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March 29, 2024

Federal Employee Retirement and Benefits News

Tag: roth tsp

Roth TSP

Getting the most out of the Thrift Savings Plan by Todd Carmack

For employees under the FERS system, the TSP is one of the best benefits to take advantage of. The TSP plan allows FERS employees matching contributions:

TSP Matching Contributions

1% is automatic from their agency

100% matching on the first 3% of contributions

50% on the next 2% of contributions

This gives you a total of 5%. Let’s face it, free money is too hard to come by, so make sure that you are contributing at least 5% to your TSP plan.

Contributing to your TSP:

Traditional TSP – where the amount is deducted from your check prior to taxes. You will pay taxes on any distributions.

Roth TSP – where the amount is deducted from your check after taxes have been taken out. As long as you keep the money in the account for 5 years and withdraw it after age 59.5, your distributions are TAX FREE !!!! If you are only contributing to the Roth TSP, your matching 5% will be deposited into the Traditional TSP.

If you withdraw money from either the Traditional or Roth TSP prior to age 59.5, you will pay a 10% penalty. There are a couple of exceptions to this rule.

TSP Contribution Limits

For the year 2015, if you are under the age of 50, both CSRS and FERS employees may contribute up to $18,000 a year (spread that out over the 26 pay periods).  If you are age SO or above, you may contribute the Catch-Up amount of $6000 a year.  These amounts can be contributed to either the Traditional or the Roth. The Roth TSP does not have the same income restrictions as a private Roth account!!! This will allow high-income earners (married or single) to take advantage of accumulating wealth for a tax free retirement income.

Employees can take money out of their TSP account in a few different ways:

TSP Loan – employees may that a loan from their TSP in the amount of their contributions, but not the matching contributions. Loan interest is based on the G-fund. Growth of this loan money is stopped until it is repaid bi-weekly. You can continue making your regular TSP contributions while repaying the loan.

TSP Hardship Withdrawal – this would be withdrawing money and NOT paying it back. This will result in a 6-month freeze of making any contributions and receiving the matching contributions. To add insult to injury, you will also pay income taxes and penalties (if under age 59.5) on the withdrawal. Try and avoid this option.

TSP Age Based Withdrawal – this gives the employee the opportunity to withdraw money after the age of 59.5 without penalty. The gives you the opportunity to take advantage of investment options outside of the Thrift Savings Plan that may help you achieve your retirement goals.

When money is simply withdrawn, 20% is withheld for taxes.  If you are transferring TSP funds to a self-directed IRA, financial advisor (still classified as IRA account) or a tax deferred annuity (still classified as IRA account), then you pay no taxes or penalties.

Other Todd Carmack Articles

Social Security for FERS Employees by Todd Carmack

Understanding The Thrift Savings Plan, By Todd Carmack

Is The Pension ‘Survivor Benefit’ Best For You? by Todd Carmack

Understanding Your FEGLI Coverage, by Todd Carmack
 

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Learning About Your Thrift Savings Plan

Thrift Savings Plan

Thrift Savings PlanThe Thrift Savings Plan (TSP) is a retirement account and Federal Retirement benefit and Postal Benefit similar to 401(k) plans offered to employees of private corporations. Your TSP.gov account can be a great savings vehicle, which offers a contribution ‘matching’ by the government, which, along with the employee’s savings can create a significant retirement nest egg for Federal and Postal employees as well as other eligible participants.

The Thrift Savings Plan is a defined contribution plan.  Which means that the amount of benefit that you derive from the plan depends on how much you put into the account during your working years. The Thrift Savings Plan is one part of a three-part retirement package for those employees covered under the Federal Employee Retirement System (FERS). In addition to your TSP.gov account, this includes your social security and FERS basic annuity.

For CSRS eligible retirees, the Thrift Savings Plan is a supplement to the Civil Service Retirement System (CSRS) annuity.

Features
The federal retirement plan: thrift savings plan provides the following benefits:
•    Five basic investment options
•    Professionally designed life cycle funds is one feature of the diversified investment options it provides
•    It gives a choice of tax treatment options (Roth TSP, and Traditional)
•    Tax-deferred investment earnings

Traditional versus Roth Thrift Savings Plan
Employees are eligible to contribute to either plan given total contributions to both do not exceed the deferral limit set by IRS. This limit changes from year to year.
Contributions are deducted from an employee’s gross salary in a traditional Thrift Savings Plan and this deduction results in current-year tax savings. Federal and income taxes are paid when funds are withdrawn at retirement, and the earnings grow on a tax-deferred basis until those withdrawals are made.
Contributions are deducted from an employee’s after tax income in the Roth TSP but there are no taxes to be paid upon withdrawal and earnings grow tax-free as long as the funds remain in the Roth TSP.

When is a Roth Thrift Savings Plan Suitable?
As a general rule, the lower your current tax bracket is today, the more suitable the Roth TSP is for you.  This is because of the growth on your Roth TSP will be tax free assuming you take it out after 59 1/2 and if you don’t need to current tax-deduction then the tax-free compounding of your growth can be a real advantage.

Establishing an Account
The earlier you start contributing to your Thrift Savings Plan in your career the greater you will benefit through compounding. This could increase your retirement income substantially.
Your first contribution to the account will establish it, whether it is individually or through your agency (more information can be found at TSP.gov). You are automatically enrolled in this account if you a FERS employee who was hired after July 31, 2010. Every pay period, 3% from your basic pay is deducted and deposited in the account. You can also elect to stop or change the deductions by visiting www.TSP.gov.  You will need your TSP.gov login to access the information available to you through the site.

 

Click HERE for information on Thrift Savings Plan

Click HERE for information on FERS

Click HERE for login information on TSP.gov

Click HERE for access to LiteBlue

 

 

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