Actual pay, W2s, and catching up on today’s Fenobabble.
Welcome to today’s Fenobabble, I’m Kevin Jones. We try to make federal retirement benefits understandable for humans like you in under 20 minutes.
And I’m Cassie Knight, and we take questions from viewers and listeners like yourself and who submit them on Fenobabble and also through Kevin’s workshop at Fed Pilot and we answer them and just help make sense of different planning strategies or concerns that somebody might need to know. So question number one for high three, FERs, is it based on actual pay received or is it based on actual GS 15, step 10? That’s very specific.
Very, very specific, which is what this person must have been. Yes.
You know, sometimes questions come in and and it’s like, yeah, you’re you’re kind of asking the wrong question, but that’s OK.
Well, and in a way, it’s it’s just worded kind of weird.
I think it’s just the it’s a it’s the right question. I think if they were talking to somebody about their situation. Yes, right. Specific. Yes, yes, very, very specifically, which is really cool. I’m OK with that.
Good, though. Three because it’s easier. Yeah.
High three Fer’s. So let’s say this. There are things. So in my workshop when I do it, when I do it live and in person I say, OK, question is high three based on your net or your gross. And OPM, oh, it’s your net, no, no, no, it’s your gross oh, no, no, no.
And I say neither, really. That’s that’s really not how it’s figured out. It’s a trick question. It’s it’s there are things that are included in your high three and there are things that are not included in your high three. And it doesn’t matter what G.S. level or step you are.
Sometimes it does depend on your agency. Here we get that again, that’s rare, but I can think of one exception to this and CBP. You’re looking at me like, what do you mean by it depends on the agency for that. Yeah, there’s only one exception in that. And so, for example, regular pay counts toward your high three, your locality pay scales for your high three. Overtime does not count toward your high three, except for CBP does in some circumstances when they’ve transferred their stuff over.
So it’s not just CBP.
Oh, it’s even more than OK. It’s even more. I didn’t realize that. Yeah, yeah.
So law enforcement, firefighters and air traffic controllers typically have what’s called and this is more common for law enforcement officers, but it’s a twenty five percent increase for. Oh yeah. I’m trying to think I know the automatic uncontrollable overtime. Yes. OK, yes. So on a medically undeterrable.
But I think it’s a technical term. It’s a LEO or law enforcement availability pay or LEAP. Yes. OK, and that is included in their high three actually. Mm hmm. Yeah. And fire with Department of Defense don’t technically get the twenty five percent, but they do get some sort of premium pay factor in there that if we do some backwards math, we can determine exactly how much that high three will be or exactly what kind of pay and should be included to determine the high three.
And like you said, there’s some backwards math that needs to be done some time. It’s not as straightforward as a lot of people would think to figure out the exact high three. There’s some calculation in there to make it work just right, especially if you have an exception. And like you said, firefighters, we have we work with a lot of people in Montana and firefighters. Well, that’s a question we get all the time from them.
Do do do my does my overtime count. And it’s no.
And and honestly, it depends on boy. And again, when someone and this is a. That would depend on the type of agency. Yes, that’s right for me, for firefighters, they have premium pay that does count, right? Right.
So for Department of Forest or whatever, then that might be different. Department of Agriculture, I think, is what they’re actually under, but that’s going to be different. OK. And so it also could depend on the agency and those different rules. And so there are certain types of pay that count. There are certain types of pay that don’t. And it really depends on your situation.
And and I will say one of the things that makes this difficult when I’m talking with a lot of federal employees from a lot of different agencies, is that someone will say, well, does this thing count? And everyone looks at them and they think, I’ve never heard of that. I don’t get that. And this is one type of pay count. And then I’ll have to say, OK, we have to realize that every agency calls something one thing, something different.
And it could be termed this in your agency, but in another agency it’s it’s called this. And everyone else goes, oh, I’ve heard of that before. Right. But that’s not what OPM even calls it. OPM calls it something different.
And so so we have to translate as you’re doing these reports Cassie, you have to translate to OPM-ese and figure out, OK, what were they talking about when we talk about OPM?
Because OPM is the one who gives you your pension, for example. And so you have to translate it over to make sure that it it all goes smoothly or oh, there’s a hiccup. And then in the report you say, here’s the hiccup. Yeah, so I do I guess I play in translation a lot because I am interpreting all of that information from the employee and the adviser, what they’re asking and and trying to get it to where it’s understandable to me to where I can look up the different questions or exceptions or all the different things on a case and get all that information back to where it’s understandable for the adviser and the employee.
Again, that’s it is another language you have learned.
Yes. You’re bilingual for sure.
Well, I’ll take it. Yeah.
That can’t be law.
Oh, yeah. Yep, yep. OK, that’s question number one. There’s a number two.
Discuss filling out a W2 form in retirement. I am a single, I am single and no dependents. I would like to pay the minimum in taxes, in retirement. Well, OK, so I think there’s a difference between Kevin.
It depends what you do in retirement. They do not do when they have to fill a new one, right? Yes, however, if they do not, it automatically puts them as married with three dependents.
Oh, I did not know that. OK, then I just don’t need to do it. I didn’t know that there was a default that they owe, but I guess there would have to be a default.
Oh, good. And actually, it’s not a W-2. Right, because that’s something an employee fills out. Sure. So it’s OK for pension because you could do it for just on a regular basis or one strictly for your pension. OK, so there are strategies. So what option will be the best for an employee? I have no idea. I’m not a taxpayer and I don’t know the differences in your state or your area. And so I cannot say, you know, what’s going to do where you can pay the minimum taxes in retirement.
However, I do want to stress to everybody how important this form is when you are looking at retirement. Please, please, please, please fill out a form form. Right. Pay of your financial adviser is not helping you with that or telling you to do that.
Find another one that’s not good, period. That’s right. That do exactly that. That’s right. Now, I will also want to mention. Yeah, I want to mention that when when someone says I want to pay the minimum amount in taxes. Again, a little translation or a little clarification needs to happen here, because are you talking about the absolute minimum you want to pay or are you talking about the minimum overall because it could wind up in the end of April 15th of the next year?
You have to pay taxes because you truly did get the minimum taken out in taxes and now you have to pay extra or are you talking about coming out as even as possible and calling that minimum? And so April 15th, you don’t owe anything, but you don’t get a refund either. And so there’s a little you know, we’re trying to figure out exactly what do you mean there by minimum?
Right, and that’s definitely something to talk to I think about with a tax adviser. Yeah, because they’re going to ask you the right questions to find out what that minimum means for you and how to strategize that overall in your retirement plan to really make sure that you are doing what you can to have the best financial success with everything, not just with the W-4 form at retirement. I mean, there’s so many other factors that need to go in here as well.
If you have other income coming in from different buckets of money and things like that, people need to look at this as just one piece of the puzzle. There are several other pieces that need to be considered as well to make sure that you’re on the right path.
Let’s let’s kind of detail out a quick scenario here. If we get this wrong and we say minimum and we pay the absolute minimum, then it’s going to get to April 15th. You turn in your taxes for the year previous. Oh, my goodness, I owe four thousand dollars because I didn’t pay enough taxes. I have to pull that. From where? From my TSP as a large chunk. Now I’m taxed on that automatically as well. And again, as we talked about the snowball, it just snowballs into one issue after another after another.
So you’re right, talking with a tax professional about these kind of things is critical to make sure that one thing doesn’t affect another and that you can just make it work. It’s like the pieces of the puzzle, like you said, put it all together so that it works rather than be hitting being hit by some surprise later on. Yeah, and, you know, that’s one of the things that we strongly encourage financial advisors to do, the ones that are in our program, we have the availability to review those retirement applications, make sure that all the forms are filled out correctly, that they’re getting to the right place, that they’re being submitted properly and in all of that to make sure everything’s good to go.
And most of those folks, if they’re not doing the tax planning themselves, they have a good resource of somebody who will help you. Yep, yep.
And I will say just to throw this in as well, because this blows me away every time I think about it. Cassie you before had mentioned nine out of 10 applications for retirement that you see are wrong in some way. That blows me away. Absolutely.
Whether it’s filling out the survivor spouse benefit or not, including this form, I mean, for a single guy who doesn’t have any dependents or gal for a single person with dependents having it just automatically default to married with with three dependents, I mean, that might not be the best strategy for you there.
I don’t think so.
And again, that’s the fine print. It’s not even something that’s very obvious on the retirement application. It’s in the very tiny, itty bitty section. And if you’re not doing that correctly, then certain things can can get missed for sure.
So, OK, well, that’s that’s that’s a good question. Number one, we have about oh that’s question number two. I like oh so we have six but I think we just went over one. That’s two. Here’s three. How do catch up contributions work in TSP. Cassie. You want to start on that one.
Well, how they work now is not going to be how they work in three months, I’ll tell you that much. Yep. So now if you are contributing more than seven hundred dollars, seven hundred fifty dollars a paycheck, then you have the option to include catchup contributions if you are over the age of 50, OK, if you’re under the age of 50, you’re not even eligible for ketchup contributions, OK? And then you can include another two hundred and fifty dollars per paycheck going into the TSP for the total amount of sixty five hundred dollars per year for twenty twenty.
OK, now this amount typically changes every year. Sometimes it doesn’t, sometimes it does. But typically it is a slight increase. OK. Now however. Go ahead.
Yeah, that’s right, that’s right, keep going in a few months for people who over contribute, say you’re contributing nine hundred dollars a paycheck to your TSP, then it will automatically default for catchup contributions so that you’re not even having to fill out the form, because right now, if somebody is over contributing, then it’ll just allow them to contribute the max annual amount, which is nineteen thousand five hundred. And then once that is done, then the person does not get to contribute to TSP anymore.
So they’re done paycheck or pay period 20. Then they miss out on that six periods where the matching contributions aren’t going in. They’ll still get the automatic one percent, but they don’t get the other four percent match. Right.
A lot of people don’t realize that they’ll they’ll over contribute finish by the end of, you know, end of September and then have three months of no. In fact, there was once a sweet lady who came in and she had her husband with them, with her. And and she goes, wait a minute, I’ve been doing this and I’ve been I’ve been maxing out by the end of September.
Are you telling me I didn’t get my five percent match throughout my whole my whole time working full time? And I said, yeah. Oh, yeah. So she said, I’ve lost thousands of dollars.
And her husband turned to her and said, What?
Why did you do that? And I said, Whoa, whoa, whoa, whoa. She had no clue. This is this kind of information is not made available. Some people know it. Some people don’t. I would say probably most people don’t, because it’s not even a scenario that they’re thinking of. But it’s not your fault for not knowing. It’s it’s sad. There are too many things to know, everything about what happens if this is not your your job, right?
If you’re doing something else and you’re just a federal employee, it will take a lifetime or a career time to really figure out all of this. And even then, with how many changes happen, it’s so difficult to keep up. And you’re doing this like I am for a living, right?
Yeah, we are all say also financial professionals see this and they’re they’re watching the changes as well. And they’ll call you up and say, hey, by the way, this rule changed. You’re doing it as of as of in three months, you’ll be doing it wrong. You need to get in here and we need to switch this around and figure out what way is best for you so you don’t continue to do it wrong in three months. And they’re they’re reaching out to make sure that federal employees are not just misapplying the rule or are applying the old rule correctly, but now it’s switched.
And they didn’t even know because it was in the fine print or because it wasn’t advertised well enough or because OPM just did it and they didn’t really even tell anyone or because of a myriad of reasons why. And so that’s why it is so important to have a financial professional that is looking at this with you to make sure. So if you want to I’m sorry, did you have something to say before you got to understand the federal benefits?
So, you know, it’s not just a question of who is a financial adviser, right? These guys need to understand your benefits. And if they don’t know more than you do, move on. Yep. To somebody who does get in touch with us, go to Fednobabble.com and let us help you get in touch with somebody who understands these rules and all the different exceptions and all of this stuff so that they can help you as your situation pertains to your financial plan and let them get you going on a road to success where something is not going to bite you in the rear end in the and a year from now or two years from now.
Right. And then, of course, submit your questions as well to us. And if we use your question on the show, then you’ll get a t-shirt or face mask. But also back to when you’re getting in touch with us to reach out to a financial adviser. The first thing that they’re going to do is have you give them have you give them information so that they can provide a benefits report for you and find out where you are, because that’s what needs to happen before you can make any planning decisions in the future.
And whether it’s your pension and all of that, they’re going to find out what decisions you’re making, what adjustments need to be made so that they can really set you up properly.
Yeah, and I’ll say there’s no cost, no obligation, no sales pitch for all this. We just want to help federal employees get on the right track and not be dinged by these things. And, of course, if you would, please share this episode with others, share Fednobabble.com overall with others so that they can learn and then share like follow all that good stuff so you can get notified when we warn you of other things that are happening as well.
So thanks for coming. Thanks for listening. Thanks for watching. And we’ll see you next time.