Pension refund, FICA and Roth Swich 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, where we’re going to take your questions that have come in through Kevin’s workshops and webinars and also that I get from my advisor team and talk about them and see if we can help you all out a little bit.
Yep. That’s all it’s all about, trying to clear them up. And because they are so darn confusing, let’s make them understandable for humans like you. And the first one is a long one. OK, who after OPM processes your retirement paperwork. OK, so usually that takes it could take up to a year or so easy if you’re messing things up. Do you get a lump sum check for the difference they owe you from the fifty-five to 60 percent interim check?
OK, let’s just talk about that right there. I think that’s a good idea.
Yeah. We need to stop. Right. There is more time out.
Cassie. Real quickly, talk about the interim check and this. 55 days. I don’t know where they got this because I didn’t say this in the webinar. 55 to 60 percent. So why don’t you clear that up a little bit. Yeah.
So after somebody submits their paperwork or I should say there are estimates to OPM that OPM starts processing your paperwork and they will give you an interim check of anywhere between 40 to 60% of what your calculated pension should be or is estimated to be.
So that’s the interim check that they’re talking about because they’re going to you’re going to receive that amount.
Whatever OPM decides that amount should be between the time that OPM is or I should say, well, during the time that OPM is processing your retirement paperwork. So in the meantime, you retire to the time they finalize that retirement paperwork and your pension amount, then you’re going to receive an interim check or a percentage of what you’re estimated or calculated pension should be right now.
During that time, the reason it’s 40 to 60%, we don’t know, we’ve seen much lower.
But that’s a rare circumstance. But it happens.
The reason they don’t give you the full pension check is that what they’re doing is they’re taking money and they’re holding it to pay for things like health care, things like your family, but they actually don’t pay it until later. And so if they have estimated right, it should be right around how much they actually will pay it out later. But sometimes they’ll over withhold or sometimes they’ll under withhold if they over withhold then in this question that, yes, you will get the extra amount, but it’s not going to be that full amount because again, part of that’s going to go to things like health care and other things.
But if they undersold, you’re going to have to pay that back. Thankfully, I don’t think that happens too often. I think they over withhold anything.
Yeah, I think they do that on purpose. Yeah. And so the rest of the question is, do you get a lump sum check for the difference they owe you from the fifty-five to 60 percent interim check. And so essentially once OPM finalizes that had your retirement application, then you’re going to receive a lump sum, whatever is owed to you from that 60 to 40% that they didn’t give you. Right. And so they’re going to give you all of that money in one lump sum then the question.
They will pay you a lump sum check. Once the retirement application is finalized, they determine your pension amount and withhold whatever they need to. Then they’re going to give you that that money back then.
The question comes at the end here. Could that potentially put you in a higher tax bracket? And. You bet. Yeah, it could. And that’s great again, another great question to be thinking about. Right. This is a question that I think very few people it’s not on the radar. They don’t even think about this. But it’s something to definitely think about for sure. Yeah.
And this is really good, you know, and it goes back to that timing of the retirement, because essentially, if you’re retiring in December and it takes OPM a year to process that paperwork so that the full year of, say, twenty, twenty one, you’re not receiving your full pension amount. So you’re in the lower tax bracket. What have you and you’re not getting see the full SRS benefit either or the SARS benefit at all because they don’t give it to you while you get the interim check.
But once they finalize that, they’re not only are they giving you the pension, they get that lump sum amount that that you’re entitled to. But they’re also giving your SRS payment that can definitely put you in a different tax bracket. They were your previously or even as an employee, depending on what that special retirement supplement is. So it’s not just a pension because now for twenty, twenty two, you’re getting your full pension amount. You received that lump sum payout for the extra 40 to 60 percent or whatever from that whole year previously that you didn’t receive it for.
Plus, you’re getting the full special retirement supplement and you’re getting the payout for the special retirement supplement lump sum check.
That could be that adds up a thousand, $20,000 dollars.
I mean, I don’t know what that looks like for you, but, you know, these are these are definitely things to consider when you’re looking at when do I retire? Is my retirement application package healthy enough to where it’s not going to take long for OPM to to finalize all the LEOs different pieces that people need to think about? So very, very good question. And the answer is yes, they’ll give you the lump sum. And yes, that could could scrub your tax bracket.
Right. Be it. So definitely something to talk to somebody about a financial professional is is going to be able to determine this, and especially one who understands federal benefits are going to be able to help you out with that timing and what that looks like and whether that’s to tell you, hey, you should wait a year because you’ve got to do X, Y, Z before you submit that paperwork to make sure that, you know, the processing goes well or, you know, your you’re good to go or whatever.
That looks like they’re going to help you be able to determine that.
So, you know, in the in the workshops I do, we have a discussion and I ask, OK, what expenses do you think will go down when you retire? And invariably I get taxes and I have to pause and I say, well, it depends.
Right, because they may actually go up if you don’t do it right. And we have seen that happen. So it’s really important to get this figured out beforehand rather than be stuck with and go, oh, whoops, I did that wrong. Well, now it’s too late, unfortunately, because we’re taxing for the last for the previous year. And there’s nothing much you can really do about the previous year now. OK, next question. If that employee has already reached a date and that mysterious apply, I don’t know what employee they’re talking about, but that employee.
Right, that employee that has already reached the maximum amount of FICA, which is Social Security on your pay stub tax for that for the year and then is rehired. So, OK, so I’m assuming that someone reaches the maximum amount of Ficca that they can contribute, then they retire, then they get rehired again. And I assume as a retired a Nuytten, is it correct to assume that they will not be subject to the FICA tax during the rest of the year or, you know, I guess not even the rehired annuitant.
And if they were maybe even if they got another job, would they not be subject to the fire contact for the rest of the year? Yeah, yeah.
And the answer is no. They wouldn’t be subject to the bike attacks because they’ve already met that cap for that year. Yep. Yep.
No matter who you work for, I yeah. Yeah. Whether you’re a federal employee or you separate it from service and you’re going into the public sector, I mean whatever that looks like for you, if you have met the cap for Social Security, for those maximum deductions from your pay, then you’re not going to pay that for the rest of the year.
Doesn’t matter the session you’re in.
I have a question for you then that just made me think of a question. So I’m going to throw in an extra question here. And this is kind of off the wall a little bit. But let’s say I retire. I’ve maxed out my ficca and then I go get hired somewhere else. I’m a part time greeter at Wal-Mart or something. Does Wal-Mart go to Social Security and say how much they paid this year or do they just start taking it out and it works out?
Or I mean, that’s I don’t know how that’s done. I hadn’t thought of that.
I’ll be recorded through their Social Security. And so if they start taking those deductions, then they should be able to see. You’ve already met that Max. Right. And but do they do that? Check that out, huh? I don’t know. That’s a great question to ask. That’s a great question.
But I think your employer think about it, though. If you are starting a new job, right, then you’re filling out that W-2 and that’s going to whomever it is, go to the IRS, Social Security, what have you do? Well, not Social Security, but to the IRS. But so somewhere along the line, somebody should say something to make sure that those deductions are not being taken from your paycheck.
Right. OK, I will tell you this.
Just because you’ve met the cap for Social Security does not mean that you’ve met the cap for Medicare. So Medicare takes up contributions because there’s no limit to the amount contributed to Medicare.
Very good point.
I just want to make sure that we’re clear that you’re not like, why am I contributing to one and not the other? Aren’t they the same? They’re not. They’re two completely separate programs. Social Security has a cap of the amount that you contribute per year. Medicare does not. So just be aware of that. Good, good, good.
I like that. All right. How can you switch to ROTH?
Well, I love that nice short question. And yeah. Well, I think we you know, in past episodes recently, we’ve talked about how you can’t switch your present money from your regular traditional TSP to a ROTH TSP. That just cannot be done. Right. So let’s take this question as if they’re saying, all right, I want to contribute from here on out or I want to start contributing to my ROTH. How can I switch to can start contributing to my ROTH?
How do they do that? Cassie.
Well that’s easy going to TSP that gov. You log into your account and you switch your contribution there.
You go to it from traditional to ROTH. That’s, that’s the easiest way to do it from here on out. But you cannot switch what you already have in the traditional TSP over to the ROTH side.
And I want to also be clear that just because you switched your contributions to ROTH contributions, your matching money still will be contributed as traditional TSP income and so are contributions.
And so the match that you receive from the federal government will always be traditional. So you will still see that traditional balance increase not only based on the growth, but based on the agency matching contributions as well. So the only thing that gets counted as ROTH will be your contributions to that side.
And I and I’ll throw one more question in there that this leads people to that we. We could probably use as another question another time, and it’s that if I put a hundred percent of my money into ROTH, do I still get the match? And the answer is yes. Except that what you just said, it goes into the traditional side, not the ROTH side.
So, you know, there’s a bonus question for the five percent.
Right. They’re not matching up to whatever you’re contributing if you’re contributing or what have you.
So and also you can switch to a ROTH. It’s just not in the TSP. Right. That’s a different strategy. Whether you should or should not is another question. Like we can go on and on about what questions this leads to it and what’s the best program and and all of these different things. And is that even a good idea, depending on what Jeff or somebody that you have, I don’t even know, switching to a ROTH in general, switching your contributions to ROTH is going to be a good thing, right?
It very well may not be. Yeah, right. So so that is where financially. Yes.
That is where you have to go in and talk to a finance professor who understands the TSP not just understands investments, understands the TSP and how it works. Because, you know, I find that a lot of a lot of people have a misunderstanding of how does this OK that an IRA works this way and then they think the TSP works the same way? Well, sometimes it does. Sometimes it doesn’t. And you have to know when it does and when it doesn’t and when how to take advantage of one or the other.
So there’s it’s always going back and forth. So, again, a financial professional who understands this is going to be very, very important for everyone here.
And again, if you go to Fednobabble.com, you can get that basically free, no cost, no obligation, no sales pitch, just to take a look at your benefits, to see what’s going on. Cassie what?
Because before you can make a plan or ask any of those further questions, you have to know where you’re starting from. Right. You’ve got to know what traditional you’ve got to know what your FEGLI looks like, what your what your annual leave payout’s going to be and how that’s going to affect taxes, which are special retirement supplement, like all of these different things that could affect your taxes that aren’t taxed like what are those different things and what do they look like?
Are they federal tax, state tax, you know, all of these different things that really can affect you in that retirement. And it’s not just when you retire.
It’s so far in advance. Yes, exactly.
What is my FEHB Cassie’s going to do ten years from now, 20 years from now if it continues to increase the way that it has been in the past five years?
Right. So these are things that we want to be able to help people understand, to get them from a place where there they know where they are, what things are projected out to be. So that way they can really strategize what those different buckets of money need to be to plan the best for the whatever retirement goals and and picture you have for yourself.
Let’s let’s put all these different pieces of the puzzle together. Take action, go to Fednobabble.com, get the report from us so that way we can help you. And it’s not let me just be clear, though. It’s not being Kevin preparing these reports.
Well, I prepare them, right. We’re not giving you the report in person. Right. We’re having one of our trusted advisers or one of our advisors and our trusted network reach out to you to get the information, to get the report to you. So that way we can really make sure that you have somebody who’s going to be able to help you with all of these other things that need to be considered, too, not just your benefits, but tax implications, you know, whatever that looks like for you.
Yep, yep. And and as always, if you would please like, subscribe and share this with your coworkers so that they, too, are prepared for retirement. And I don’t care if they’re younger or they’re about to retire, everyone needs to know what their plan is going to be before retirement. And and the earlier honestly, the better. Last words Cassie take action, take positive action for your retirement. So that way you can feel comfortable and confident during those most precious years for your life.
Thanks, 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.