If you are a Fed with your retirement investments tied up in the Thrift Savings Plan, no doubt you are doing a lot of looking over your shoulder after the month of August.
That’s the assessment of guest analyst, Arthur Stein, certified financial planner with SPC Financial in Rockville, Maryland. He says August is a month many Feds in the TSP won’t soon forget.
“August is interesting, in the same way that a punch in the head is interesting,” quipped Stein. “I mean, it was painful. All the funds in the TSP went down in August, except for the G fund and the F fund. Included in that, all the L funds declined in value.”
Stein, like most financial analysts, advises feds invested in the TSP not to place too much stock in the performance of the TSP during any one month. For better perspective, he says, look beyond a month, to the performance overall of the TSP for the past year, or so.
All the funds are up. The F fund is up an astounding 9 percent, the C fund is up 5 percent, the S fund 11 percent. The I fund is down over the 12 month period, its down 2 percent. Of course, all the L funds are up around 4 to 5 percent. Longer term, the TSP funds have been doing fine. In August, it was not good. There was lots of negative news in August. And August is always a difficult month to judge, because so many people are on vacation, and here, I’m referring to people on Wall Street, traders and investors. Trading tends to be thin, which means there are not as many numbers of shares traded. So, negative news, or positive news, can have a larger than normal effect because there’s not a lot going on.
What to do if you’re concerned?
“You really don’t want to be making any decisions on the basis of one month’s return,” he says. “I’m not even sure you want to be making any decisions on the basis of one year’s return. You can check your asset allocation, what percentage do you have in the different TSP funds, which means what percentage do you have invested in stocks, what percentage in bonds, is that what you want? It might have shifted over time because some funds did better than expected. So you might want to shift it, you might not.”
Stein also suggests that now might be the time for feds to start doing their homework, and thinking strategically in advance of the Roth TSP investment option which is expected to be available to feds sometime next year.
“It’s expected to be established next year. That’s the goal, but obviously no one knows if they’re going to meet it. The money you contribute to a Roth TSP is not going to reduce your taxable income. The two big advantages are that the money you withdraw when you’re retired, and you’re 59-and-a-half, and you withdraw money from a Roth TSP account, there’s not going to be any tax on the money that you take out. And that can be a huge advantage. The other advantage is there are no minimum required distributions with a Roth IRA (individual retirement account), and nor will there be with a Roth TSP.”
Stein goes on to explain that a person who reaches the age of 70-and-a-half, and who has their money invested in a normal IRA, or a regular TSP account, they usually have to start withdrawing some of their money even if they don’t need it. He says you don’t have that concern with a Roth IRA or Roth TSP, because, “not only do you let the money stay in a tax-deferred account longer, but because its going to reduce your taxable income, from not making withdrawls, or making withdrawls that are tax-free, it will keep your taxable income lower, and that may reduce the premium you pay on Medicare, and it could reduce the amount of taxes you pay on Social Security.”
Advisor Stein also says the generational group expected to benefit the most from the Roth TSP are younger employees.
“The reason is they’re younger, usually, they earn lower income, which means they’re in a lower tax bracket, so the deduction they get if they were making contributions to the regular TSP is going to be worth less. Thirty years later, if they’re in a higher tax bracket when they’re making withdrawls, that can be a big advantage because they’re taking advantage of the difference in the income tax rate. Also, because they’re younger, the money has a longer time to compound.”
We asked Stein about the feasibility of current TSP participants diversifying their investments further by considering keeping some of their money in the current TSP, and shifting the balance to the new Roth TSP.
“Any conversion you make to the Roth TSP is going to be fully taxable, and most people can’t afford to pay tax on converting the full amount. So, if you are going to convert, you can do a little bit at a time, you can do a little bit a month for the next 20 years. Another reason is that not everybody is convinced that the tax advantages of the Roth TSP are going to last. They’re cynical, they think that by the time they get around to retiring, the federal government is going to take away that tax break. I don’t know if there’s a situation where that’s happened with other retirement accounts, I’m not personally worried about that.”
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