$231 for the TSP Mutual Fund Window may be Worth It

As I teased in an earlier post about the costs of the TSP Mutual Fund Window, there may be a scenario where it makes sense to participate in the TSP  Mutual Fund Window and pay-up.  Here it is:

 

CONDITION #1: You desire to invest in assets outside of the G/F/C/S/I Fund classes and do not have a low-cost option to do this within another current or former employer’s 401k plan;

 

AND –

 

CONDITION #2: You live in a state like California that does not protect IRAs from lawsuits.

 

The lawsuits issue is a biggie. 

401k plans and other ‘Qualified Retirement Plans’ like TSP provide you with asset liability protection in all 50 states.  While a Qualified Retirement Plan won’t shield you from BEING sued if someone slips on the proverbial banana peel on your driveway, the TSP (and a 401k) do protect the ASSETS held within the Retirement Plan from lawsuits or credit judgments. 

 

This is because a 401k and TSP are ‘Qualified Retirement Plans’ with full protection from creditors, as defined by  the Employee Retirement Income Security Act (ERISA).  

 

In other words, if you live in a state like the Democratic People’s Republic of California and most of your retirement assets sit inside of an IRA, a judge gets to decide how much you are allowed to keep in the event that you are sued:

 

 

I personally don’t like the idea of a California judge determining what is an appropriate monthly income I am allowed to receive from my retirement savings, so I maintain the vast majority of my retirement assets within TSP and a former employer’s 401k to take advantage of the ERISA asset protections.  I view this as a ‘free’ liability insurance policy.

Other states like Georgia, Maine, Mississippi, Montana, Nebraska, West Virginia, and Wyoming each have some mealy-mouthed protections in place for IRA’s, with different treatments proscribed between Traditional versus Roth IRAs.  There’s a good state-by-state summary of IRA protections on assetprotectionplanners.com website, but I recommend you verify this info with your own research that is relevant to your state(s) of residence. 

 

So, knowing that only an employer’s Qualified Retirement Plan (such as a 401k or the TSP) provides iron-clad asset protection in all 50 states per ERISA, what do you do? 

 

If you choose to keep some or all of your retirement assets in IRA’s instead of a 401k or the TSP, you can go out on the open insurance market and purchase an ‘Umbrella’ liability policy to protect your assets.

 

Umbrella policies are typically sold in $1M increments, with each additional million a bit cheaper than the first million. According to NerdWallet (with a secondary reference to the Insurance Information Institute), a $1 Million Umbrella Policy runs $150 to $300 per year. For our Veteran readers, know that I shopped Umbrella insurance a few years ago and found USAA’s rates to be reasonable.

 

 

ACTION PLAN:

So,  if you want to dabble in investments outside of the TSP’s G/F/C/S/I funds AND do NOT have a low-cost option to do this within you current or former employer’s 401k plan, now you do.

 

You can now compare  the $231 or so per year to participate in the  TSP’s Mutual Fund Window versus the cost of maintaining a rollover IRA and purchasing a private Umbrella policy out of pocket to protect your retirement account value.