Here are answers to some of the most asked questions about a Thrift Savings Plan.
In this article:
- What Is a Thrift Savings Plan?
- What Are the Benefits of a TSP?
- What Are The Different Types of TSP?
- How Do I Open a TSP Account?
- How Do I Change TSP Contributions?
- What Is the TSP Limit for 2019?
- How to Rollover to TSP?
- What Are the TSP Investment Options?
- When Can I Withdraw My TSP Money?
Thrift Saving Plans Frequently Asked Questions
What Is a Thrift Savings Plan?
The Federal Employees’ Retirement Security Act of 1986 established the Thrift Savings Plan or TSP. This is a qualified retirement plan available to current and retired members of the United States military (including Ready Reserve) and federal government and agency employees.
The TSP is an effort to expand federal employees’ options for retirement savings. It is similar to a 401(k) plan offered to employees in the private sector.
What Are the Benefits of a TSP?
Using the TSP to save for retirement offers the following benefits:
- Automatic payroll deductions
- Access to diversified investment options, including professionally designed lifecycle funds
- A tax-treatment choice to contributions (tax-deferred contributions vs. tax-free earnings)
- Low administrative and investment expenses
- Agency or service contributions for federal government and agency employees and uniformed service members part of the Blended Retirement System
- A beneficiary participant account established for spouses in the event of death
- A variety of withdrawal options
Blended Retirement System Definition: The BRS is a new retirement system made available to the members of the Uniformed Services in 2016. It blends the existing 20-year cliff-vested defined benefit annuity and the Thrift Savings Plans. This blending is specifically beneficial to members who leave the service before getting retirement checks.
What Are the Different Types of TSP?
There are two types of TSP: the Traditional TSP and Roth TSP. The latter offers employees the benefits of tax-free growth and tax-free distributions after retirement.
The TSP rules and benefits differ for military members and federal government and agency employees.
Deployed military members serving in combat zones enjoy the benefit of a raised elective deferral limit to the maximum annual limit.
Federal government and agency employees, on the other hand, enjoy matching contributions from the government. Eligible TSP participants get matching contributions on the first 5% of their contributions with the following matrix:
- 100% matching on the first 3%
- 50% matching on the next 2%
If a TSP participant stops paying contributions, he will still receive an automatic 1% contribution from his agency.
Military members can only receive these matching contributions if they are part of the Blended Retirement System.
How Do I Open a TSP Account?
- For FERS (Federal Employees’ Retirement Security) employees hired after July 31, 2010, the agency or service automatically enrolls them in the TSP. The agency or service will deduct 3% (unless a contribution election to stop or change contributions is made) of the participant’s basic pay from his paycheck every period and deposit this into his TSP account.
- For BRS (Blended Retirement System) members who rejoined service on or after January 8, 2018, participants can sign up for a TSP account only after 60 days of service.
- FERS employees hired before August 1, 2010, and BRS members who have served less than 12 years as of December 31, 2017, get a TSP account with Agency or Service Automatic 1% Contribution. To start making contributions and to acquire Agency or Service Matching Contributions, employees have to make a contribution election through their respective agencies or services.
- Make a TSP election through respective agencies or services to establish an account, if unqualified for the specifications listed above.
How Do I Change TSP Contributions?
- A TSP participant should ask his agency or service payroll office for their procedures for making an election to start, change, or stop his TSP contributions. The payroll office will ask employees to:
- Use an electronic system or;
- Submit Form TSP-1, Election Form TSP-U-1
- If the office accepts the TSP election form, he can complete the document that they provide. If not, he can get them from the TSP website, or call the numbers provided also on the website to have it sent to him.
What Is the TSP Limit for 2019?
Elective Deferral Limit
This is the limit one can deduct from their paychecks—base pay, bonuses, and special pays included. The limit for 2019 is $19,000 for both a Traditional TSP and Roth TSP.
Depending on the savings strategy of an employee, one can split his contributions into a Traditional TSP and Roth TSP. Just make sure that the sum total from Traditional TSP and Roth TSP contributions for the year do not exceed this limit. This limit does not apply to the following:
- Agency Automatic (1%) Contributions
- Agency Matching Contributions
- Catch-up contributions
- Traditional contributions made from tax-exempt pay
- Amounts transferred or rolled over into the TSP
If deployed in combat zones, military members can exceed this limit.
Annual Additional Limit
This is the max amount a TSP account can hold from all contributions sources, except catch-up contributions. For this year, the limit is $56,000, including the following:
- Employee contributions
- Agency or service automatic (1%) contributions
- Matching contributions
TSP contributors who are 50 years old or older by the end of 2019 can make catch-up contributions of up to $6,000 this year. Catch-up contributions are not counted toward the elective deferral and annual additional limits.
Employees can make regular and catch-up contributions. TSP owners have to elect catch-up contributions yearly because they’re automatically stopped after a year.
The $6,000 limit is for both a Roth TSP and Traditional TSP.
How to Rollover to TSP?
There are two ways to do this:
A TSP member can send all or part of the money from his IRA or other plans directly to his TSP. For tax-deferred money transfers, a filled out Form TSP-60 (Request for a Transfer Into the TSP) is needed. Accomplish a Form TSP-60-R, on the other hand, for Roth money transfers.
For this option, one can personally make the transfer after receiving the money from his IRA or plan by using the Form TSP-60-R. Everyone is given 60 days to complete the transfer after getting the money.
Note that an appropriate amount of taxes from the IRA or previous plan will be withheld before the money is received. That being said, to withdraw the entire amount from the IRA or other plans, one should pay the total withholding taxes. Any amount not to be rolled over is subject to federal income tax.
RELATED: Roth IRA Conversions Explained
What Are the TSP Investment Options?
1. The L Funds
These are “Lifecycle” funds invested based on a professionally designed combination of stocks, government securities, and bonds. Investing in L Funds gives the benefit of choosing a retirement schedule, the target date when one wants to start getting distributions.
The L Funds suit TSP participants who may not have the time, experience, or interest in managing their savings. With these funds, participants are assumed to be more risk tolerant as they won’t need their money for quite a long time and they’re seeking higher returns. When the need for income is nearing, L Funds automatically adjust to reduce the ability to tolerate risk.
The five L Funds includes the L 2050, L 2040, L 2030, L2020, and L Income.
2. The Individual Funds
With these, TSP owners make investment decisions by creating a mix from any of the TSP investment funds.
- G Fund (Government Securities Investment) – This is a short-term investment in the US Treasury securities. This offers the opportunity of earning interest rates as those of the government’s long-term securities with no risk of loss.
- F Fund (Fixed Income Investment) – This fund is invested in an account used to track the Bloomberg Barclays US Aggregate Bond Index. This offers the chance to get return rates exceeding the rates of money market fund for a long time.
- C Fund (Common Stock Index Investment) – This fund is invested in an account managed by the BlackRock that tracks the Standard & Poor’s 500 (s&p 500) Stock Index. This provides the opportunity to earn higher investment returns from equity investments.
- S Fund (Small Capitalization Stock Index Investment) – This is invested in a stock index fund tracking the Dow Jones US Completion Total Stock Market (TSM) Index. TSP holders get the chance to earn potentially higher returns from “small cap” investments although with greater fluidity.
- I Fund (International Stock Index Investment) – This fund is invested in a stock index fund tracking the MSCI EAFE (Europe, Australasia, Far East) Index. TSP owners are allowed to invest in international stock markets giving their portfolios global equity exposure.
When Can I Withdraw My TSP Money?
The main purpose of the TSP is to help holders save for their retirement. Hence there are rules in place for when and how they can take money from their account while they are still employed.
After leaving the federal service, however, TSP owners are free to take out money from their TSP anytime as long as they pay the imposed early withdrawal penalty tax.
Nonetheless, there are four ways to get money from a TSP:
1. Getting a Loan
- Eligibility – Only actively employed participants in pay status, who have contributed their own money to the TSP, are eligible to get a loan.
- Interest – Loans are repaid with interest. The rate is the interest rate for the G Fund during the loan application processing.
- Fee – Borrowers will be charged a $50 processing fee that will be deducted from the amount of loan they will get.
- Types – There are two types of loan: a general purpose and a loan for residence purchase or construction. TSP owners can only have one of each loan at a time.
- Maximum Amount – The maximum amount one can borrow is limited to his own contribution, but it must be between $1,000 and $50,000. After paying off one’s loan, borrowers will have to wait 60 days to be eligible for another loan of the same type.
- Payments – Loan payments are deducted from the borrower’s paycheck in the amount he has agreed on. If he wants to pay off his loan early or make additional payments by check or money order, he can do so by using the Loan Payment Coupon found on the TSP website.
- Payment Duration – The TSP rules give borrowers of general purpose loans up to 5 years and residential loans up to 15 years to pay.
- Penalties – If a borrower fails to pay according to the Loan Agreement, or when he did not repay the loan after leaving service, he will get a taxable distribution from the IRS. He will owe income taxes on the taxable amount of the loan balance and an early withdrawal penalty tax.
2. In-Service Withdrawals
- Eligibility – All active participant can take in-service withdrawals.
- Tax – When making in-service withdrawals borrowers will pay federal, and/or state taxes on the taxable portion of the money. The TSP also imposes a 10% early withdrawal penalty tax.
- Types – There are two types of in-service withdrawals: financial hardship in-service withdrawal and age-based in-service withdrawal.
- Financial hardship in-service withdrawal – Getting one is possible as long as a borrower can prove under oath that he is under a financial crisis because of recurring negative cash flow, legal expenses for a separation or divorce, medical expenses, or a personal casualty loss. The TSP allows requests of $1,000 and up but limits it to the actual amount of the borrower’s financial hardship.
- Consequence – After making a financial hardship in-service withdrawal, a borrower cannot contribute to his TSP within 6 months.
- Age-based in-service withdrawal – This is available for federal employees and military members aged 59 1/2. The TSP rules allow eligible participants to get a part or the whole amount of the TSP funds. The rule allows this only once.
- Consequence – After taking a financial hardship in-service withdrawal, the borrower cannot make a partial withdrawal from his TSP after he leaves his service.
3. Post-Separation Withdrawals
- Eligibility – If a TSP owner has a TSP balance of $200 or more after leaving his federal service, he can either leave the money in the account until he is 70 1/2 or he can withdraw a portion or all of the amount. If the vested account balance is less than $200, the TSP will send it to him automatically.
- Types – TSP owners can either do a partial or full withdrawal.
- Partial Withdrawal – Eligible participants can withdraw $1,000 or more. The rule allows this only once.
- Full Withdrawal – Eligible participants can choose how the entire account will be distributed using one or any combination of the following withdrawal options available:
- A single payment – the TSP owner will receive a lump sum
- TSP monthly payments – the TSP owner receives a series of payments each month. He can specify the amount he wants to receive each month or he can have the TSP calculate the monthly payment based on his life expectancy.
- Life annuity – On behalf of the TSP owner, the TSP buys an annuity for him from an insurance company. This annuity pays the TSP owner or his survivor every month for life. The amount used to purchase an annuity, in general, is $3,500 or more.
4. Rollover into an IRA
Another way to access your TSP money is to roll it over into an IRA. To roll your TSP money into an IRA, you must first open an IRA account.
Depending on if you plan to do a full withdrawal or a partial withdrawal, you will need to fill out different forms:
You must be careful to rollover the correct funds into a Traditional IRA and/or a Roth IRA. If you have tax-exempt contributions, these should probably be rolled over into a Roth IRA so that you are not taxed upon withdrawal. For any TSP money that is a pre-tax contribution, consider rolling it into a Traditional IRA. It will be taxed upon withdrawal in retirement.
The Thrift Savings Plan is a great retirement savings vehicle. When utilized with the right strategy, this plan can make TSP owners’ golden days indeed golden.
Do you have any other questions about the Thrift Savings Plan? Let us know in the comments section below!