Business Innovators Radio - Interview with Mario G. Taffo, Federal Benefits Consultant on Navigating TSP Withdrawals and Tax Implications

Episode Date: December 23, 2024

Mario Taffo is a volunteer educator for The Institute for Financial Awareness, one of the fastest growing 501(c)(3) nonprofit organizations in the DC/Metro area.Mario is a widely sought out speaker. His most requested workshop/webinar topics are 10 Steps to Financial Freedom, Retirement Planning for Federal Employees and Estate Planning.Mario has been a member of the Greater Washington Hispanic Chamber of Commerce since 2009. He has provided financial educational support and resources to many embassies in Washington D.C., military bases, federal agencies, churches and other organizations. He also provides direct support to numerous HR departments at federal agencies in the DC/Metro area.Mario has presented hundreds of financial wellness and financial literacy workshops in the DC metropolitan area, as well as educational webinars to participants around the world.Mario has a MBA degree from the University of Central Florida and has been working in the financial services industry since 1996. Mario started his financial services career as a loan originator.Mario has experience in investments and banking, in addition to retirement planning. Mario is fluent in Spanish. His bi-lingual abilities have allowed him to help guide many civilians, active duty and in-service and retired federal employees through the complex steps of their retirement planning process.Thousands of individuals and small business owners have benefited from Mario’s knowledge and expertise, but one of his greatest pleasures in life is to help his friends and family plan for retirement. As a father, Mario has personal experience planning for college and has helped countless families reach their college planning goals.In his free time Mario enjoys traveling, playing soccer, scuba diving and exercising. He is a loyal CrossFit enthusiast who can be found in his local gym every morning, competing with himself and pushing others to reach their full potential in the gym.Learn more: http://www.ifaonline.org/Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-mario-g-taffo-federal-benefits-consultant-on-navigating-tsp-withdrawals-and-tax-implications

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of Influential Entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with us Maria Tafo, who's a federal benefits consultant, and we'll be talking about navigating TSP withdrawal. and tax implications. Mario, welcome back to the program. Thank you for having me again, Mike.

It's a pleasure to be here. Hey, you're welcome, and I know that with your body of knowledge, with the federal benefits, and there's so many things that these employees just don't know what they don't know, and you're on a mission to help educate and help bring these to light. So this, I know, is going to be a really powerful topic, because when you mix withdrawals with tax implications, if you can lay the groundwork to help mitigate taxes.

Now, my personal opinion is no one can ever eliminate, but you can mitigate or lessen them. That's what we want to find out. So let's start with this. What is TSP? What does that stand for? Great question. TSP is a brief savings plan.

That's the equivalent to the 401K for everybody in the private sector, an employer-sponsored IRA. Okay. So it's similar to the 401K, and it's similar in the sense that money goes in pre-tax. So at some point when you start taking money out, now you have to address the tax implication. That's correct. With the TSP, you have what's it called the traditional TSP way to contribute into the account. But in 2012, the TSP introduced the Rolf option.

which allows you to pay the taxes up front, have the money grow tax-free, and then have it out, come out tax-free. Now, I know in the private sector that a Roth conversion strategy can be really something powerful to look into where you start taking money out of one of those types of accounts

that haven't been tax yet, pay the taxes, put it in a Roth. So with this, this is a nice idea to be able to use your TSP as a Roth. it makes me think of something. Let's say that someone has already contributed. This is picked the number 10 years, 10 years into their TSP, and then find out, oh, well, I never knew I could do this Roth.

So I'm going to start contributing to the Roth side. So now they've got a specific amount of money in the non-taxed, you know, traditional side of the TSP and then now money building up in Roth. How would that kind of scenario work? Great question. So the TSP had set up for, future contributions to be put into the Roth option. But for everything that's already in the traditional, that would have to stay in that account.

But all of the future contributions can actually be moved into the Roth TSP option. Okay. That's a good point. And is that something where it's just a matter of calling their administrator and saying, please now make this change? And I now want to pay the tax up front through their payroll and then start to. contributing to the Roth. That's correct. So all they have to do, they can log in into their online account and switch to the Roth. Also, they can log into their payroll software and switch the

contributions. But with this Roth, we're used to Roth IRAs have an income limit and a contribution limit of around $7,000. With this Roth option, there's no income limit. So you can contribute to this Roth regardless of what your total annual income is. And then second, the maximum that you can contribute to this Roth option is the maximum allowance by the IRA code, which in 2024, it's 23,500. And then for the catch-up, an extra $7,000. So we can put into this Roth account. The max IRA allows us to contribute every year plus the catch-up.

The catch-up bits, if you're 50 years of age or older, you can contribute an extra amount. extra $7,000 for 2024 and $7,500 for 2025. So that's interesting that you bring that up because like we discussed in a previous conversation, the Burr's Benefits Package that federal employees get give some extra things that you don't see in the private sector. What you just said there with limitations to Roth contributions, some of those are lifted, expanded, and gives you some great opportunities that way. And if it makes sense, now, you know, I'm sure that you would say this to every one of your clients.

A specific strategy doesn't make sense for every single person every single time. So if that makes sense, it's nice to know that there's some relaxed and expanded benefits through that Rolf opportunity. That's correct. And that's why usually, I run into federal employees that, you know, don't even know that they have access to this Roth option. And when we're planning for, you know, we draw us, when we're planning for the future, when we're planning for avoiding tax issues, this is something that will save you a ton of money, not just in taxes, but also it'll provide the tax free growth that we all want in our investments. So I know we're talking about taxes and I know you're probably not a CPA, so you need to, you know, disclaimer that and say, hey, you talk to your CPA. or maybe let's have a joint meeting with your CPA to make sure some of these recommendations, you know, aligned.

But talk a little bit about some of the strategies retirees can use to make sure that their TSP withdrawals now are aligning with their tax brackets. That's correct, Mike. I'm not a CPA, but I do work alongside a lot of CPAs and bring them this information that in most cases, they don't even know it's accessible to their own clients, right? Yeah. So that's where it really becomes really powerful to understand, you know, that if their tax brackets in retirement, most likely are not going to be less. They're going to be pretty much what they are today.

And then based on what they withdraw from the traditional could potentially mean that they're going to be paying higher taxes in retirement. So this rough option, even though most CPAs will not agree with me, on paying the taxes up front. When we run numbers and, you know, after numerous plans, we identify that taxes are not going to be cheaper for federal employees in retirement. So paying them now and having that money continue to compound, you know, tax-free will be a huge advantage for their client. You know, I know that you don't have crystal ball, but I would venture to say if we had a box

that says, do you feel taxes will go up in the future? Yes or no? Most people will say yes. And in my uneducated perspective, I always tie it to a big factor of will taxes go up is our federal deficit, which grows by the second. And the only way to tame that is to lower government spending, which we know never will happen, or to raise taxes. So if that is a major driver, then I would check the box, taxes are going up.

in the next five, 10, 15, 20 years. So that's kind of what we're talking about here. If everyone is nod their head going, yeah, I agree with that, then what can we do to pay the taxes now when we know what there are so that that fund grows, that Roth account grows later. You don't need to worry about it, right? That is correct, Mike. So right now, not only, you know, we're in some of the lowest tax brackets we've seen in history,

and I agree with you, taxes will definitely have to go up, because the government will need to take more money in from us, right? But the idea of this money growing tax-free, the idea of, you know, the tax brackets utilizing the current deductions, utilizing the current standard deduction, right? The standard deduction got introduced back in 2018. And with the tax law expiring next year, right? Because right now, our current tax law is due to expire at the end of 2025. So therefore we know that we're going to have a new tax law.

So we don't know what the new tax law is going to look like. We don't know what the tax brackets are going to be in 2026. And we don't even know if we're going to have a standard deduction. So that's why we want to anticipate and take advantage of the current standard deduction, the current lower tax brackets, and making sure that we have these extra deduction. Kids under the age of 18 are an extra deduction on top of the standard deduction. So making sure that we put in this money at a lower tax bracket, utilizing these deductions, which I usually like to call it as a coupon, right?

I try to let people, you know, hopefully educate them on an easier way to understand things. You say tax deduction, it could be confusing. But think of them as a coupon, you know, having coupons to offset your income now. And then in retirement, literally, we're probably going to be out of deductions. So we're not going to have things to offset it. therefore we're potentially going to pay higher taxes and retirement. You know, I want to clarify something that I know just crossed my mind and maybe other people have thought the same thing.

We've talked about higher taxes and we've talked about tax brackets. And there's two things. Those are two different things. One is the amount of taxes that you have to pay, the higher taxes. And then the bracket, if you make between this amount and that amount, that's a bracket. Well, the minute you make any more than that higher amount, then you, you go to the next higher bracket, the next higher bracket. So we don't know what those brackets will be.

Those can shift. And then whatever bracket you're in, but is the percentage of tax you're going to pay, that's what we're talking about can go up. So there's actually two things working here, right? That's correct. And that's something that when we analyze or when we run the numbers, you know, on the traditional money and on the Roth money, the traditional money, remember, on the way out,

based on those tax bracket, will get added to your total annual income. For better employees, they're going to have a pension and they're going to have a Social Security income. Therefore, that withdrawal will get added to that annual income. And if that annual

income, it's outwards of 18, 20%. That means that that withdrawal is going to pay that percentage in taxes. 18, 20%. And if we put our investor hat on, and we see or we look at what the returns average are on those TSP, it's somewhere between 9 and 12

percent. But let's say you did really well in your account performed 12 percent. And on the way out, you're paying, you're in the 22 percent tax bracket. Mike, they lost 10 percent of taxes. Yeah. Yeah. And if you could know that and then hit rewind, there could have been some things to put into place to help lessen that impact. And that's where that rough option comes in. That's why planning for retirement doesn't mean that you have to start planning for retirement as you get closer to the retirement age. It means plan for your retirement as soon as possible with what you currently have

to make the best out of your retirement. Yep. So I know in traditional accounts like civilian jobs, not federal jobs with that 401K or IRA, There is something called RMDs required minimum distributions. And basically the government said, all right, you've not paid taxes for decades. Now you've got to start paying something. So at a certain age, you've got to start taking out a certain amount. Does that apply with the TSP accounts?

And if it does, how do you make sure that your tax planning for those withdrawals are being done in the most efficient manner? It sure does apply for the TSP because it's still a traditional account. The only thing that RMDs, the required minimum distributions would not apply, it would be to the Roth money or the raw money that you have inside. But yes, at 73, your traditional money, your traditional TSP will become your income. And that's why under the federal employee retirement system under first, you have three accounts. It's what OPM calls the three-legious stool system. You have your pension. Social Security, and we draw us from your TSP.

Now, when you add those three, we identify what your total annual income is going to be for that year. And of course, the higher the amount, the higher the tax bracket. In most cases, it's a good problem to have. But I'm sure, just like me, I'm okay paying my fair share of taxes. I'm just not going to pay more than I have to. Yeah, if I know there's a way to ethically, legally pay less. Let me know about it. You know, here's something that I mentioned earlier about, you know, wow, so many jobs these

days don't have a pension. And here's, you know, the federal employees package that has the TSP, which is like 401K and then the pension type plan. So here's a question. Let's say that a retiree goes, oh, I'm getting so security of X amount of dollars per month. I've got my pension that's coming in to me. You know, I don't need any more money this year. So at age 73, when you're talking about the required minimum distribution,

amount and they're looking at their TSP, they might fake in their mind, yeah, I'm good to go. I've got all this other stuff, so I'm not going to take it out. But that could be a big mistake, right? Big mistake. And that's probably one of the biggest mistakes that most federal employees, you know, go through by waiting for, you know, for the RMDs until 873 to make some of these withdrawals. Because if they retire early and Mike, some federal employees out there will retire at what they call the minimum retirement age, which is age 57 with full benefits and full income,

and not withdraw money into age 73. If they can plan ahead and start making small withdrawals every single year up to where their tax brackets allows it, right, withdraw it and then put it into a Roth IRA using that Roth conversion, right? They could minimize the their huge tax liability by the time they get to 873. So, you know, hopefully that they could, you know, minimize that liability down by half and hopefully eliminate it by the time they get to 873. So that's why it's important to understand what access you have, what are the options, because if they qualify for the immediate retirement at age 57, they have access to their

TSP as early as age 57. Wow. Yeah, I think that, you know, having someone that can help them navigate through this deadline, that deadline, here's what you need to be aware of. Here's some options for you. It's just huge because if you trigger one of those penalties, it's done. You can't unwind it. So I think that's a big, big point that people need to keep in mind. So can you think of some examples or real like scenarios where people may TSP withdrawals in the wrong way and it negatively impacted their tax situation? And then, an example where, you know, you guided them and someone else, another client, that you helped them avoid a negative situation. Definitely. So one, the biggest problem I see is when, you know, two years ago, when the market was down, you know, 16, 18%, I had a 74-year-old that came into my office, and the market was down 16% and he had to take the RMDs, which is right around 4%.

his account depleted by 20% in one year. That's a huge problem. Because he had to make a withdrawal while the market was down, so it was like a double whammy. Bingo, you're seeing it. And then on top of that, in order for this guy to make up that 20% loss, remember, the market would have to make 40% in order for him just to make it back to zero. Yeah. So that was a huge. huge huge issue and that's something that we're trying to avoid with with planning accordingly and

staying ahead of the curve now another problem that I see a lot it's federal employees will max out their TSP thinking that they need a lot of income coming out of this account and they don't I'll probably say 12 to 13 years ago a lady came into my office her husband had just passed and he was only four months into his retirement when he passed. And she came to me and said, you know, after we rent everything, after we helped them with their state planning and we transfer everything to her, she realized that they didn't need to save so much money throughout their career. They could have taken that extra vacation.

They could have afford that extra nicer car or they could have, you know, spend more money, you know, with the family. And that's another thing that most people are not taking in consideration, not having to need, you know, the need to save so much money throughout the career and create more cash flow to enjoy the moment because that's another problem, right? The problem is not saving too much,

and then the problem is saving too much, right? And that's the balance that I think we got to get it in place as a retirement plan, not have to, you know, realize and get to retirement and, you know, see this huge pile of money, which is not going to be used accordingly, right? Because remember, the way that the TSP was designed for federal employees, it was designed to be a supplement of income to the pension and social security. Because I've also seen a lot of federal employees never put a penny inside the TSP

and still have plenty of money. retire with. Because they had the pension and then, of course, the Social Security. That's correct. If you, if you bear, you know, if we just run a two-minute plan, right? If I have a, if I bought a property and in retirement, even if my property is not paid off, if I sell my property, whatever I get out of it, I dump it into my retirement home. Now I have my pension and Social Security as regular income.

And it's going to be somewhere between $40,000 and $60,000 a year. And without a mortgage, in most cases, that's plenty of money to cover most of your needs. Yeah. That's a great point. And I think another thing that people don't really take into consideration is sometimes not knowing cost you in that emotional distress, like what you just said, like, oh, wow, I could have got that extra thing or car or whatever. been good to go. So having that plan of place and having that clarified factoring in like what we're talking about here, those tax implications. Now, we never know exactly because who knows what bracket and what tax rates, there's always a little bit of margin for error. But if you've got a planted place that

factors that in, boy, that's a huge gift that you can give to yourself to sit down with someone like yourself and say, what should I be planning for? And that kind of gives them that, you know, breath of fresh air. It does because I see too many federal employees get to retirement and not being able to use their entire savings. Remember, unfortunately, the traditional TSP, the money that's in there, it's not liquid. They can't access it because of taxes, right? They don't want to withdraw so much money to where a third of it is going to taxes. so they're limited to the access or the amount that they're accessing every single year. They've got to play around with those tax brackets every single years.

So the way they take it off without having to jump up to the next tax bracket. And that's something that most federal employees should be planning the day that they start in the government. Well, I tell you, again, this has been so educational, Mario, and it's great that you can help shine a spotlight on some of the, these things. If someone is interested in learning a little bit more and then also reaching out and connecting with you, what's the best way that they can do that? They can call me, text me, 240, 454, 6154. They could look me up on LinkedIn. We have a big presence on LinkedIn. I think right now we're a little bit over 10,000 followers just just in my

page. So we provide a lot of these webinars and information on LinkedIn. Or they can visit our website, which is www.IFAonline.org. That's that, Maria. Thank you so much for coming back on. It was real pleasure talking with you. It was my pleasure. God bless, Mike. We really love what you do.

And looking forward to us meeting again. You've been listening to Influential Entrepreneurs with Mike Saunders. To learn more about the resources mentioned on today's show or listen to past episodes, Visit www. www. www. influential entrepreneurs radio.com.