Retired and should I move funds out of TSP?

[rickangelini]

I'm 57yo and have been retired for two years. I currently have my TSP funds distributed over the L funds. I have questions about TSP but not sure where to start - so I'll start here and hope someone can push me in the right direction.

I have a financial advisor trying to get me to pull my funds out of TSP now that I am retired and is using the following as one of his pressure points:

There is no direct dividend or interest re-investments in TSP (which I can confirm to be true) therefore the number of shares that I had at the time of my retirement will remain constant until such time as I start to withdraw (I believe this is true also). Since there is no compounded growth over time, the only value that matters between now and the time I withdraw funds is the per/share value at the time of the withdrawal. This seems too simple - there must be some compounded growth in the TSP holdings that 'grows' over time even if my total number of shares never increases.

If I move my TSP dollars to an external IRA that allows me to re-invest quarterly dividends, my total number of shares increases over time and I get compounded growth which would (seemingly) be clearly better.

What am I missing?

Thanks!

 

[userque]

I'm 57yo and have been retired for two years. I currently have my TSP funds distributed over the L funds. I have questions about TSP but not sure where to start - so I'll start here and hope someone can push me in the right direction.

I have a financial advisor trying to get me to pull my funds out of TSP now that I am retired and is using the following as one of his pressure points:

There is no direct dividend or interest re-investments in TSP (which I can confirm to be true) therefore the number of shares that I had at the time of my retirement will remain constant until such time as I start to withdraw (I believe this is true also). Since there is no compounded growth over time, the only value that matters between now and the time I withdraw funds is the per/share value at the time of the withdrawal. This seems too simple - there must be some compounded growth in the TSP holdings that 'grows' over time even if my total number of shares never increases.

If I move my TSP dollars to an external IRA that allows me to re-invest quarterly dividends, my total number of shares increases over time and I get compounded growth which would (seemingly) be clearly better.

What am I missing?

Thanks!

You are correct. The growth (or decay) is compound in nature. Also ...

Emphasis added:

https://www.tsp.gov/InvestmentFunds/FundsOverview/sharePriceCalculation.html#gains
Dividends and Capital Gains

"Under the Internal Revenue Code, earnings in the TSP and other similar defined contributions plans (e.g., 401(k) plans) are not taxable income, nor is the tax treatment different for interest, dividends, capital gains, or tax-deferred contributions when money is withdrawn from the plan. Therefore, there is no need to report dividends and capital gains separately for tax-deferred accounts.

BlackRock Institutional Trust Company, N.A, which manages the index funds in which the F, C, S, and I Funds are invested, credits interest and dividend income each business day. This income is then reflected in the TSP share prices.

The daily change in TSP share prices reflects all investment income (interest on short-term investments, dividends, capital gains or losses, and securities lending income) net of TSP administrative expenses."

 

[rickangelini]

Thanks for the quick reply. So the dividends, etc earned by the underlying Fund holdings are re-invested and presumably slightly increase the price/share - but not the total number of shares held by the individual investor. So is the theory that re-investing to increase the price/share at the Fund level is comparable to the traditional re-investing to purchase more shares at the investor level? (I'm not sure that makes sense but hopefully you can follow my question!)

 

[userque]

Thanks for the quick reply. So the dividends, etc earned by the underlying Fund holdings are re-invested and presumably slightly increase the price/share - but not the total number of shares held by the individual investor. So is the theory that re-investing to increase the price/share at the Fund level is comparable to the traditional re-investing to purchase more shares at the investor level? (I'm not sure that makes sense but hopefully you can follow my question!)

Yes, it makes sense. And yes, afaik, they are generally equivalent.

(I say generally because I don't know whether the reinvestments are executed in the same manner for TSP vs OTHERS. One way may be slightly 'better' than the other ... by a negligible [imo] degree.)

I'm curious, have you compared, over many years, the returns/draw-downs of the TSP funds vs what your advisor is offering? How do they compare?

 

[rickangelini]

I have my TSP spread over the L2020/2030/2040 funds. What my advisor is offering performs slightly better than the L2040 over YTD/1yr/3yr/5yr/10yr, it's a 5-star from Morningstar with $12-billion in assets.

Apparently I should also be concerned about inherited IRA issues with TSP. Apparently, if my children inherit the balance of my TSP holdings, they'd have to take out the entire balance of my account and that would be taxable to them. If I roll over to an inherited IRA, they would only have to take a taxable minimum annual distribution?

 

[userque]

... If I roll over to an inherited IRA, they would only have to take a taxable minimum annual distribution?

Unfortunately, that's beyond the scope of 'off the top of my head knowledge.'

Perhaps you can ask, one thread at a time, at these locations--if someone else doesn't timely chime in here:

https://www.tsptalk.com/mb/retirement-talk-with-tony/
https://www.tsptalk.com/mb/retirement-and-ira-talk/

 

[rickangelini]

Thanks for all of the pointers!

 

[DreamboatAnnie]

I have my TSP spread over the L2020/2030/2040 funds. What my advisor is offering performs slightly better than the L2040 over YTD/1yr/3yr/5yr/10yr, it's a 5-star from Morningstar with $12-billion in assets.

Apparently I should also be concerned about inherited IRA issues with TSP. Apparently, if my children inherit the balance of my TSP holdings, they'd have to take out the entire balance of my account and that would be taxable to them. If I roll over to an inherited IRA, they would only have to take a taxable minimum annual distribution?

You may want to visit Tsp.gov and review the TSP publication on Death Benefits.

https://www.tsp.gov/LifeEvents/personal/death/index.html
Click on Death Benefits at right when you get to this link. Read page 13 and 14. This makes it clear that children beneficiaries can elect to move TSP funds into an inherited IRA;and take payments over their lifetime.

Also, very important to review this TSP Tax notice
https://www.tsp.gov/PDF/formspubs/tsp-583.pdf
Page 2, Section 3 note is very interesting. Not certain what it means. Seems to indicate a child who receives a transferred inherited IRA cannot have a balance transferred to anyone else at their death. ????

Best wishes to you. :smile:

 

[PessOptimist]

I have my TSP spread over the L2020/2030/2040 funds. What my advisor is offering performs slightly better than the L2040 over YTD/1yr/3yr/5yr/10yr, it's a 5-star from Morningstar with $12-billion in assets.

Apparently I should also be concerned about inherited IRA issues with TSP. Apparently, if my children inherit the balance of my TSP holdings, they'd have to take out the entire balance of my account and that would be taxable to them. If I roll over to an inherited IRA, they would only have to take a taxable minimum annual distribution?

Thanks for that info. I had looked in to what and how a spouse would get the TSP if I die, explained in the link below, but never in to how it would work for a non-spouse like children.

https://www.tsp.gov/PDF/formspubs/tspbk31.pdf
I copied the below from that link.
Non-spouse Beneficiary. A beneficiary who is not a surviving spouse cannot retain a TSP account. The death benefit payment will be made directly to the beneficiary or to an "inherited" IRA. (See page 13 for more information.)
A non-spouse beneficiary can avoid this withholding and defer the tax liability by requesting that the TSP transfer all or part of the payment directly to an “inherited” IRA. An inherited IRA is established specifically for the purpose of transferring money inherited from a plan such as the TSP. Inherited IRAs may provide significant tax benefits because their required distributions can generally 14 be spread across the lifetime of the beneficiary. However…
Read it yourself. It refers to https://www.tsp.gov/PDF/formspubs/tsp-536.pdf but I noticed dreamboat refers you to https://www.tsp.gov/PDF/formspubs/tsp-583.pdf which I had forgotten I had downloaded.

I do not pretend to know anything about inherited IRAs but suppose I need to find out.

Good luck in your planning. I suppose you would have to look in to Morningstar’s fees, guaranteed returns and fees for the children to join Morningstar to get your money.

PO

 

[2moryrs]

Hello,
Offering my 2 cents worth here:

Whatever you decide to do, pick an amount to leave in the TSP so that WHEN you are not happy with all the fees and expenses that you will have (that you don't have with the TSP) you can come back to the TSP. If you withdraw all your funds from TSP you can never come back. As in NEVER get the low fees TSP has. I know it is not as diversified as some who are smarter that I about investing are, and only two times a month you can adjust your funds, but I have increased my TSP a little bit over time from what was in it when I retired in 2009. I'm CSRS and not FERS so my TSP is icing on my CSRS cake!

csh (2moryrs)

 

[2moryrs]

As to the other part about the pressure to get their hands on your TSP funds: I, too, had a financial planner wanting to get his hands on my TSP funds. I inherited money in Vanguard from my parents and I signed up for their Investor Services and their fee is 0.30% per quarter. So my advisory fee for 2018 was $464.99. So that money was lost to me for investment purposes, but I am gaining knowledge by watching what they are doing and asking questions.

One of the investments I inherited was my Dad's IRA. So I now get a small required minimum distribution but I watch the funds in the IRA so they are holding their own in this turbulent market.

Hope this gives you something to think about. I had a small IRA which I put in Vanguard and am slowly converting to a ROTH IRA so I will have a pot of money that will be tax free upon withdrawal at some point in time.

A good tax man is worth his/her weight in gold!

 

[rickangelini]

Excellent information. Thanks

 

[rickangelini]

Great info - thanks!

 

[evilanne]

Also, very important to review this TSP Tax notice
https://www.tsp.gov/PDF/formspubs/tsp-583.pdf
Page 2, Section 3 note is very interesting. Not certain what it means. Seems to indicate a child who receives a transferred inherited IRA cannot have a balance transferred to anyone else at their death. ????

Best wishes to you. :smile:

The inherited IRA can be transferred upon death but the rule are different. For someone who inherits an inherited IRA, they have to take the RMD based on the original person's RMD factor at their date of death and the factor (denominator) decrease by 1 every year.

 

[Trouble]

Whatever you decide to do, pick an amount to leave in the TSP so that WHEN you are not happy with all the fees and expenses that you will have (that you don't have with the TSP) you can come back to the TSP.
csh

Since my retirement 8 years ago, I explore this option just about every 6 months. Run through numbers, mull it over and end up not doing anything.
In my TDA and Schwab accounts I've managed my own investments for about 12+ years and have done quite well.

A person could use one of Schwab's zero commission ETF's. SCHD (Dividend Equity ETF) the fee is 0.06% and the dividend yield is 2.90%. Assuming diversification on a 1MM TSP, putting 10% into SCHD the expenses would be about $60/year and the dividend would be about $2,900. The average dividend on a portfolio of 10 ETFs, could be about 1.4%. On a 1MM account that is $14,000 with an expense average of about $1,000.

Keeping this thread moving in the on topic question, doesn't it seem reasonable to consider doing this?