#27 – Vacation Days, Locked in, Avoid Penalty

Vacation days, locked in, and avoiding penalties on today’s Fenobabble.

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, everyone. It’s good to have you back to learn about your federal benefits. I am Kevin Jones.

But I’m Cassie Knight we’re here to answer the questions Fed Pilot my things off, don’t laugh at me anyways.

That’s OK.

OK, so answer your questions that come in from Fed Pilot the workshops and webinars that Kevin puts on and also from the advisors that submit them from their options who build the reports for you guys. So let’s just jump in. What is the first question? They are vacation days paid out as earned income. Is there a time or is there a limit the first year you retire when you have higher earned income?

OK, well, let’s just take our vacation days. Yeah, they’re talking about Annual leave, right? That yeah, that’s. Yeah. In other words, a.k.a. vacation days, a.k.a. Annual leave. Are they paid out as earned income as well. So you get so you get that money. If you retire you get any unused annual leave paid out to you.

It’s not just if you retire, when you separate from service, your annual leave is paid to you.

Oh that’s true. That’s true. Yes. That is so far as earned income, they mean like for Social Security or you know, it’s probably against the earnings test where maybe they’re thinking that it’s, you know, does that count against the earnings test?

So let’s say that a federal employee retires at fifty six at the end of the year. They get let’s say they get a chunk of money into the next year. And if they earn too much in that next year, they don’t get the special retirement supplement. If you earn it’s about forty thousand dollars, then you don’t get any of the special retirement supplement. It starts going down at about eighteen thousand, but it goes away at about forty thousand. So does that, so does that annual leave that get cash get gets cashed out to them.

Does that count as earned income to count against the special retirement supplement. That’s what I think that they’re asking.

Yes. Yes.

Because it is income, it’s it’s income that you’ve earned from working. Whether it’s I mean that’s the bottom line.

Yes.

It counts as you earn it throughout your career, even though you’re not paid for it. But so let me back up a little bit as an employee. If you take an Annual leave day, then you’re paid for that day as income. Right? It’s not like you where your pension is just automatically given to you because you paid into the system and now they’re essentially returning those funds to you with interest, what have you. Right. Or a TSP where you’re you’re taking those that money, but you’re not earning it but annual leave you have earned and even though you’re getting paid out for it, it’s based on your salary or your hourly rate, hourly salary that you that you earn.

And so it is considered earned income. It’s it’s not because it’s fully taxable essentially.

And I think one thing you may want to or people want to think about is that the term in earned income gets thrown around a lot. And we just think of it as a title. But if you think about it as a functional phrase, earned income, yes, you earned that income. And so it actually does count against because you earned it, whether whether or not it’s paid out as normal, you still earned it.

Right. And it’s not something like you saved up for. Right. I guess that’s a that’s a very good distinction because you’ve saved your TSP, you’ve saved your your contributions to first throughout your career and and your annual salary is something that I’m not your annual salary, but your annual leave is something that you have not paid into already. You’ve earned those hours and they will pay you for it once you’ve separated. That’s why it’s considered an earned income, because you accumulate the hours and then it’s paid.

To you, it’s not where you’ve paid into this program and then they give you that money. There’s that are we just yet?

That’s another great consideration, though, because if someone’s going to retire and they want to still work but still get the SRS, then, you know, I’m just throwing this out.

I’m not saying that someone should do this, but maybe they should retire at the end of November, get the Annual leave that doesn’t account count against them for the next year of earned income.

Again, that’s a calculation that would have to be done. Whether that works or not, I don’t know. But it could it could throw off what day you’re planning on retiring or at least change it, I might say.

Yeah, especially if you’re a higher earner. Right. Is there a limit to the first year when you retire, when you have higher earned income? I’ll tell you what, it’s based on an hourly salary. And I’m doing calculations to employees or employees, to our advisors. And sometimes the payout is well over $15,000. And it’s the payout is over $15,000 for, say, you know, 300 hours. But you’re trying to maximize your payout for Annual leave.

I mean, that can really hinder somebody who’s a SRS or other benefits tax planning considerations. I mean, there’s so many other things to consider. It’s that ripple effect that we’ve talked about. That’s right. You you think that you want to do this thing, but then it affects five other benefits negatively. And so maybe that’s that’s not the best thing for you to do. You know, it’s really you have to talk to somebody about what that’s going to look like, project out those other considerations to really see how all of these different pieces are going to fit into what your goals are in retirement once you’ve actually taken that leap.

If you want more information on that, obviously you can let us know and we’ll be able to get you in touch with somebody who can figure that out for you. But, you know, planning those that Annual leave payout is way more important. I think people realize you’re right.

It’s just not, oh, I’m going to get paid out. Well, maybe. Maybe not like you think we’ll have to see. Yeah, you’re right. It is a big, bigger deal than most people think. OK, next one. I have family. Who should I call to be sure I don’t get locked into the next increase in payments.

Oh oh oh oh.

Too bad you’re going to get you’re going to get the next increase in payments. Ghostbusters. Oh that’s right.

Yeah.

No, no. And we’ll get you in touch with somebody you know. But just let you know you’re not locked into your family premiums either.

They don’t get Cassie. They do increase every five years.

So, uh, I’m 34 at 35 they would increase right at 40. They’re going to increase at 45. At 50 every five years they increase.

But you’re not locked into those rates because you can always change. Or I should say you can always decrease your coverage. You cannot increase that unless you’ve had a qualifying life event. We’ve talked about that before, but you can always decrease your coverage. And so if you don’t want as much coverage you want to pay a lower premium, then that’s one way to do it, is availability to do that?

Yeah, it’s not the right question. Right. But if they want to keep the same amount, you’re going to pay more on those five year increments you are locked in and you can’t call anyone to change that specifically. But you’re right, you can decrease or you can say, forget Fed Pilot, I’m going to go somewhere else, where else and get it where it may be cheaper and I can lock it in and it’s not going to increase and have more flexibility in what it can do rather than just pay out when someone does.

And and a ba ba ba ba ba ba ba all that stuff.

Yep. OK, that’s good.

That’s the short answer. Yeah. That’s, that’s a short one. OK, maybe we make this a really long one just for the fun. It ok it says ok so you have ok sorry. I feel like I’m a first grader when I read these sometimes. OK, so you have to be fifty nine and a half to pull out money without a penalty question mark.

And they’re talking obviously about their TSP.

What do you think Cassie. I think they’re talking about their withdrawal options, right? Yeah, well, it depends. Yep. Are you still an employee or are you retired? And that’s the determining factor right?

There is. If you are if you if you are retired, even there, OK, there are nuances in there. But basically, for the most part, if you’re retired before fifty nine and a half, you well there’s actually fifty five. If you retire in the year that you are fifty five or later you can pull out your money and you’re fine if you retire before that. Unless your special provision. I’m not going to get into all that blah blah blah blah blah however.

But you know what I just Cassie my mind I think, ok, here’s the answer and then my mind starts going, well there is this exception and there’s this oh, and you forgot about this scenario and this too. And it just keeps going and going and going. And I try to make it really simple without getting too complex. But these are really complex answers to what would seem a really simple question. Let me help you out.

If you’re an employee, you have to wait till 59 and a half to death penalty free access to your TSP. Yep. If you are retired as a regular first employee, you’re not a special provisions employee. You are eligible to withdraw or transfer or withdraw your money without penalties in the year that you turn fifty five or later. So you don’t have to wait till fifty nine and a half if you’re retired. Right. Or I should say separated from service.

Now if you are special provisions employee, you can take your money out of the TSP penalty free in the year that you turn 50 or later if you have retired from service A IT.

But you have to be, you have to be retired in the year that you turn 50. If you retire in the year, the year to turn forty nine, you cannot take out TSP until fifty nine and a half. You in fact I was, I remember being in it. What was that. Sorry. I said what.

Penalty free at least. Right.

Yes. Yes exactly. That’s a good point. So I remember being in a workshop and the number two law enforcement person for specific agency was there and he said, OK, I want to retire at 50. Can I do that? I said, OK, well, let’s you know, so the answer is yes. But actually what he was thinking of doing is retiring in the year that he turned forty nine instead of fifty and and and like one month before that.

And he said, and I want to access my TSP and we said, hold up. Oh whoa. All you have to do is wait one more month. If you can wait one more month then you can access your TSP without a penalty. If you wait, if you don’t wait that month, you can’t access your TSP without a penalty. And he was about to make that mistake for himself. And it was just one month difference is all it was.

Yeah.

You know, these these little things are what we help employees to understand when they’re talking with our financial professionals to make sure that they get these things right. So I have a fact finder that the financial professionals fill out regarding the employees information. And I remember this time where somebody came back and was like, hey, we’ll rerun this report at, you know, this one year earlier, I called the advisor and I was like, hey, look, that’s before his minimum retirement age.

Like, you can’t even retire. It was a regular for his employees. Right. So he could retire before then. I said, if he does, he’ll defer his pension. He’s going to lose his benefits like he’s not going to. And he’s like, whoa, whoa, whoa, whoa, whoa, wait a minute. That’s not what he’s trying to do.

I don’t think so. Right. Right. And so it’s those little things that you have to think about if somebody is a special operations person or or what have you and they’re submitting paperwork and we’re giving that feedback to the advisor on. OK, well, I ran the report waiting two months because we want to make sure that this person has penalty free access to their TSP because that’s a huge, huge deal. Right?

That’s 10 percent of whatever income or whatever which are you’re trying to make out of your TSP. So you’re taking out one hundred thousand dollars. That’s ten thousand dollars. That could be a big deal. Yeah.

So and that’s. Deliberatively impact somebody’s financial picture later on, and, you know, it’s all these little caveats that we got to make sure that we’re we’re looking at correctly and, you know, through the lens of of understanding their benefits and giving them the knowledge and the power to take hold of that responsibility, of their benefits so they can actually do what they’re trying to do and what they’re intending to do in retirement.

And that’s why I love our our financial professionals and our trusted network, because they are doing that. But we have conversations regularly on how things affect an employee and what they should or shouldn’t do and why this affects what have you, because we really want to make sure that whatever goals an employee has, whatever they’re trying to accomplish in retirement, they can actually do. And you have to know where you’re starting from. You have to know your benefits and what they are and see be open to exploring other situations, too, because there are so many other things that can be done with your benefits, not only with the government, but on outside products as well that really are beneficial to people.

And I love our advisors. They help you get to that goal and are able to to make that happen for you.

So, yeah, you know, it’s the Fednobabble.com and request your information. Within 48 hours, somebody is going to be in touch with you to to get that report.

And it’s amazing how how we cannot make these decisions in isolation. We can’t just say, OK, I’m going to do this with my TSP. No. Well, that affects your Social Security. That also affects your special. Well, not so much retirement, but actually it can I mean, it can affect all these different things. It in fact, it affects what your spouse does. It affects so many things. We cannot just make one decision in isolation and think, OK, that’s what I need to do for that.

Again, that’s why it’s so important your report shows that ripple effect and or can show that ripple effect. OK, well, if you choose to do that, this is what that’s kind of what happened. So again, it’s important. So again, go to Fednobabble.com and you can get that report from Cassie Knight. And as always, if you would please like share subscribe, let your colleagues know that Fenobabble exists so that they can get their questions answered and act on what they’re learned.

Any hey, Cassie any last words of wisdom here?

Take action, please, and take action for the right direction. Right. Because if you decide not to go to Fednobabble.com and not get your report, that is an action. Maybe a negative is a positive action for your benefits and for your financial plan and what your goals are in retirement.

And just make sure that you’re reaching out to somebody. Even if you’re not getting our report, make sure that you’re finding somebody who understands the benefits. Who’s going to give you a report on that, because that’s huge. That’s that’s I can’t even express how beneficial it is to know where you’re starting from. So that way you can make that path to where you’re going in the future.

So open your eyes. Absolutely. All right. Thanks for joining us, everyone.

Take care.

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.