Irreversible Mistakes with Your Federal Benefits

Our recent post, Trust but Verify, showed that relying on your agency’s HR staff to determine your retirement qualifications can have serious consequences. There are many common mistakes that Federal Employees make regarding their benefits that can have irreversible effects, including the selection of FEGLI Option B by younger Federal Employees that we discussed in an earlier post. While we can’t address every option here, we have chosen to highlight a few that we believe are the most important pitfalls to avoid.

The day you retire will affect your first retirement annuity payment. FERS employees must be retired a full calendar month before they receive a payment for that month. For example, if you want to start receiving your annuity for November, you must retire no later than October 31st. The payment will arrive in early December, and will cover the full month of November. If you work just one day in November, your first annuity payment will be for December and will not arrive until January, causing you to lose out on any payment for the unworked portion of November. On the other hand, CSRS employees can retire through the 3rd of the month and still receive payment for the remaining days in that month.

Maxing out your TSP contributions too early in the year can be a huge mistake. For 2014, Federal Employees can contribute up to $17,500 to their TSP accounts. You can contribute the maximum amount evenly over the 26 or 27 pay periods each year, or over a shorter time span. Some people prefer to go ahead and make their full contributions early in the year, but this is usually not the best plan. The problem is that the contribution match is based on your salary per pay period, up to 5%. The first 1% is automatic, but once you can no longer contribute to your TSP account for the year, you will miss out on the other 4%, and receive only a 1% match for the rest of the year.

Think hard before using your TSP to pay off debt. Just like any other qualifying retirement account, if you pull money out before you turn 59 ½, not only will that amount be taxed up to 39.6% on the federal level, but it is also subject to a 10% tax penalty. In addition to the severe tax consequences, the money will no longer grow tax-deferred for your retirement.

Another irreversible mistake is not choosing any survivor annuity under either FERS or CSRS. If you die unexpectedly, you could leave your spouse in a desperate situation. There is a lot of talk about pension maximization, which means opting out of any survivor annuity and purchasing life insurance with a portion of the larger monthly annuity to cover your spouse in the event of your untimely death. However, depending on when you die, the life insurance payout may not keep up with inflation, whereas the survivor annuity has COLA increases. Also, you must choose a survivor benefit for your spouse to remain covered through FEHB after you die. If you are considering the reduced survivor annuity option, make sure the amount will be sufficient to cover the cost of the FEHB coverage so your spouse will not have to worry about paying out of pocket.

Another missed opportunity involves the social security spousal benefit. Taken too early, it can adversely affect the total lifetime payout for the working spouse, but if it is not taken at all it is money lost. The Social Security Administration will not volunteer benefits that are owed but not requested, and it will not advise you on the most advantageous time to receive your benefits.

If you are a CSRS employee, you have the option to set up a Voluntary Contribution Program (VCP) account before you retire. You can deposit after-tax money into this account, up to 10% of your career earnings, and roll it over into a Roth IRA to grow tax-free. This is a complicated process, but if it is done right it can give CSRS employees the opportunity to superfund a Roth IRA. For the general public, the maximum contribution per year to a Roth IRA is $5,500,or $6,500 if you are over 50, but that limit does not apply to Federal Employees rolling over their VCP contributions. For this and all matters discussed today, a federal benefits specialist can assist you in making smart decisions.\

Want to learn more? Download our free webinar, 11 Mistakes Federal Employees Make