The TSP Only Gives Participants 80% of Their Money. Here is the Reason. – Mark Heinrich

The Thrift Savings Plan (TSP) is a fast and convenient method of wealth-building for federal employees. Participants of the plan can contribute towards retirement straight from their paychecks before spending money on all other things. 

The board that oversees the plan then invests the money in safe and profitable investment assets that help to increase participants’ savings over time. Plus, TSP accounts are tax-advantaged. 

Federal employees who use the traditional TSP, which is currently more popular, can expect tax deductions in the year they put their money into the plan. Federal employees who use the Roth TSP do not have this tax advantage for contributing money to the plan, but whatever they contribute to the plan will continue to grow tax-free until they withdraw the money. 

Not many retirement plans or accounts have the many advantages that come with TSP accounts. In fact, workers that stay dutiful in their contributions can hit the one million mark or even exceed it before retirement. Every federal worker looking for a pleasant, stress-free retirement should use the TSP to save money and build wealth while getting great tax considerations on their money. 

Why Participants only Get 80% of their contributions to the Plan

While TSP has been around for quite a while, many federal workers are still in the dark about some aspects of the plan. The most confusing aspect is probably the process of withdrawing funds from the plan. The process is extremely confusing for many federal workers, especially when they request $2,000 from their traditional TSP and find out that 20% of that has been chopped off. 

The TSP has an obligation to send workers only 80% of their money. The other 20% goes to the IRS. Traditional TSP accounts are tax-advantaged, but participants still have to pay taxes on their earnings from the plan. 

Another important thing to note about the process is that the TSP may withhold less than a worker owes to the IRS. Generally, the plan withholds 20% on withdrawals to send to the IRS. However, it does this without calculating how much a participant really owes the agency. So, if you owe more than 20% of your withdrawals, you have to inform the TSP to withhold more than 20% or save money for when the IRS comes calling.

You could also owe less than 20% in taxes, but the TSP will almost always withhold 20% of withdrawals. The tax withholdings also apply to rollovers. If you want your entire savings in a TSP account to be rolled over, you have to pay up the 20% withholdings. Failure to do so would leave the portion not rolled over taxable. This process drastically cuts down the tax considerations that feds enjoy with the TSP. 

However, you can avoid these withholdings by not making any withdrawals from your TSP account until the IRS requires you to do so. Doing this will help you keep your money safe and complete for a long time. The grace period will, however, end the year you turn 72. By this time, all participants are expected to take the required minimum distributions (RMD).

Note: the above information only applies to federal employees who use traditional TSP. The TSP does not withhold any portion of their withdrawals for those who use Roth TSP and follow all the rules guiding the plan. This is because Roth TSP does not attract tax deductions on withdrawals as traditional TSP does. 

Tax Withholdings Could be Lesser Than 20% 

As stated earlier, the general rule of thumb for tax withholdings is 20%, but the percentage could be lower or higher depending on different situations. There are seventeen different withdrawals types from TSP accounts. Each of these withdrawal types has special waivers, withholding percentages, and other special considerations. 

However, the most common withdrawal rate is 20%, which is why that is our main focus for this article. It applies to the most popular withdrawal types. The second most popular withholding rate is probably the 10% type. This rate is applicable for RMDs and financial hardship in-service withdrawals. 

Another exception to the 20% rule occurs when participants take an installment payment for ten years or more or based on the IRS life-expectancy table. For this situation, the tax withholding rate is similar to someone who is married and has three dependants. 

This PDF file contains the types of TSP withdrawals and the withholding rate for each, along with other important information. You will find the eighth page of the document most enlightening on the topic.

Contact Information:
Email: [email protected]
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Bio:
Mark, a lifelong Tulsan graduated from Westminster College, Fulton, Missouri with a Bachelor of Arts in Accounting. Mark served in the United States Army as a Captain in the 486th Civil Affairs BN. Broken Arrow, Oklahoma and retired in 1996. Mark is married to his high school sweetheart Jenny and has four beautiful children. Mark’s passion for his work, which includes over 20 years in the Financial Industry started as an Oklahoma State Bank Examiner. Mark examined banks throughout Oklahoma gaining a vast knowledge and experience on bank investments, small business and family investments. Mark’s experiences include being formally trained by UBS Wealth Management, a global investment firm where he served as a Financial Consultant specializing in Wealth Management for individuals & families. Mark is a licensed Series 24 and 28 General Securities Principal and an Introducing Broker Dealer Financial Operations Principal. Additionally, Mark is a Series 7 and 66 stockbroker and Investment Advisor focusing on market driven investments for individuals, businesses and their families.

Mark specializes in providing financial knowledge, ideas, and solutions for federal employees, individuals, families and businesses. We serve as your advocate, and assist you in the design and implementation of financial strategies while providing the ideas to maximize your security and wealth. Our goal is to give you maximum control of your financial future. We provide the expertise to help you with personal issues such as: practical tax Ideas, risk management, investment solutions, and estate preservation.

Additionally, we’ve counseled hundreds of employees on their transitions from careers in federal government, and private industry to their next life stage, whether that is retirement or a second career. We specialize in devising strategies that roll your TSP, 401(k), pension plan, to a suitable IRA to meet your objectives.

Disclosure:
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