Burn or Save, who pays? IRA and TSP Part three.
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, hey, hey, hey. OK, I have to ask everybody what oh, what are you doing? I don’t know.
I had a question, too, up there. I did. I’m a mess right now, so. OK, it’s clear. Ready? Set. Go Cassie. My I can’t stop looking at your face.
And so I’m not looking at the camera. And so people are probably thinking like I’m all over the place.
I just want to say I get that all the time. People looking at my face. Oh, ha ha. No, no, I was talking with an adviser about it this morning, I was on a two meeting and I was like, I’m so sorry. Well, he apologized first, but I was like, I have the same problem. I look at the person because I’m talking with them and and I’m not looking up at the camera. And so they probably think I’m looking at some random place on my computer or something.
And I’m looking at the person on the screen.
And if I camera so I don’t know, I think you’re OK.
I think that it looks to me like you’ve been looking at me so. Could have fooled me. OK, let’s move on. That’s OK, little known. Very good. All right. Question number one, wouldn’t it be? Wouldn’t it ben efit to not actually… I’m going to reword this a little bit, wouldn’t it be beneficial to use your sick leave or to not use your sick leave and retire early? That way you can just put more into your retirement and TSP and then get paid out for sick leave.
Basically, what they’re saying is, isn’t it better to save up sick leave an annual leave rather than burn it before you retire? Let’s say you Cassie. Well, it depends on your situation. Yep, right.
Sick leave is automatically added to your retirement computation pension amount Annual leave is automatically paid out in a lump sum, typically within two weeks of 30 days of retirement. Or separation, however, there are certain situations where, you know, you’re sick, leave is there to be used for a reason. My husband, when he was working for the federal government and he got into his motorcycle accident, he was able to use his sick leave in his annual leave for the three months he laid on the bed.
All they had a broken back and before he was able to go back to work. OK, so not only did he have the FMLA leave that he that gave him the availability to leave to use that much leave at a given time because you’re going to get permission. But because he had all that sick leave saved, he was able to use it. He didn’t have to go on leave without pay or something else. So we were still able to have an income, even though he was healing from his injuries.
So it can also not just be sick leave, but it can serve as a short disability type income policy as well. So it’s used in the same concept. It is not a short term disability policy, but it can be used for that. It could be used as such in a situation where somebody may not have that coverage and needs to you need to use that leave or certain medical reasons. So sick leave, it is nice to have a bucket of it saved for when you need to use it.
But in the event that you don’t use it, yes, it automatically can increase your pension amount as well. It won’t help you for eligibility purposes. OK, so if you are at your MRA, you’ve got to have 30 years or 10 years if you’re going to take a reduced benefit. 60 were twenty. Sixty two with five years. It’s not going to help. If somebody is age 62 and they only have three years, they’re not going to have enough sick leave to count anyways for eligibility.
But they can’t if they can’t use it to add. More months or something like if there’s a couple of months till retirement, anything great, I’ve got sick leave, I’m just going to use it to be eligible. That’s not how that works.
Right. But it will it will increase your pension. And in fact, it’s the same. It’s a dollar for our for our kind of thing. And so if you in a given year. An employee has two thousand eighty seven hours that they work working hours, so the table stays the same for your sick leave. If you reach two thousand eighty seven hours, you’re going to get an extra year added to your pension. And of course, if you have more hours, then you can have more time.
You don’t just stop at that. You’re either some people think, you know, well, I’ve got you know, it doesn’t go beyond this. Well, the table still goes. It just only shows you that amount if you’re looking at the sick leave chart.
But if it can still it could go on as much sick leave as you can accrue throughout your career.
You could add time, all that time, all those hours, rather, to your retirement computation. On the flip side, your annual leave. You are limited to how much you can have in a given year. You can earn. Well, depending on, well, you. For six or eight hours, so it depends on how many years you have in service to how many hours you’re accruing for Annual leave, but you can’t you can only use or you can only carry over rather a certain amount per year.
So a lot of times you’ll see use orsomebody’s lose on somebodies pay stub and that’s the amount of hours that they have to use before the calendar year is up or they’ll lose that time. So, I mean, if you if you’re going to. Retire at the end of the year, then you can count all of that time, those user lose hours into your Annual leave payout amount, that lump sum. But if you’re going to retire at the beginning of the year, use that time that you have because you’re not going to you’re just going to lose it if you don’t.
And so you might as well take advantage of it.
Right. And there’s also with Annual leave, we have to people do not think about this, but we have to think about taxes. So, one, because you’re if you’re paid out, you’re going to be taxed. Twenty percent right off the top, I mean, it’s going to come out right off the top of your Annual leave payout check, it’s possible to cut down on taxes by using your Annual leave. So what what some people do is they say, I’m going to retire.
Let’s say I’m going to retire July 1st, but I have two months of annual leave. So I’m going to actually retire two months before that. I’m going to quit working and then use my Annual leave, get paid out at get continue to get paid out for that time at a higher rate for the next two months. But then there’s some tax implications of where it actually works out better. And you actually make more you’ll get more money if you do that than if you just save it up and get a check for it.
And so there are different ways to make this work and there’s more considerations of, oh, I get a check. We have to think of taxes and we have to think of other things like that that a lot of people just it’s not on the radar when they’re thinking this. Yeah.
To include on that point, it might even bubble up to the next tax bracket if you are looking at some sort of the increase or step increase as well, because the Annual leave payout is based on your hourly rate at retirement. And so if you’re going to retire or if you’re going to work all year. And then separate November 30th and you get paid out for the Annual leave in December. Well, that actually might hinder your taxes look like next year, too, because not only are you paying the initial taxes, but then you’re having to use that or account for that in your federal taxes on how much you earned as well.
And so and who knows if that’s going to bump you up to a new tax bracket or what have you because of your your increase that you had. Some people think, oh, well, I’m going to I’m going to work another couple of months to make sure that, you know, where that money is included in your height. In my high three. Well, that is great. But then what does that do on the flip side, when you’re paid out for your annual leave as well?
And can I can I suddenly felt I was sorry.
Can I can I just say this is a simple. This this is probably the least I don’t want to say complex, but the least worrisome aspect of federal employee retirement burn or or save up, right? I mean, it’s not like typically people think a lot about this, but it could mean the difference of thousands of dollars. And and just this simple thing can make a huge, huge difference. And most people just say, well, I’m going to do it this way.
Well, did you really think about it? The day someone retires, people just throw that out is OK, I’m going to retire this day. Right? OK, I’m done. Well, let’s think about this in context of everything else, because it can mean thousands, again, thousands of dollars of difference to maximize your retirement. So these little issues should not just be taken just incredibly lightly. They should be planned out. Yeah, and here’s the other thing.
Are you going to need the Annual leave amount to help offset the percentage interim pension that you receive because you have to wait so long before OPM finalizes your paperwork? And so if your payout is going to be, you know, ten thousand dollars, fifteen thousand dollars, is that going to help you get through a couple of months on offsetting what you’re not getting from your pension? To Timbalier, OPM can finalize that amount. Right, and so we have to think about that as well.
And I get this from advisers as well. Why do you put that note in there about the Annual leave? Well, because it could make a big difference. That might be what some Slowes is is looking forward to because they see the numbers and they don’t, you know. They know that they’re only going to receive a certain amount of the pension, right. And so we have to plan for that as well. And they just wanted to make sure, like, oh, is that what you’re putting that in there?
Because that’s how much they get paid out. Right. And it’s like, yes, they don’t have the option to put your annual leave and include in your pension about it’s automatically a lump sum payout. There are no options for sick leave paid out. It’s automatically included in your pension. And so we’ve got to be very clear on that and how those leaves are used because they are beneficial to you. You just got to figure out how are you going to use them, right.
For your situation. That’s right.
So so we’ve taken a lot of time on that one. But it’s a good example of just how much we need to think through this. It’s it’s not a simple decision of, oh, you know, this is the way and again, shortcut phrases. You should do this oh, are you sure about that? That’s again, that’s where a specialist comes into play. No, no, there’s there’s a lot more behind this than just just making a decision and calling it good.
Yeah, I remember that as well, not all agencies are going to let employees use their annual leave like that, right?
Sometimes you have to get special permission to use your annual leave in a situation where, OK, I’m going to separate the state, I’m going to stop working, rather, and then I’m going to burn my annual leave until my separation date or my retirement date. So that way, because that’s going to be best for my situation or what have you. Right. And but you you have to get permission for that. Agencies aren’t just going to say, yeah, go ahead and use up all of your annual leave or all of your sick leave.
Some require maybe doctor certification for sick leave and things like that. And so you just got to be really clear with your agency and what the rules and their policies are for for using leave to see if it’s even an option for you and how that can coordinate with your retirement benefits.
It’s amazing. It’s amazing to me that in in the workshops, I probably spend one minute on this because. It’s something to think about, but then we have to move on to other subjects as well. But we just spent 15 minutes talking about this, and that doesn’t even involve someone’s situation where, OK, let’s look at all the options and all the different things. We’ve just spent a lot of time focused on this. And so I know a small issue can seem like a really big issue later on.
OK, we have five minutes for two questions that is fully paid for by the employer while you’re working.
Isn’t FEGLI paid for by your employer while you’re working? A portion of it, I should say, it’s not fully covered. Well, hmm. Postal employees get basic… What’s that postal employees get their basic. Paid for. Yeah, but besides but besides this place, it’s up there.
Good point. Good point. Someplace. Someplace. Yeah. Yeah, there are like postal inspectors and things like that. Their basic is included or I’m sorry, not included to the father government deduction. So they’re not the federal government’s not paying for that.
So you’re. The government has given you a break. In the premiums that you pay while you’re working for for the FEGLI amount. Once you retire, that premium will change. Because and it’s not because the government pays a portion of it, it’s because of how.
They factor. The premium. It’s kind of complicated to get it to advisers understand this because they get like the price point to the cost per thousand that goes into the FEGLI premium. But essentially your cost per thousand is less while you’re working than it is in retirement. And so that’s why you see a big increase once you retire for your FEGLI premium.
Yeah, and can I can I add to that? I don’t want people, people to misunderstand and mhere when you say it is less than when you when you retire and after less than it’s only comparing before and after. It’s not comparing less than, for example, a private plan. A private plan may already be less than that. It’s just less than when you retire, and so we have to be careful and understand what we’re comparing there. I mean, you said it perfectly, but I just want to point out that we have to understand that.
No, that’s that’s a very good catch. Thanks. Yeah, OK. Next question. This is an easy one. An easier one. How is the ice? A shorter one? How is the government ROTH TSP different than a Roth IRA? OK, so do you want me to do this or do you… Yeah, yeah, watch a previous episode, we talk about that a little bit when we talk about traditional.
A lot of similarities. Well, when we talk about the differences between an IRA and a TSP, well, it’s ROTH or traditional. A lot of the same concepts are applied. Right. So, for instance, when you take money out of the ROTH, TSP, as opposed when you take money out of a Roth IRA in the ROTH TSP, you have that split.
Yes. Well, you go ahead and explain that you’re so much better at it.
No, no, no, no. I mean, you’re on the right track. It’s when you pull it out from the TSP if you have as and the example, if you have 50 percent in your G, 50 percent and you see it’ll come out 50 50 and that’s ROTH more traditional. It doesn’t matter in an IRA with your ROTH or traditional, you can pull it out whatever way you want to. But I think the big the one of the biggest differences of the ROTH TSP other ROTH TSP versus a Roth IRA is that.
For example, I can put up well, you know, if I’m a federal employee, I can put nineteen thousand five hundred dollars into my TSP I can put that all into the ROTH in my TSP.
Right. There are income limits in an IRA so that it if I make too much money, I can’t put any in my Roth IRA. And even if I could, I could only put like I think the limit is seventy five hundred dollars a year, something like that. Yeah.
It’s, it’s limited on the amount that you could contribute to the Roth IRA depending on your income and whether or not you’re married and your situation. Right.
There are there are certain restrictions with the Roth IRA as opposed to the ROTH TSP. And if you’re looking at having a ROTH TSP, there could be a match to write you, whether it’s ROTH or traditional, that you’re contributing that five percent to the government still going to match. Right there, five percent were contributing up to that amount. Now the government match doesn’t go towards the ROTH, but your match does so. I just noticed we’re out of time.
I’ve got to say one more thing. I’ve got to say one more thing real quickly. I know we’re out of time and I hate that. And I apologize people, but I got to say one more thing. And I’m going to and I and I hesitate to say this, but I’m going to do it anyways. Overall, and I’m just going to say this overall, and this may be different for everyone. ROTH Espy’s. And again, I hate saying this, but ROTH TSP, typically for an employee, I’ll say are better for the employee in that rather than a Roth IRA.
When you’re putting the money in when you go to take it out, it’s usually the opposite. A lot of times the Roth IRAs are better of pulling it out. And we have to realize that there’s a distinction between pulling putting an ad in and putting it out. There are different rules and there are different times to have your money in different areas. Again, it may be different for everyone. So I don’t want to say that, you know, that’s a hard, fast rule because it isn’t.
So that’s my disclaimer. That’s what I had to say. Real quickly, before we end, any last words, Cassie? Yep.
There’s also different features between those policies. And, you know, I don’t know, we can’t say what’s going to be good for you or what’s not. Right. But we’ve got to talk to a financial planner. But if you’re curious, please reach out to us, Fednobabble.com, and we’ll get you in touch with somebody who can help you. We we don’t give your information to everybody. We give you information specifically to one adviser who can answer these specific questions for your case.
So they’re they’re going to provide a benefit analysis for you and then also be able to answer any questions on the back end regarding these types of scenarios where you’re curious, which is better. So go take action.
Yes. Thanks, Cassie Sorry everyone for going over. See you next time. Take care.
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