#4 – Finalize – Earnings Test – 59 1/2

Finalized earnings test, and fifty nine and a half all on today’s Fednobabble.com.

Welcome to today’s Fenobabble, where we make federal retirement benefits understandable for humans in under 20 minutes.

I am Cassie Knight and I am Kevin Jones and we take your questions submitted on Fednobabble.com or from workshops and we answer them. We’re not going to get into the heavy techno jargon of federal benefits. We’re just going to say it simply and make it so that you can understand. All right. So let’s jump in. Question number one, Cassie. Do they pay you back after they finalize now?

One day, OK, so right on this one, they’re talking about the pension, of course, they’re talking about the pension and the interim payment. So when someone retires. Let’s let’s go for a standard time right now of 12 months, one year before they actually finalize everything.

Yeah, it definitely takes OPM a little while to get everything to process.

Because… Oh, go ahead.

Yeah, well, get their information to H.R. and then it goes to OPM. And so people want to make sure that they’re submitting their information in enough time for H.R. to verify their information before it gets into OPM.

Right. But not here. And it is that if you send it to H.R. earlier, that doesn’t mean it gets to OPM earlier because H.R. doesn’t pass it on until they actually retire. True, however, if they send it in 30 to 60 days, sometimes 90 days for certain agencies, then that can at least get them on the ball to do their follow up.

Yes.

To get the information they need to have in order to be able to just send it to OPM once that retirement date happens. Right.

OK, so it does get a little bit quicker because if they submit it, you know, two weeks before they retire, then that could delay the timeframe that OPM gets it correct.

OK, so it can delay the whole processing of it. It doesn’t necessarily delay OPM.

You’re absolutely correct. Yeah. And I’m glad you said that because in saying that, I didn’t mean to send it in the day that you’re retired. I mean, we’re, you know, six months in advance might be good, you know, just trying to get it in as early as I don’t want to say as early as you can because 20 years is a little early, but get it in with plenty of time so that H.R. can do their due diligence and there’s stuff that they need to do.

Yeah, but then they’re paid and they get an order from the original Hayati and the original elections and everything like that to verify FEGLI and FEHB requirements were met or not met. So once OPM has the paperwork, then OPM is going to do that same process but in more detail. Right, because they have to verify if depository deposits were made or not made, give the employee the option to make those deposits or deposits and then also verify any inconsistencies with service.

Right, make sure that your SF-50 is are matching up with all of the other information, you know, of course, verifying that FEHB and Feigley and divorce decree. There’s some things that you can do preretirement to make sure that at retirement and that doesn’t delay the processing of a retirement application. But to answer those questions simply. Yes. Oh, all right. OPM will send the check retroactively from when a person retires. So when they retire, OPM then begins to give them around 40 to 60 percent of their pension amount so that they can live on.

Now, mind you, this is only during an interim paycheck. Only federal taxes are taken vaguely.

FEHB will still be in effect and an employee will still have coverage. However, they’re not going to take those premiums until they finalize the application and begin the retroactive payment. And they just take that lump sum premium that has accrued during that time from that payment. However, people need to think about when they retire, what is in order for OPM to do before that retirement work is processed and finalized? Because if somebody were to retire December thirty first of twenty nineteen and it takes a year for OPM to process their paperwork, then they could be receiving that retroactive payment and that full pension amount in twenty, twenty one.

And that created a huge tax problem and people don’t necessarily think about that. So they really need to do what they can prior to retirement. And I see a year to six months prior to retirement at least, to make sure that at retirement everything goes smoothly. Yeah.

So let’s line out kind of the timeline of this for everyone, if we can, just to show what is expected or what they could expect. It’s not going to be exactly this. But around, let’s say, a few months before you retire, you turn in paperwork. It gets H.R. processes it when you retire. Then they finally set it on to H.R. or sorry, OPM. OPM takes about a year to figure everything out. During that time, they’re giving the employee interim payment checks.

But as you said, it’s only 40 to 60 percent of that. And so they hold back the other 40 to 60 percent to eventually someday pay for the FEHB and the family and other things like that. And then once it’s done, then they will get their full pension check, plus any money that they held back above and beyond what they paid out for FEHB in February, etc. They will give it a lump sum to the person once they finalize and are doing everything.

So a lot of moving pieces there, not just a pension to it’s a special retirement supplement if they’re eligible as well. Right.

OK, and so they’re not paying that out during the interim time. OK, and so they don’t receive the special retirement supplement until after that paperwork is finalized, if they’re eligible to receive that. So there’s a lot of different things. Plus, state tax is not something that’s withheld from a pension automatically. Right.

The only thing held automatically from when you retire until your paperwork is finalized is federal taxes. And so people have to think about if I have federal vision and dental, if I have federal long term care, if I need to pay state taxes, then I know, you know, they’re responsible for all of those on their own until after those things are finalized. And so if they’re only receiving 40 to 60 percent of their pension amount. And they have a mortgage and they have a car payment and all of these different expenses, you know, then people really need to have some savings in the bank or have some other buckets of money that they might be able to pull from in the meantime.

Yeah, it’s amazing if the people listening and watching this actually went through just the first year of retirement. And that’s it. If we only took that amount of time and then took the amount of money coming in, the amount of money taken out before you even get it, and the things that you have to pay for up front, like the state taxes or I not up front, but you’ll eventually have to pay for and did all this out of pocket.

And where everything goes, it’s really confusing, really confusing. And it’s shocking how much money they thought they were going to get that they’re not going to get. Yeah, yeah, I think people really think that once they separate from service, then, you know, their paperwork goes to OPM and it’s maybe a month or two. Right. And that that’s simply not the case, especially if you have broken history, broken service history or, you know, you’ve been divorced or any of these things where it can really get kind of muddy.

And if you’re not sending in the information, I mean, even if it is simple, say somebody went to the post office that was a postal employee and has been a postal employee other career, so they don’t have any broken service. You know, there wasn’t any deposits of deposits owed or maybe they’ve already made them. Right. And so they have all of that information in there. They’re married. They send the marriage certificate, all of these different things.

And it should be a clean, easy report or retirement application if they do not have the retirement application filled in correctly and have not included the proper documents or included documents that were simply unnecessary, that can even delay the OPM processing of an application like this is a huge thing. And we can get more into detail on that in another session, because I don’t want to take up all of our time here, but I just want to stress the importance of an employee doing their due diligence prior to retirement and just making sure that they have those things in order.

And one of the ways to do that, first off, is knowing your numbers right. Get benefits report, whether it’s from us, whether it’s from OPM. Obviously, I want you to get our report because it really lines out the information that you learned beyond retirement. Yeah. And then not only get the get the numbers, but also figure out, OK, what is their federally. Right, and and personally, that I have to do in order to make sure that all this goes smoothly and meeting with one of our trusted financial planners or advisers really will help you be able to distill down what that needs to what needs to happen prior to retirement, because they’re giving you all of that information and making sure you’re sending in the divorce decree as soon as possible and telling you where it needs to go and just really getting all of those detailed things done prior to retirement when they need to be done to make sure that you are not paying out more interest and are not having your retirement application delayed any further for OPM.

Yeah, and having someone walk you through that process is invaluable. It’s a life saver in many cases.

So, OK, good boy. That’s and I love these questions.

We could just go on and on and on about these questions from thing to thing to thing.

And it’s all the same thing at the same time. I mean, it’s it’s so expensive and so complicated, but we’re trying to make it very understandable.

Obviously, we’re trying I mean, one of our things is to really just make sure that people understand that these things can be complex and it can help when you have another person on your side. And, you know, we want to encourage you to just make that decision to take action and have somebody else walk with you through that process to make sure nothing is missed.

Amen. Absolutely. Good. OK, question number two, are Social Security benefits reduced? If you have earnings after retirement, then they give two different scenarios. What if those are salary earnings and what if those are business earnings income? So really what they’re saying is if you’re if they want to continue to work and draw Social Security and they’re thinking of two different ways of income, income from working and income from salary, earnings, business, income, earning, employment.

Yeah. So there are different ways. And the answer to this is, are they reduced? It depends. Right. Everything just depends on Kevin. Oh, it depends on so things so really overall it’s the earnings test. Well, part of it is the earnings test, they’ll say. And if they’re under their full retirement age of whatever that is on the chart, and you can Google that pretty easily if they’re under that and if they make less than about eighteen thousand dollars, then they can work and draw Social Security at the same time.

But as soon as they start going over that eighteen thousand dollars, they’re going to get hit for every two dollars they make. Social Security is going to take away one dollar until about it’s about forty thousand dollars. When they do that, they make that they don’t get any of that year. Right, and so people really need to think about, OK, am I between the ages of 62 and full retirement age right after the full retirement age, the earnings test does not apply any longer.

Right. And so if they are going to be employed, though, it doesn’t matter whether you’re an employee or whether you are self-employed. This is strictly based on earnings that you have coming in your own earn income. OK, this is not your pension because you’ve already that’s not something that’s an earned income, you know, for tax reasons and by any income that you have as an employee or as a business owner are going to be subject to the earnings test between the ages of 62 and your firm retirement age.

Right.

And I do want to delineate here, and this is where it gets tricky.

And we highly suggest that you meet with someone about this like a tax professional, because if it is your own business, there’s your salary that you get. But there’s also interest from the company that could happen depending on how the company is set up. If you’re an S, if you’re sorry, if you’re a limited. Well, I’ll say if you’re a sole proprietorship, let’s just say that if you’re sole proprietorship, everything’s going to be taxed and it’s all coming in.

But if you are, for example, limited liability taxed as an S corp, then you can have income coming in. That is salary, but is not taxed at the same time. I mean, I don’t want to get too into it because I don’t want to confuse. But there are ways are tax advisors, not financial planners.

We will not give advice. However, there are strategies that can be done on the tax side to be planned out properly to avoid or possibly delay how much of the income will be subject to the earnings tax. And so strongly recommend me with a tax professional or financial planner who can really help you dig down and figure out how to strategize that correctly.

I think simply if if so, if everyone thinks if I’m a W-2 employee or if I’m a ten ninety nine, is that right. Ten thirty nine. Then it’ll be against the earnings test, it’ll have dollars against that. So that’s an easy way to remember that. OK. Number two, we’ve got four minutes left after fifteen and a half. Can you get money. Not a loan. Correct.

Now they’re talking about TSP here, the fifty nine and a half rule and the difference between withdrawing money and taking out a loan instead. What do you think? Well, it depends. Are they still in service or are they retired, right, because those are going to be a little bit different for loan options depending on that situation.

And so if you are in service, then you have to determine, OK, do I want to pay tax twice on my money because I’m taking a loan? Or is it simply easier to make a. When is my retirement date going to be and what is going to be the best financial situation to meet my goals once retirement happens? And so that’s really hard to say if that is, you know, which is going to be the best situation. If somebody is separated or retired from service, then you have to withdraw.

Right, you can avoid penalties after fifty nine and a half, and even if you have separated or are retired from service, actually a little bit lower than that, depending on what type of employee you are, then you can make withdrawals, but you won’t have the loan option. And so, you know, it really depends.

It really does. And it’s not something to be taken lightly either. It’s not something that can just you can just say, oh, you know, I’m going to do this. I, I once was do it. When I was doing a workshop on time, we talked about the dangers of TSP loans. We’re not going to get into the dangers today, but there are serious dangers to loans, even though the you know, the shortcut phrases you’re paying yourself back.

And it’s a great idea, but there are dangers there. So there is a lady who came up afterwards and she said, Kevin, thank you so much. I was about to take out a loan and make a huge mistake and I didn’t even know. So now instead, I’m going to go in and take out fifty thousand dollars as cash. And I said, Whoa, Sister, you probably just went from one big mistake to another without even realizing what you you’ve got to meet with a specialist, a financial professional who understands federal benefits so that you can make the right decision because you’re with one bad mistake to another.

And I think the both both decisions at that at those times were great decisions and they were probably horrible decisions for her.

Yeah, there are so many other ways if you need that income or need an emergency lump sum amount of money, maybe the TSP isn’t your best option. Right. And that’s where it really boils down to, OK, where are my different buckets of money?

What is the penalties and tax implications for these different buckets of money? And what does that look like? You know, how do these affect my other benefits or how do they affect my financial plan that I have to really meet my my goals in retirement? And so people need to definitely take a look at that and figure that out. So if you want some help figuring out some of those numbers and getting one of our reports, please go to Fednobabble.com.

We’ll be able to get you one of our iReports and also get you to one of our trusted advisers. They’ll be able to reach out to you and get the information needed to build that report.

It’s really a comprehensive report on all of your federal benefits and just breaks down your pension, special retirement supplement deposit, redeposit the information and FEGLI,t-shir FEHB, long term care, all of that information. And then you can ask some other questions, too, because obviously they don’t just deal with the federal benefits, but they also deal with other things. And so they’ll be in touch with you. And also, if you want to ask us a question that we can discuss on on air here, then go to Fednobabble.com and fill out that information.

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And I’ll say that the report and that whole process thing is no cost, no obligation, no sales pitch, nothing like that at all. And also, if you would share this with your friends, share Fenobabble the on Facebook, YouTube, the podcast, all of it. If you would share that with them and like it, subscribe and do all that good stuff. And until next time we’ll see you and be good and have a fabulous day.