“Federal Benefits are complex and confusing. There’s no basic ‘here it is’” says Schmidlin, who has made them her study for much of her career, along with the intricacies of regular retirement planning, including tax laws, investment management, and asset protection. As president of Franklin Planning in Sewell New Jersey, she knew her firm was located in a bedroom community for government workers, less than 30 minutes away from downtown Philadelphia, and had the opportunity to work with retiring federal employees. She also knew that if she was going to work with them, “I’d need to know these benefits backwards and forwards.” The complications are many; for example, “They have a great health insurance program, but unless they provide a survivor’s pension for their spouse, their spouse wouldn’t be able to receive that benefit if they died. You could find yourself ineligible for continued health insurance benefits if you’re the surviving spouse. As a financial planner, you could do irrevocable harm if you didn’t know that,” she says.
Unfortunately for federal employees, most financial planners don’t understand federal benefits, which can cause significant losses that cannot be fixed later. Schmidlin explains that an employee’s entire retirement system might be different depending on when he or she was hired, or whether they worked part-time. In fact, she says “There are so many exceptions that OPM [Office of Personnel Management] still does retirement benefits by hand, exactly like they did in 1920 when pensions first came out, because it’s so complex.”
Federal employees have two different retirement systems: CSRS and FERS – as well as a brand new one: RAE (for employees hired January 1st, 2013 or after. “The older CSRS retirement system provides a generous pension, along with the ability to make contributions into the Thrift Savings Plan,” says Schmidlin, and while CSRS employees don’t pay into Social Security, they do have the Voluntary Contribution Program (VCP) which Schmidlin says “most people don’t even know about.” Federal employees in this program are allowed to put up to 10 percent of their lifetime earnings in the Voluntary Contribution Program, which they can roll into a Roth IRA when they retire. She says one of her clients recently converted her voluntary contribution funds to a Roth IRA worth $300,000.
There’s one striking new piece of information on federal benefits that everyone should know about – yet few understand. It’s a law that took effect in May of 2012 that creates a Roth T.S.P. option for federal employees. Schmidlin explains, “The Roth T.S.P. is phenomenal. It doesn’t matter how much they make, they’re eligible to contribute to the Roth T.S.P.” unlike the regular Roth IRA which has an income cap. She says she doesn’t see many retirees taking advantage of the Roth T.S.P., and recommends that everyone should look at it to determine if it makes sense for their situation. While a Roth IRA limits contributions to $5,500 a year, and only if retirees don’t overshoot the income restrictions, this new law makes it possible for federal employees to contribute $17,500 per year if they’re under 50 years old, and $23,000 if they’re over 50, with no income restrictions.
Schmidlin says retirees “don’t understand how the Roth T.S.P. rules work going in and coming out. It’s very confusing. It’s been a big topic of my workshops and webinars. It’s such a lost opportunity for them to build a nice, tax free retirement account.” And with taxes expected to do nothing but rise, ensuring tax free money could be the best deal out there.
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