LEOs 62, 1991, and tax brackets, all on today’s Fednobabble.com.
This is Fednobabble.com, where Kevin and Cassie make federal retirement benefits understandable for humans like you, these two don’t hold back as they answer questions from the Fed Pilot workshops and webinars or from questions submitted by you at Fednobabble.com.
Welcome to today’s Fenobabble. I’m Cassie Knight and we are here to answer some of your questions that have come in from Kevin workshops and from the advisors that are on our team.
And I’m Kevin Jones and we get a ton of questions that we don’t get enough time to go in-depth with and we get to do that here. So we’re going to do that with you right now. Here’s the first question. Does not start until 62 for SP as well. What’s SP Cassie? What’s the COLA Kevin.
Oh really. Throw it back at me. I guess since that does come first in the sentence we should talk about COLA you know. OK, so here, here’s one thing I’ll say about cola. I think most people understand COLA: cost of living adjustment. I’ve heard over and over again people say, well as an employee we get a cola, a cost of living adjustment.
And that’s not true. No, no, actually, no, you don’t. But it functions similar. And I think that’s why people get confused. Right. A cost of living adjustment increases their salary as they are an employee, but that’s actually not what does it cola is something different. And so that doesn’t happen while you’re employee. COLA is when you are… Happens when you are retired.
Yeah. It increases your pension, a pay raise increases your salary. There you go. Right. So that’s the the biggest difference that people need to understand is that a pay raise increases your salary while you’re an employee. The COLA is something that automatically happens when you are retired and it is to your pension. Well, not the special retirement supplement or any of the other benefits just for the pension.
Well, you said automatically happens. It automatically happens when it happens.
Not that it always happens if there is an increase or if there is a government that automatically happens. Right. If you retired in the middle of the year, though, just know that you’re not going to get the full cola for the next year. Right. Like it. It’s based on how many months that’s you know, it’s so if you’ve only been retired for six months, you’re going to get half of the cola.
So this this this question points to the fact that Fer’s employees do not get a cola until they’re sixty two, but that is regular for his employees. So if a regular employee doesn’t retire or retires at least a minimum retirement age of fifty six, for example, they’re not going to get a cola for basically six years, five, six years there.
But if they are special provision, which is law enforcement, air traffic controller, firefighter, if you retire at 50 years old, you’re going to start getting a COLA the very next year.
So they automatically get called or I should say they get COLAs immediately as opposed to having to wait till age 62 to begin receiving those colas. Right. So that’s the great thing about being a special provision of the special provisions employee. Not only do you get the higher pension factor in the computation of your pension, but you also get the cost of living adjustments automatically as opposed to regular first employees or most employees where you have to wait until age 62 to begin receiving those cost of living adjustments.
Yep, that’s just the way it works, whether we like it or not.
OK, how do you buy back time for temporary employee status years between nineteen ninety one and nineteen ninety three Cassie. The answer is I have props for this. Yes you do. And you see it in the.
Yeah look at that. This is now Cassie. You have to explain this prop here.
You have to keep this stuff together. Guys, this is complicated. This is not easy to remember all the little darn rules that are floating out there.
Not at all.
And temporary service. So let me let me back a little bit. Temporary service is non-deduction service or a service or when an employee does not make contributions to FERS or CSRSnon-eduction. That’s the federal employee retirement system or the Civil Service Retirement System, so the part that I just showed was for four years and essentially if you had any non eduction service after January 1st of 1989, you’re not eligible to buy back that time period. They don’t give you the option to and that’s just how they change the law back then.
But if you had any service prior to that, you can, but essentially if you’ve had ChampVA your service are not adduction service after January 1st of 1989 then your you get, you get leave accrual for it. Right. So your leave. So this computation on your pay stub will probably show 1991 of whatever month and whatever day that you started. But that doesn’t mean that your retirement service computation date will be the same. Right.
Retirement is a service. Computation is the one that helps for eligibility and your pension calculations. And that can be vastly different if you’ve had on deductions service. Right.
Yeah. Big difference here now. And I will say this as well, Cassie. I remember one gentleman, he came up and he said, my temporary time counts. And I said, well, what do you mean? And he talked to me about how his agency, his agency, their version of temporary time was different than another agency’s version of temporary time. And most agencies, when you talk about temporary time, you’re talking about non deduction service in his agency.
It wasn’t non deduction service, but they called it temporary time. Now, I don’t know whether they officially called it that or is more of a casual thing that everybody does call this temporary time. So we have to be really, really careful and making making sure we’re speaking OPM ease and not just what we’ve heard or what our agency says it is, because it could be different from agency to agency. So I will say this.
My husband’s a Delta employee. When he was first hired, he was temporary because he was on a trial basis. Right. They had to make sure his background cleared for the federal purposes of doing all of this stuff and his badge color was different and whatever. Then permanent employees. He was considered temporary, but he was still contributing to hers.
And so I think this happens often with the employees because their temporary service is it technically non deduction service. So we have to make that very clear as well. Yes, you have just temporary service where your agent when you’re on a temporary trial basis with your agency, that is not non non deduction service. And that time will count. However, if you are not contributing to FERS or CSRS, which is that both employees, that’ll be FERS. Now, that’s finally showed the FERS sign that I had because, you know, CSRS are still eligible for that deposit.
Right? They can still make that deposit. But FERSnon-deduction employees are cut off if it is true, non deduction service or temporary service where and this is common for postal employees, where you they get hired as temporary.
They’re not contributing to the first retirement program and then they become permanent and then they start contributing to their first program. And that’s when their time actually starts counting for the retirement purposes. So very different between agencies. And that’s why we always recommend getting a certified summary of service for people who I get back that the advisors like. Well, they’ve had temporary time. OK, well, was it true non-deduction service or was it time where they were just on a temporary basis until things cleared through the government or what have you where they were still contributing?
Yeah, right. So very, very different. But essentially, if you weren’t contributing to the first program and that’s that’s the bottom line, was it no deduction service or not.
Right. And I’ve heard so you mentioned post office. I’ve also heard that same thing. You know, they come they come for a season and they work and then they’re done. I hear that also for IRS. I hear that also for Forest Service. And there are a bunch of other ones that have, you know, seasonal. And there’s another great word. Right, seasonal. Well, what is seasonal mean to your agency? Again, it could be very, very different and very different, depending on your.
Position in that agency as well. We won’t get into all that, but just to show again how complicated it is, which is again another reason why it’s important to talk to someone who understands federal benefits, who can look at it and pick out, oh, no, I know it says that, but that’s not how it works. It works this way and and move on. And then again, you’re awesome. Report just shows step by step.
This is what this means. This is how it gets handled. This is how you want it, how you can take advantage of it. Love that.
And if essentially the easy way that we can figure out some of these, how that temporary service is getting a copy of that pay stub from then, and you guys can submit that with our advisors and they’ll be able to tell you or they’ll submit it to me and ask. And I’ll be able to tell you whether or not that that temporary service was actually non-deduction service or not. If it was a service where you contributed to, then all that type counts.
You don’t have to worry about it.
We like to be nice that we figure out when people or it when people go to the advisors and they’re submitting that information. You know, the more information that you have regarding certain things like temporary service and and those things that can get convoluted, send us whatever documentation you can and we’ll be able to distill down whether we need to send in certain forms to get more clarification, such as the certified summary, or if we’re able to tell you what kind of service and how that how that gets treated with your retirement or your pension calculation, then we’re doing all of that for them.
So feel free to reach out if you don’t have somebody who understands the benefits, because that’s can make a difference for sure. Yep.
Huge difference. OK, question number three, if I do a ROTH conversion while in the thirty two to thirty five percent tax bracket, wouldn’t it be best to let let it ride to the next generation to that to be taxed at the lower tax brackets.
OK, so basically what this person is saying is if I do a Roth IRA, a Roth conversion, which is taking traditional money, paying taxes on it and putting it in a Roth account. Right. Which you cannot do in a TSP, which we covered in the last episode. But you can’t do that in the TSP. But you do that in a in an IRA, for example. So you take your traditional money, put it into a ROTH, but you pay the taxes in the middle.
Why would they do that if they’re in a thirty two to thirty five percent tax break, and why wouldn’t they just leave the ROTH money alone or the traditional money and then give it to, you know, let that pass on to their, to their kids when it gets well passed on, if it can be passed to their kids? Oh, that’s a good question right there. Can it be even passed to their kids? Cassie.
Well, first, I want to just have a little disclaimer here, OK? We are not tax professionals and we are not here to tell you what you should or should not do tax wise to your financial portfolio, period. A We are not licensed or legally able to give any sort of tax advice. All right.
So I just gonna throw that out before we get into this question. We can kind of go over a little bit of what considerations to think about, different strategies that may pertain to maybe go to you or may not. But really, you need to talk to a tax professional before you to really look at the numbers before we can. Well, we can’t even answer this question, but before you can have this question answered for yourself. Right. I just want to make that clear.
Thank you for me. So essentially. Sorry, what was your question?
Kevin you don’t forget. We’re done. No, let’s not. No, this really I mean, really basically what they’re saying is, wouldn’t it be better for me to take the money that’s going to be taxed at a higher rate? If it’s going to be taxed at a higher rate? For me, I just take the money that will be taxed at a lower rate and pass on the stuff that would be taxed at a higher rate. So I can give it to my kids and then it’s going to be taxed at a lower rate for them.
Now I see it right. And that’s the thing. And I want to say this question is so incredibly complicated. And honestly, I don’t know that we can do it justice on this episode because it is really, really, really complicated. There are so many things. And I think to really answer this, we’d have to go into each bit of this and explain, OK, this is what this is and this is how this does and this is the effect that.
It it’s massive, it’s a massive question, I think that’s really something like this needs to be projected out because I don’t know how much you’re going to pay, even though you’re in a thirty two to thirty five percent tax bracket. I don’t know anything about the income, about how much you’re trying to take, what that looks like. Right. So I don’t know any of the details here, so I can’t tell you how much tax you’re going to pay.
Right. That kind of what is it how far is your next generation. Right. 20 years, 30 years, 40 years. Maybe there’s a big difference between all of that. Essentially. I think, though, that people need to understand taxes always increase. So if you could pay tax on that money now and leave it to your kids, would that be a better scenario?
Hmm. Hmm. Right. What is that projected tax bracket going to be? Do you think that? Why do you think that they’re going to be in a lot lower tax bracket?
Right. It is not this all this almost assumes that this person knows when they’re going to die and what station that their family was. OK, but maybe it will be passed on to their children. Maybe this person is buried in the TSP is passed on to the spouse, and then do we know when your spouse is going to pass away? Right. But I think I think the big thing, big thing about this question is that they’re thinking about the right things.
They’re asking the questions that need to be asked. And I love this in-depth question just for that fact.
Yes. Whoever submitted this, kudos to them, because they are thinking about the ripple effect of how that’s going to affect their benefits, what they’re looking at, the different options that they may have for this particular situation. And that’s fantastic, right? Because this is what you should be doing.
Unfortunately, we simply can’t answer in the detail that this person is looking for, which is not awesome. But I really do want to encourage them just to take a look at it. Right. Go to a tax, go to a tax professional or financial planner who is able to take a look at the numbers and do those projections for you. We can give you where you’re at right now or if you’re retiring in five years with that estimated TSP balance will be and all of that.
So that way they can do the projections from there on out, because this is something that really does need to be looked at. And kudos to them for thinking about that. So that’s really good.
I love it. And that’s, again, if anyone were to go to Fednobabble.com and sign up, that that’s the report they get. That’s the kind of questions they can ask. And again, it’s no cost, no obligation, no sales pitch. And it’s just it’s beautiful because they get your report Cassie, but they get to ask these kind of questions that are just solid. Love that.
So, yes, you’re right about the network. They give you that advice. They’re able to tell you all these different pieces of the puzzle to fit it together to where you’re making those goals or exceeding them. But you’re able to to make those plans, whether it’s a tax stratizization plan, whether it’s a financial plan. If you’re just looking at the income side of it or what have you, they do a full service. They’re not just looking at your TSP.
They’re not just looking at your at your benefits, your life insurance or what have you. They’re looking at all of these different pieces of the puzzle and they’ll be able to best answer those questions. So please, like share comment, go to Fednobabble.com, get the report so that we can get you in touch with somebody who is able to really dial in those numbers for you.
Yeah, and I think most importantly, as Cassie as you say, go act on what you learned. Go do something about it. Go do it.
Thanks for joining us and have a fabulous time until next time.
To get Cassie’s comprehensive report on your federal retirement benefits. At no cost, no obligation and no sales pitch. Go to Fednobabble.com while you’re there. Submit a question for them to answer on the show.