Foreign Service Money Matters(@diplonomics on Facebook)
Knowing your ‘effective tax rate’ can provide some mental relief when it comes time to pay your taxes. Many people believe that their income tax is a higher percentage of their earned income than it actually is. Even though you may be in the 28% tax bracket, your effective tax rate may only be 15 – 18%.
To learn more, please see this article from Investopedia.
Did you make any financial resolutions for 2017? You will be more successful if you write them down. Here are a few that I suggest for members of the Foreign Service:
- Increase your TSP contributions to the maximum allowed, if possible.
- Consolidate your bank accounts. Many FS folks have multiple checking and savings accounts. Life is a lot simpler with fewer accounts to track. And there is less chance for identity theft.
- Create a budget to get an idea of your cash flow. It doesn’t need to be elaborate, just enough to answer that nagging question about where all your money is going.
The TSP “over 50” catch-up contribution limit for 2017 is $6,000. Catch-up contributions do not count against the $18,000 elective deferral limit. To qualify to make catch-up contributions, you must: be age 50 or older, or will turn 50 in the calendar year the contribution is deducted from pay; be in a pay status; not be in a 6-month non-contributory period after taking a financial hardship withdrawal; and be making the maximum regular TSP contributions (i.e., $18,000) for the year in which you are making the catch-up contributions.
Employees wishing to make catch-up contributions in 2017 must make an election to do so even if they were in the catch-up program in 2016. To make the maximum catch-up contribution in 2017 via level bi-weekly payments, you should set your contribution at $231 per pay period effective December 11, 2016 (pay date January 5, 2017) via Employee Express. There is no restriction on accelerating the payment of catch-up contributions over a few pay periods. Anyone retiring prior to the end of the year who wants to reach the annual contribution limit will need to accelerate their contributions.
Where do robo-advisers fit into the overall wealth management process? Below is a very interesting article on the subject. Many consumers would like to have the perceived cost savings of a robo-adviser combined with the advantages of a human adviser. We offer that at Carrington Financial Planning. We found a way to offer robo level investment fees combined with comprehensive planning. While I am not a fan of the robos, I have to admit that the robot adviser in the photo below looks pretty cool.
Employees sometimes ask if they can contribute to an Individual Retirement Account (IRA) even if they are contributing to TSP. The answer is yes. Employees may contribute up to $5,500 in 2017 to an IRA. Employees age 50 or over may make an additional $1,000 “catch-up” contribution. Those limits apply to the combined total of traditional IRA and Roth IRA contributions. Almost all employees may contribute to a traditional IRA. The extent to which those contributions may be tax deductible will depend on the employee’s income level. Many employees may contribute to a Roth IRA, but that option phases out for higher earning employees. For more information, consult a financial advisor.
It depends on where you are in your career life cycle. Early on, it is important to focus on contributing the most that you can (maximize, if possible). Then later, the allocation (how it’s invested) becomes far more important. Please see a great explanation of this in the following article.
The TSP LifeCycle funds are target date funds. This means that the fund’s allocation automatically becomes more conservative as the ‘target date’ of the fund approaches. These are common investments in retirement savings accounts. The TSP version of target date funds have a relatively high allocation to cash (G fund) and to the S&P 500 index (C fund). As time passes the cash allocation increases rather quickly – perhaps more quickly than is appropriate from some investors. This can cause loss of potential growth in the TSP account. However, allocation to the G Fund provides less account balance volatility.
While it is very important to reduce volatility as one approaches retirement, this can be accomplished without such a high allocation to cash. Everyone’s situation is unique and the LifeCycle funds are appropriate for some participants. It is a function of a number of variables and your financial adviser can help you make that decision.
Foreign Service Resources
Association of American Foreign Service Worldwide – Host of Livelines – forum monitored by Foreign Service experts.
Thrift Savings Plan
TSP Roth calculator – TSP paycheck estimator that shows the impact of using the TSP Roth vs. the Standard TSP.