What Federal Authorities Need to Know About Financial Disclosures and Retirement Investments

This item is paid for by ClearLogic Financial.

The Government Ethics Office requires federal employees to submit a confidential financial disclosure report (Form 450) each year by February 15. Federal News Network spoke with Shawn Steel, a certified financial planner with ClearLogic Financial, to find out how this may affect the federal government. employee retirement plans and what to consider when investing.

Federal Information Network

Do federal professionals and executives who plan to retire in a few years need an investment plan that takes into account their financial disclosure requirements?

Shawn Steel

Yes, they have unique considerations because of their role. Much of their work can affect a specific company or an entire industry. They are also subject to financial disclosure and conflict of interest rules to minimize conflicts of interest between their official duties and their personal financial interests. And so yes, their investment plan must take this into account.

Federal Information Network

And what type of conflict of interest are we talking about here?

Shawn Steel

Federal employees, by the nature of their work, can sometimes find themselves in a position where their actions will affect a specific company. So the rules on financial disclosure and conflict of interest are meant to ensure that the federal employee doesn’t have a personal financial interest in a particular business that they might regulate or take action against or something like that. It is designed to prevent the federal employee from having an incentive that is contrary to their official duties.

Federal Information Network

So what are the disclosure requirements that federal professionals should keep in mind?

Shawn Steel

There are two basic financial disclosure forms: there is the 450 form and the 278. As we are approaching the due date of the 450 form, we are going to focus on this one. Form 450 has five basic parts, but we’ll focus on the part that talks about investments. Basically the rule is that you have to report any asset you owned that was worth more than $ 1,000 at the end of the year or that generated more than $ 1,000 in income. However, there are some exceptions. For example, you don’t have to report your TSP. Also, if the fund you invest in meets the definition of a diversified mutual fund, you do not have to disclose it. For Form 450, a mutual fund that you would not have to report is one that does not have the stated objective of investing in a particular industry, industry, country, or single state bonds. . So if it meets that definition, you don’t have to disclose it.

Federal Information Network

And since they don’t have to report their TSP, should they have investment accounts other than the TSP?

Shawn Steel

Yes, and this is very important. Much of what we hear is “saving for retirement”. And so almost everyone is saving for retirement in tax-deferred retirement accounts, like the TSP. While this makes it easier to save during your working years, there is one issue that can be a little off the radar that arises during your retirement years. Every dollar you withdraw from a tax-deferred retirement account at retirement will be taxed at the regular income rate. If you don’t have different types of accounts, you don’t have the ability to manage your taxes in retirement. And therefore, you should have a brokerage account and a Roth IRA if you are eligible to contribute to a Roth IRA. Now, there are some income limits on the Roth IRA that might prohibit a professional or federal executive from making Roth IRA contributions, so we’ll focus on the brokerage account. The advantage of having a brokerage account, in addition to your TSP, is that you will be able to fund the same level of expenses with fewer dollars in retirement savings. And the reason is that the money in a brokerage account is taxed at lower rates than the money in the TSP. And only the growth of your brokerage account is taxed, not your contribution. So every dollar you take out of your retirement brokerage account will not be taxed, only growth.

Federal Information Network

Can you give us a concrete example of how tax-deferred retirement works when taxes come out?

Shawn Steel

Yes, basically the way it works is, let’s say you need to fund $ 100,000 to cover your expenses in retirement. If every dollar is in a tax-deferred retirement account, you have to withdraw 100,000 more than enough to cover the tax on that 100,000. And if everything is in a tax-deferred retirement account, the part you must withdraw to cover tax will be higher than it would be if you had a combination of tax-deferred retirement accounts and brokerage accounts.

To illustrate the benefits of a brokerage account, let’s compare the tax results of a person who retires at age 63 at the GS-14 or GS-15 level with an FERS pension of $ 40,000 and supplements their pension using the TSP or its brokerage account. For this example, I’m using a married couple who live in Virginia, jointly deposit using the standard deduction, and 50% of the money used in the brokerage account is taxed as long-term capital gain. I also assume that no one has started Social Security. In both scenarios, the goal is to fund $ 100,000 in annual living expenses.

Details are below, but the main takeaway is the ability to use money from a brokerage account to supplement retirement income, resulting in a combined federal and state tax savings of $ 12. $ 600, which means the same level of expenses can be funded with less money. savings. You will notice that there are significant tax savings on the federal side. The reason is that at the federal level, capital gains are taxed at 0% until your taxable income reaches $ 83,350 for a joint filing or $ 41,675 for a single person. Note that this is intended to illustrate the benefits of having a brokerage account, and taxes are rounded to the nearest $ 50. It should not be taken as tax advice.

Pension supplement using only the TSP Pension supplements using only a brokerage account
Resources used
Pension $ 40,000 $ 40,000
IRA $ 77,600 $ 0
Brokerage account $ 0 $ 65,000
Total resources used $ 117,600 $ 105,000
Expenses
Federal income tax $ 11,400 $ 1,400
State income tax $ 6,150 $ 3,550
Living expenses $ 100,050 $ 100,050
Total expenses $ 117,600 $ 105,000

Federal Information Network

We’ve talked about it a bit, but what better for federal professionals: a Roth IRA or a brokerage account? Assuming they qualify for a Roth IRA.

Shawn Steel

All three must be part of your retirement savings if you qualify, because when you retire you will be withdrawing money in a different order. Your Roth money is tax free money, and it is very valuable money. To maximize the Roth’s benefits, you want to maximize that growth, which means you want to give it as much time as possible for that money to grow. So you want to save that money for your later years. Now in the early years, this is when you want to use a combination of your brokerage account and your tax deferred retirement account. This will keep your taxes as low as possible for the first few years and extend your retirement savings. Since you don’t take out that much when you retire, this leaves more money in savings to keep growing for years to come.

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So what impact does this have on the financial disclosure requirements on the Form 450?

Shawn Steel

As long as you invest in funds that meet the exception of diversified mutual funds, you are not required to include them. On the other hand, if you invest in individual stocks in your brokerage account, they will need to be reported on your 450 each year. But if you are using diversified mutual funds that meet the exception, you don’t have to report them. So, it’s going to keep it nice and streamlined, and diverse.

Federal Information Network

And what’s the best way to save in a brokerage account?

Shawn Steel

The best way is to automate it. If you make a monthly deposit from your checking account to your brokerage account each month, you are more likely to save. The best way to do this is therefore to set up an automated transfer once a month, just like a TSP contribution, where it automatically leaves your checking account. If you set it up and it’s automated, you’re not tempted to spend it on your bank account or do anything else with it. And it’s the perfect way to save for people whose kids have left home and are independent. Now is a good time to start focusing on that brokerage account. Because that’s probably not something you focused on when you were raising kids, trying to save for school, and having all the expenses you needed to take care of the kids. It was probably quite difficult to accumulate money in a brokerage account. So that’s a good thing to focus on in the window between when the kids are out of the house and independent and when you are preparing to retire. Now is a good time to focus on this.

Shawn Steel is a CFP® practitioner and joined ClearLogic Financial in 2013 after several years of practicing law. Shawn advises clients on retirement planning, tax planning, investments, and federal employee financial disclosure requirements. He also oversees the preparation of financial disclosure forms for federal employees and advises clients retiring from federal service on the retirement process.