Buy Back, secondary FEHB, IRA versus TSP Part one.
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.
Hey, Kevin, how are you? Good, good, good, good to get to some of these questions again. We’re starting a part one, part two, we’re starting a part on TSP and IRAs.
This is going to be fun.
Yes. IRA versus TSP series. I love it. Yeah.
Let’s do question number one. Can I buy back time for my agency? Yeah, for my agency from work in the 80s, this person had five years, four months to make it possible to retire this year. I’m assuming that that five years, four months puts them up, you know, for example, up at the 30 year level or whatever it may be. But I think the essence of the question here is, can I buy time back for my agency from work in the 80s?
What do you think? Well, the short answer would be yes, if your first any time that you had a prior to one one of eighty nine you can make a deposit for.
I’d have to look at the rules for CSRS, we don’t have very many of those anymore. That’s rare.
And if this person is looking at eligibility to be able to retire this year, I’m going to assume that they’re not serious because most of those guys are already eligible to retire anyways. And so, yeah, we’re just going to answer this for FERS right now.
Yeah. You know, so you say the short answer is yes. And I would agree. But again, always it depends, doesn’t it? And there are certain things where you may not be able to buy it back because it doesn’t fit certain criteria. So but typically the answer would be yes. But again, that’s something to dove into and then at that point, so we know this is five years and four months. Do you have the money after all of these years, interest included, to be able to buy it back?
Do you have the cash? Well, you know, not well, I guess, really, it would have to be cash, because if you’re going to retire at the end of this year, it’s not like they’re going to be able to take out enough out of every paycheck to buy it back by the end of the year, possibly. I don’t know.
But I it would depend on what the debts owed. And another factor that people don’t think about is how is it going to negatively affect my pension?
Wait a minute. Wait, hold on a sec. Are are you saying. Oh, OK. So are you saying how will it negatively impact my pension if you don’t buy it back or if you do buy back? If you don’t, OK, and if you do, we need to make sure that it’s going to be fine, like if you’re not. So what we look at when we’re considering a buyback for somebody who’s had Non-deduction service in the eighties is how much?
Well, anybody who owes a deposit or redeposit, really, we’re looking at a couple of different factors. And that’s how does it impact your pension amount? Right. Because we need to know, OK, if it makes you eligible, how much are you going? How much more are you going to get in your pension? OK, and then how much is your deposit? And we take those two and divide them up to find out how long it’s going to take you to recoup that money in retirement.
If this person is 70, well, they’re probably not 70, but if this person is looking at being eligible at, you know, fifty seven or sixty or something to that effect, where they’re looking at having that time being counted towards their 30 or 20 years of service or getting that to that point.
OK, well, if you get to that point, is it increasing your pension enough or rather should you wait till, you know, fifty eight or fifty nine or whatever that age is for you? How much longer do you have to wait, how long is it going to take you to recoup that benefit?
If it takes you 10 years and say you have health issues or something, are you going to make it worth it. There you go.
To be able to get the benefits of buying back that service. If it takes you two years to buy it back, then that’s probably worth it.
Right. But we have to distill down how long it’s going to take to recoup that money and figure out if it’s financially advantageous for somebody to to to make a deposit. Just because you’re eligible doesn’t mean it’s worth it.
Yeah, that that’s exactly where I was going. I think the two first words of this sentence can I are very telling. Can yes. Most likely. Should you again, we keep coming up against that. And it’s strange because people think, can I. OK, then I’m going to go do it. Well, then what they forget to ask is, should I? That should be the follow up question every single time. Can I do it?
Yes, you are eligible. Should I? That’s a completely different question. And a lot of people just assume that because they can, they should. And not only in this situation, but in all of the other benefits, a lot of other things as well. So I actually I have the opposite. People that really maybe think that they can, but that should not, and so they’re not taking into consideration that it might be really financially advantageous for them to do.
And a lot of times I see this with military service. I know this is kind of just for instance, the whole I’m retired military and I’m getting a thousand dollars or twelve hundred dollars, you know, and they think, well, my military pension is going to be better than my federal pension. Well, that’s not always true. If your income is higher with the federal government than it was when you were in the military, in the military, it might be worth it.
And furthermore, if you’re not retired. And how else are you getting credit for that military service? Mm hmm. I think because you’re not going to get credit if you’re not retiring from the military. You have the service and a lot of people think that it affects the VA benefits, but it doesn’t. Right, right. And that’s strictly federal stuff.
Yeah, that’s a good point. Yeah. And I called so I call these shortcut phrases where where you’re you’re told, for example, you should if you retired from the military, you should not buy your time back. OK, you know, whether you can or not doesn’t matter at that point. It’s I shouldn’t. Well, you don’t know that. You don’t know that. And that’s a rule that people say that isn’t actually a hard, fast rule where it might be really, really good if someone actually did buy it back.
So, yeah. Yeah. You have to check.
Yes. Yes. Right. Well, you sure. But I was told I shouldn’t buy back my temporary service and then people think that it’s not worth it for them either. And of course, that spreads like wildfire. And that doesn’t necessarily mean that you shouldn’t. That just means that that person shouldn’t. Right. And we have to think you’re different. I have to do this to my kids. They’re twins. I have to teach them individuality.
What, you are different than your brother or your you know, your coworker because of many different factors. And so figure it out for yourself. Yeah, OK.
That’s a great example, though. I love that you are your own individual person. You need to figure it out on your own. Yeah. All right. Next question. How does Medicare work? If you work receive private health insurance, it becomes secondary, right? Is it any is is there any downside to this? OK, private health insurance. What do they mean, like not FEHB?
Yeah, FEHB and Medicare.
So let’s let’s take this as Medicare and FEHB and let’s call that private life insurance. I should I should back up so anybody with private health insurance, whether it’s FEHB or not, Medicare typically pays first. Right. And then your plan is secondary. So the short answer is yes. Your private insurance plan, whether FEHB or not, is going to be secondary. Is there any downside to this? Yes. Not all doctors except Medicare.
Right. Ding, ding, ding, ding. Right there. Yeah. People think that just because their doctor that they automatically accept Medicare, but they don’t realize that when they’re considering Medicare that not all doctors will take it. And it’s just like any other health insurance plan. Not all doctors are going to take Blue Cross Blue Shield or not all doctors are going to take Aetna or what have you. Group Health or Kaiser Permanente or whatever their you know, you can only go visit their clinics.
And so it depends on the type of plan that you have privately on what doctors you can and can’t see and check with your doctor, you know, and find out if they accept Medicare, because if they don’t accept Medicare, then your plan is going to be primary. If they accept your plan, mm hmm, yep, and and another downside, I would say, is that some people so obviously when you have Medicare and you have, for example, in FEHB plan, FEHB plan, you are paying two premiums.
Now, the reason people do that is because typically I don’t want to say even typically, but it’s very possible. And in a lot of cases, it’s really possible that the overall cost of health care will be less if you do those two things. But if you don’t have enough money to pay for two premiums, you can’t do it. So the downside is that you’re almost, in a way, have to pay up front for a lower, lesser amount.
And again, going back to what was the last episodes when when we’re talking about people coming out with a negative, you know, retiring and having a negative pension amount, well, then in that case. Oh, my goodness, what do you do there? And it’s just going to get worse from that point on, so. Right. Yeah, I mean, you know, it can go both ways. Are there downsides? There are always downsides.
There are always downsides to everything, even if it looks golden. If you’re in some senses, I mean, that’s just the way it is. So, yeah, so again, is there any downside to this? Sure, but I can’t tell you what that is because I don’t know what kind of plan you’re in and how prominent Medicare is in your in your area. And if you’re going to travel or not travel, there are a number of different factors that come into play to a person’s situation that you have to think about.
Are you going to be internationally traveling because then Medicare is not going to cover you or or very minimal coverage?
And does your plan cover any outside international, international or any domestic traveling that you might do?
For instance, again, Kaiser Permanente, typically those are regional, like you have to stay in your specific area to have coverage. Unless you’re traveling to a place where they have one of those clinics, but if you don’t, what do you do then?
That’s a good cover. Yes, that’s a great thing to bring up, because when I ask, hey, what do you you know, at the beginning of my workshop, I say, what do you plan on doing when you retire? The number one answer is travel by far. And and a lot of it is overseas. A lot of it is obviously out of their area. And if they don’t have a plan that covers them out of their area, even even state to state, then that could be an issue.
But people don’t typically think about that. That’s that’s a really good point. I hadn’t quite thought of that. OK, now this is IRA versus TSP, part one to maximize someone asked to maximize what can it be best to do, a Roth IRA and do a traditional TSP? So basically what they’re saying is, wouldn’t it be best to do my traditional piece of my savings in the TSP and then the ROTH in the IRA? I don’t know as far as my understanding is, and again, I want to clarify, we are not financial advisers.
We do not have certificates or licenses to give any sort of financial advice. We are simply here to tell you to explain rather different pieces of how something may work. Whether that works for you or not, we don’t know number one and number two, we can’t tell you what’s going to be best, right? So a Roth IRA, there are some limitations compared to being able to contribute to the ROTH, TSP and having the traditional TSP, so you have to look at that.
There’s different, I think, income limits and things like that as far as how much you can contribute to an outside Roth IRA. But if your income is high enough, it might not be an issue for you.
That might be something that you want to look into. And there might be other benefits that go along with a Roth IRA as opposed to doing the traditional TSP or doing in addition to the traditional TSP. Right. So what are those factors look like for you? Are there living benefits? Are there other. I prayed for not just the taxable income, and that might be where the Roth IRA is more beneficial than the ROTH TSP. Mm hmm.
So it depends on that person and what their situation is. Again, it boils down to the numbers. Yeah, it all depends every every single time, doesn’t it? And I think so. I’ll just say this to the in answer to the question. If you’re if someone is if someone has, you know, is putting money in the traditional TSP in a Roth IRA and taking all the ROTH and putting it money and putting it in an IRA instead, then the money that they’re not putting into the ROTH TSP they’re not getting a match on unless they’re maxing out their well up to the five percent.
I’ll say if they’re you know, if they’re doing it, if they’re not doing the full five percent into the TSP, a traditional TSP, then the money that they’re putting into the Roth IRA could have been matched in the ROTH TSP. Yeah. And so. Right. And like you said, and there are there are income limitations and there are other things that we have to be there are differences. And and I have heard this over and over again.
I remember someone in one of the workshops gave me negative feedback, said you’re trying to do all this. You know, he was he was accusing me basically of of trying to steer people to an IRA. And I’m like, no, he said, because IRAs work the same as the TSP. And I’m like, and that is where you are wrong. They they do in some ways they work the same, but in other ways they are completely different.
And it’s important to know where they are the same and where they are different and then how to take advantage of them. But to assume that the TSP works the same as an IRA is so completely wrong and right. There are strengths and weaknesses.
The both of them all say that it’s not really yes, the TSP. It’s got great fees as opposed to a regular IRA.
However, actually, let me stop you right there real quickly there. Yeah. Yeah, there are IRAs that I mean, and that’s what a lot of people say, is that, you know, TSP cost so much less. And then the financial professionals we talk with are like, well, it depends what you get into. There are some that are actually cheaper than the TSP as well. And people are know what? Yeah, actually, yeah, there are.
Well, hold on. I wasn’t finished though. I’m sorry. Sorry, sorry. You have to consider each of the other features to you. Yes. But IRA as opposed to the TSP like for instance somebody who is a special provision employee who is going to retire at age 50 or a regular employee who’s going to retire at 57. Right. They’re going to have the availability to draw a portion of their TSP penalty free before age fifty nine and a half.
But then again, on that flipside of the IRA, you have other features. You have living benefit features for chronically and terminally ill most of the time, I should say, because that’s different for every state.
Exactly right. But there are other my point to that is there are other benefits of features within an IRA that might be more beneficial to you than keeping money in the traditional TSP or maybe having both.
Yeah, so. That’s where you really have to talk with somebody who understands all of those different intricacies of the products that are offered or your state and who understands the federal benefits, who is going to be able to coordinate all of these different features for you and and get you the answers that you’re looking for, because it also depends on what your goals are in retirement and what you need.
Mm hmm. So all of those different factors and then some is what our financial advisers help with, and I was so happy to have them as a resource for employees because like I said, when I’m on the phone with them, they’re able to ask me so many other questions and we can kind of get into a specific case on the nitty gritty of it and really distill down what that person needs and what that person has or doesn’t have. And again, that’s going to vary whether they’re 30 or 60.
Right. So just depending on your age, it could depend on what a financial adviser, what you should or shouldn’t do.
Right. So go to Fednobabble.com, reach out to us. We’ll get you in touch with a financial adviser who’s going to be able to answer these questions for you. But before they answer the questions, they’re going to get you a benefits report as well. Then we got to find out where you are to to know where you’re going.
You’ve got to have a you know, you look at a map. You got to and you’ve got to find out where you are to know and then take a look at the different roads that are available and figure out which one’s the best one to take you to where you need to be or what your goals are and what you’re looking at going. So we do we have to do enough for retirement to we have to take action and figure out where we are and plan the path to where we need to go.
Right. That’s a lot of money. So exactly. So that’s good, good. All right, thanks. And we’ll see you in the next episode, everyone. Take care. Thanks, Cassie. I Kevin. 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.