana usage on federal employment.”

The legislation also instructs OPM to include a section in its next annual report to Congress on telework devoted to federal agencies’ readiness to adopt wide-scale telework during the coronavirus pandemic and make recommendations to better prepare agencies for similar emergencies in the future.

Appropriators also encouraged federal agencies to examine “the fairness and equity” of their closure policies, and consider offering back pay to contractors who were laid off or went without pay due to federal building closures during the pandemic.

Although the committee did not act to override the president’s 1% across-the-board pay increase plan, some lawmakers have indicated they will continue to press for action on the House floor. A bipartisan group of 10 lawmakers last week urged leadership to endorse pay parity between the civilian and military federal workforce, which would amount to a 3% raise, based on language in the House version of the 2021 National Defense Authorization Act.

DHS Staffing Shakeups Continue Amid Early Retirement and Reassignment Offers

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The Trump administration is continuing to shake up the Homeland Security Department, requiring furloughs and deployments of some employees, while offering others incentives to retire early or exclusive opportunities to apply for positions elsewhere in the department.

The early retirement offers were sent out this week to employees at the Transportation Security Administration, according to an internal email obtained by Government Executive. Patricia Bradshaw, TSA’s assistant administrator for human capital, told employees management is taking the steps to “fine-tune the organization.” Transportation security officers at 35 airports currently offered retention incentives, and certain other positions, will not be eligible for the Voluntary Early Retirement Authority offers.

Elsewhere in TSA, the agency is offering Federal Air Marshals Service workers an opportunity to apply for jobs at Immigration and Customs Enforcement. The openings are exclusively available to the Air Marshals and are for both ICE’s Enforcement and Removal Operations and Homeland Security Investigations offices. Employees would serve as deportation officers or criminal investigators.

The agency told employees the opportunity was for Air Marshals Service employees “wishing to provide their skills within other areas of DHS,” but would not lead to attrition within the component.

“Let me be perfectly clear, the Federal Air Marshals Service will remain as the key law enforcement component within TSA,” the agency told employees. “This effort is not a plan to reduce or eliminate the FAMS,” adding it is “fully committed to hiring for all positions vacated by this effort.”

Days after receiving that email, however, TSA employees, including some at the Air Marshals Service, received the early retirement offers.

Customs and Border Protection, meanwhile, has told 800 officers from ports around the country they will face two consecutive 60-day deployments to the southwest border. DHS has asked for reprogramming authority to temporarily move the employees, according to the National Treasury Employees Union, which represents the CBP officers. CBP last year deployed 750 officers from their normal ports of entry posts to the southwest border.

The officers would serve in Texas at Rio Grande Valley and Laredo posts. Cases of the novel coronavirus are currently spiking in the state, which NTEU said makes the deployments unsafe.

“We have grave concerns about sending additional federal law enforcement personnel into a region where COVID-19 cases are spiking and hospitals are nearly full,” said NTEU National President Tony Reardon. The agency is struggling to keep safe CBP personnel already in the area, Reardon said, and has not demonstrated it will have the requisite personal protective equipment, lodging and transportation and access to health care for additional staff.

Reardon added CBP has not committed to testing employees at the end of their deployments or requiring them to quarantine for 14 days, as public health officials have recommended for those who may have had exposure to the virus. Reardon said the agency does not have adequate testing or contact tracing for CBP employees already at the border. More than 1,000 agency employees have tested positive for COVID-19.

“CBP should be focusing its resources on the health and safety of CBP personnel already assigned to the border, including policies that allow for appropriate social distancing at the port and giving employees more time to remain safe at home,” Reardon said.

The DHS workforce shakeups follow U.S. Citizenship and Immigration Services using reduction in force procedures to send furlough notices to more than 13,000 employees last month. The agency has cited a downturn in application receipts stemming from the coronavirus pandemic as the root of the budget crisis necessitating the forced, unpaid time off. USCIS has notified Congress it is seeking $1.2 billion to avoid the furloughing of more than 70% of its staff, but Republican and Democratic aides have said they are still awaiting a formal request for the funding.

Labor Board Makes It Easier for Federal Employees to Cancel Union Dues

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The board tasked with overseeing labor-management relations in the federal government on Wednesday issued final regulations making it easier for workers to cancel their union dues, despite opposition from labor groups and accusations of shifting rationale from its own member.

Last February, the Federal Labor Relations Authority announced that it would shift its interpretation of federal law governing how agencies may collect dues on behalf of employee unions. Although traditionally, federal employees could only opt out of union membership at one-year intervals, under the new rule, they will be able to cancel their dues at any time after one year has passed.

In its original decision, the FLRA cited a need to reexamine the rule following the Janus v. AFSCME Supreme Court decision, which ruled that non-union member employees of public sector agencies could not be compelled to pay so-called “agency fees” to support unions’ representational work. But unions, observers, and some federal judges have since noted that the Janus decision doesn’t apply to federal sector unions, since they already are barred from collecting fees from nonmembers.

In a final rule set to be published in the Federal Register on Thursday, the FLRA said it has only relied on interpreting the “plain language of the statute” in its reevaluation of existing precedent.

“While the request for a general statement of policy or guidance asked the authority to find that the First Amendment to the U.S. Constitution compelled a certain interpretation of [the statute], the majority decision rested exclusively on statutory exegesis, rather than principles of constitutional law,” the FLRA wrote.

The agency justified the change by arguing that previous precedent relied too heavily on the legislative history of the 1978 Civil Service Reform Act when the text of the law is unambiguous.

“In support of the criticism of the [current rule], the authority relied on [the statute’s] plain wording,” the FLRA wrote. “In particular, the section says that an assignment may not be revoked for a period of one year, and such wording governs only one year because it only refers to ‘one year.’”

FLRA Member Ernest DuBester, the lone Democrat on the three-member board, issued a dissent on the rule change, hammering his colleagues for no longer mentioning Janus after multiple courts have ruled against federal workers seeking to cancel their dues allotments outside of the standard opt-out window. He wrote that the rule will “generate more questions than answers” and that it creates contradictions within the FLRA’s regulations.

“As noted by the majority, a number of parties expressed concern that the rule would require agencies to unlawfully disregard the terms of previously authorized assignments, and would ignore the revocation terms that appear on the current OPM forms governing dues assignments and assignment revocations,” DuBester wrote. “In response to these concerns, the majority explains that the rule would ‘apply only to dues assignments that are authorized on or after the rule’s effective date,’ and that agencies would therefore not be required to disregard the terms of previously authorized assignments that the agencies received before the rule’s effective date. But this explanation appears to contradict the rule’s plain language, which applies its provisions to ‘previously authorized assignments.’”

American Federation of Government Employees National President Everett Kelley decried Wednesday’s rule as a “meritless” effort to make it easier for federal agencies to engage in “union busting.”

“The final regulation issued by the FLRA reverses nearly a half-century of settled and well-reasoned legal precedent by ending window periods for federal employees who join their union, paving the way for them to drop at any time after 12 months,” Kelley said. “The administration pushed for this anti-labor rule change and refused to relent, even in the midst of a global pandemic that has forced frontline federal workers to beg and plead with agencies for basic safety protocols and personal protective equipment.”

And the National Treasury Employees Union said it has already filed a legal challenge in the U.S. Court of Appeals for the D.C. Circuit seeking to block the new rule. NTEU National President Tony Reardon said the measure was “clearly written in an effort to harm unions.”

“Federal employees join our union because they believe in empowering frontline workers and the FLRA cannot take that away from us,” Reardon said. “However, the administration should not be allowed to bypass Congress and simply rewrite labor laws it doesn’t like, which is why we are fighting this in court.

How the Secure Act Could Benefit You

By | Benefits, Federal Pay, Retirement, TSP | No Comments

Late last year, new legislation was signed into law that will usher in some of the most sweeping changes to retirement plans in decades. The Setting Every Community Up for Retirement (or SECURE) Act was originally passed by the House of Representatives last spring. It failed to pass the Senate then, but the legislation was included in the year-end spending bill that was passed on December 20, 2019.

The SECURE Act became effective on January 1, 2020, and it will inevitably affect many retirement savers, for better or worse. Here are a few of the most significant provisions that you should be aware of:

No more age restriction on traditional IRA contributions

Before the Secure Act, you could not make contributions to a traditional IRA for the year during which you reached age 70 1/2 or any later year. (There’s no age restriction on Roth IRA contributions, and the Secure Act does not change that.)

New law: For tax years beginning after 2019, the Secure Act repeals the age restriction on contributions to traditional IRAs. So, for tax years beginning in 2020 and beyond, you can make contributions after reaching age 70½. That’s the good news.

Key point: The deadline for making a contribution for your 2019 tax year is April 15, 2020, but you cannot make a contribution for 2019 if you were age 70 1/2 or older as of Dec. 31, 2019. Thanks to the new law, you can make contributions for tax year 2020 and beyond.

Side effect for IRA qualified charitable distributions

After reaching age 70 1/2, you can make qualified charitable contributions of up to $100,000 per year directly from your IRA(s). These contributions are called qualified charitable distributions, or QCDs. Effective for QCDs made in a tax year beginning after 2019, the $100,000 QCD limit for that year is reduced (but not below zero) by the aggregate amount of deductions allowed for prior tax years due to the aforementioned Secure Act change. In other words, deductible IRA contributions made for the year you reach age 70 1/2 and later years can reduce your annual QCD allowance.

You generally must begin taking annual required minimum distributions (RMDs) from tax-favored retirement accounts (traditional IRAs, SEP accounts, 401(k) accounts, and the like) and pay the resulting income tax hit. However, you need not take RMDs from any Roth IRA(s) set up in your name.

Before the Secure Act, the initial RMD was for the year you turned age 70 1/2. You could postpone taking that initial payout until as late as April 1 of the year after you reached the magic age. If you chose that option, however, you must take two RMDs in that year: one by the April 1 deadline (the RMD for the previous year) plus another by Dec. 31 (the RMD for the current year). For each subsequent year, you must take another RMD by Dec. 31. Under an exception, if you’re still working as an employee after reaching the magic age and you don’t own over 5% of the outfit that employs you, you can postpone taking RMDs from your employer’s plan(s) until after you’ve retired.

New law: The Secure Act increases the age after which you must begin taking RMDs from 70 1/2 to 72. But this favorable development only applies to folks who reach 70 1/2 after 2019. So, if you turned 70 1/2 in 2019 or earlier, you’re unaffected. But if you will turn 70 1/2 in 2020 or later, you won’t need to start taking RMDs until after attaining age 72. As under prior law, if you’re still working after reaching the magic age and you don’t own over 5% of the employer, you can postpone taking RMDs from your employer’s plan(s) until after you’ve retired.

Key point: If you turned 70 1/2 in 2019 and have not yet taken your initial RMD for that year, you must take that RMD, which is for the 2019 tax year, by no later than 4/1/20 or face a 50% penalty on the shortfall. You must then take your second RMD, which is for the 2020 tax year, by Dec. 31, 2020.

Now for the bad news

Stricter rules for post-death required minimum distributions curtail ‘Stretch IRAs’: The Secure Act requires most non-spouse IRA and retirement plan beneficiaries to drain inherited accounts within 10 years after the account owner’s death. This is a big anti-taxpayer change for financially comfortable folks who don’t need their IRA balances for their own retirement years but want to use those balances to set up a long-term tax-advantaged deal for their heirs.

Before the Secure Act, the required minimum distribution (RMD) rules allowed you as a non-spouse beneficiary to gradually drain the substantial IRA that you inherited from, say, your grandfather over your IRS-defined life expectancy.

For example, say you inherited Grandpa Dave’s $750,000 Roth IRA when you were 40 years old. The current IRS life expectancy table says you have 43.6 years to live. You must start taking annual RMDs from the inherited account by dividing the account balance as of the end of the previous year by your remaining life expectancy as of the end of the current year.

So, your first RMD would equal the account balance as of the previous year-end divided by 43.6, which would amount to only 2.3% of the balance. Your second RMD would equal the account balance as of the end of the following year divided by 42.6, which translates to only 2.35% of the balance. And so, on until you drain the inherited Roth account.

As you can see, the pre-Secure Act RMD regime allowed you to keep the inherited account open for many years and reap the tax advantages for those many years. With an IRA, this is called the “Stretch IRA” strategy. The Stretch IRA strategy is particularly advantageous for inherited Roth IRAs, because the income those accounts produce can grow and be withdrawn federal-income-tax-free. So, under the pre-Secure Act rules, a Stretch Roth IRA could give you some protection from future federal income tax rate increases for many years. That’s the upside.

Unfortunately, the Secure Act’s 10-year rule puts a damper on the Stretch IRA strategy. It can still work, but only in the limited circumstances when the 10-year rule does not apply (explained below). This development will have some well-off folks and their estate planning advisers scrambling for months (at least) to react. That’s especially true if you’ve set up a “conduit” or “pass-through” trust as the beneficiary of what you intended to be a Stretch IRA for your heirs.

Key point: According to the Congressional Research Service, the lid put on the Stretch IRA strategy by the new law has the potential to generate about $15.7 billion in tax revenue over the next decade.

Effective date: The Secure Act’s anti-taxpayer RMD change is generally effective for RMDs taken from accounts whose owners die after 2019. The RMD rules for accounts inherited from owners who died before 2020 are unchanged.

Who is affected?

The Secure Act’s anti-taxpayer RMD change will not affect account owners who drain their accounts during their retirement years. And account beneficiaries who want to quickly drain inherited accounts will be unaffected. The change will only affect certain non-spouse beneficiaries who want to keep inherited accounts open for as long as possible to reap the tax advantages. In other words, “rich” folks with lots of financial self-discipline.

The Secure Act’s anti-taxpayer RMD change also will not affect accounts inherited by a so-called eligible designated beneficiary. An eligible designated beneficiary is: (1) the surviving spouse of the deceased account owner, (2) a minor child of the deceased account owner, (3) a beneficiary who is no more than 10 years younger than the deceased account owner, or (4) a chronically-ill individual (as defined).

If your grandfather dies in 2020 or later, you can only keep the big Roth IRA that you inherit from him open for 10 years after his departure.

Under the exception for eligible designated beneficiaries, RMDs from the inherited account can generally be taken over the life or life expectancy of the eligible designated beneficiary, beginning with the year following the year of the account owner’s death. Same as before the Secure Act.

So, the Stretch IRA strategy can still work for an eligible designated beneficiary, such as an account owner’s much-younger spouse or recently born tot. Other non-spouse beneficiaries (such as an adult child, grandchild, niece or nephew) will get slammed by the new 10-year account liquidation requirement. So, if your grandfather dies in 2020 or later, you can only keep the big Roth IRA that you inherit from him open for 10 years after his departure. Bummer!

10-year rule specifics: When it applies, the new 10-year rule generally applies regardless of whether the account owner dies before or after his or her RMD required beginning date (RBD). Thanks to another Secure Act change explained earlier, the RMD rules do not kick in until age 72 for account owners who attain age 70 1/2 after 2019. So, the RBD for those folks will be April 1 of the year following the year they attain age 72.

Following the death of an eligible designated beneficiary, the account balance must be distributed within 10 years.

When an account owner’s child reaches the age of majority under applicable state law, the account balance must be distributed within 10 years after that date.

The bottom line: As you can see, the Secure Act includes both good and bad news for folks who don’t enjoy paying taxes. The new law includes more important tax changes that I’ve not covered here.

3 examples of new RMD rules for non-spousal retirement account beneficiaries

Example 1: David dies in 2020 and leaves his IRA to designated beneficiary Diane, his sister, who was born eight years after David. Diane is an eligible designated beneficiary. Therefore, the balance in the inherited IRA can be paid out over her life expectancy. If David dies before the account is exhausted, the remaining balance must be paid out within 10 years after her death.

Example 2: Diane dies in 2020 and leaves her IRA to designated beneficiary David, her brother, who was born 12 years after Diane. David is not an eligible designated beneficiary because he is more than 10 years younger than Diane. The balance in the inherited IRA must be paid out within 10 years after Diane’s death.

Example 3: Michael dies in 2020 at age 85. He lives his $2 million Roth IRA to his 24-year-old spouse Melissa. Since Melissa is an eligible designated beneficiary, the new 10-year rule does not apply to her. As a surviving spouse, she can retitle the inherited Roth account in her own name. Then she will not have to take any RMDs for as long as she lives. So, this is a situation where the Stretch IRA strategy still works well (although not quite as well as before the Secure Act for reasons that are too complicated to explain here).

Example 4: Michael dies on Dec. 15, 2019. He left his IRA to designated beneficiary Melissa, his beloved niece, who is 30 years younger than Michael. Because Michael died before 2020, the balance in the inherited IRA can be paid out over Melissa’s life expectancy under the pre-Secure Act RMD rules. If Melissa dies on or after 1/1/20, the balance in the IRA must be paid out to her designated beneficiary or beneficiaries or the heir(s) who inherit the account within 10 years after Melissa’s death.

If you think this is something you should consider, reach out to us to get your Free Retirement review to see how we can help you maximize your TSP in regards to using the New Secure Act.  Contact us or give us a call at (877) 733-3877 x 1 to schedule your review today!