The Need-to-Knows About The Thrift Savings Plan

The Thrift Savings Plan (TSP) is a contribution retirement savings program for current and former federal workers, lawmakers, and military members. The TSP is essentially the government’s version of a 401(k) plan for its employees.

To breakdown who qualifies for the TSP, there are four classifications. The first is any federal workers under the old retirement plan called the Civil Service Retirement System (CSRS). Then there are those under the newer retirement plan called the Federal Employees Retirement System (FERS), followed by any military personnel. And lastly, civilian federal workers such as those serving as judges or in Congress.

The CSRS was replaced by the FERS about 35 years ago. However, there are still old-timers that are working under that system.

As mentioned before, the TSP is designed to function like a 401(k). Participants can invest their contributions within five different funds throughout their careers so that they have the potential to increase their savings value for their retirement income.

As with most IRA’s, you put in money before it is taxed, which brings down your taxable earnings. The contributions are automatically withheld from each paycheck and placed into your TSP.

Typically, those that start working for the federal government are automatically elected to put in a 3 percent contribution, unless they select otherwise.

A majority of agencies will provide matching contributions to your TSP, but be sure to research what percentage it may be as this can vary from position to position. With that said, the percentage is generally a full 3 percent contribution match. After that, they will match up to 50 percent for each dollar you contribute up to 5 percent.

Most traditional IRAs come with contribution limits, and the TSP is no different. For 2020, there is a $500 increase from this year. Those over the age of 50 will have a $26K cap. Those under 50 will have a limit of $19.5K.

Within the Thrift Savings Plan, there are five individual funds that participants can invest in:

The Government Securities Investment (G) Fund

The Fixed Income Index Investment (F) Fund 

The Common Stock Index Investment (C) Fund 

The Small Capitalization Stock Index (S) Fund 

International Stock Index Investment (I) Fund 

Though the TSP is similar to a 401(k), there are differences between them.

Within the TSP, you can elect to make traditional or Roth contributions. Traditional contributions are made with untaxed money, which will be liable to taxes when withdrawn in the future. Roth contributions can be made with after-tax money, which, when you withdraw in the future, not even your earnings will be taxable.

Those that contribute to their TSP and receive tax-exempt pay like those serving in combat zones will also have their withdrawals tax exempt.

Participants can either contribute to their traditional account or their Roth or put money into both if they desire to do so.

Those that will have a federal pension will have TSPs that are considered supplemental. There may be some regulations within your pension where if you receive matching contributions within your TSP, you may receive less in your pension. Be sure to research this if you fit this category.

Aside from matching contributions, a majority of federal personnel will have an automatic 1 percent contribution made into their account by the federal government.

Depending on your positions, the time it takes to have your account, vested, may vary. It can typically take 2 to 3 years, however.

If you leave your federal post before the account is considered vested, you will retain your contributions and any matches. The bad news is that you will not be able to keep the 1 percent contribution and the earnings from it.

The TSP is famous for its affordability. Mainly due to a portion of the fees being paid with money that was relinquished from those that left before their accounts we’re vested. 

Like most IRAs, if you withdraw from your TSP prematurely, you will face a tax penalty of 10 percent.

Yet, there are some circumstances that allow you to withdraw without facing the penalty.

If you rollover your money into another qualified retirement savings account, you would be penalty-free

Those that leave their federal post after the year they turn 55, the 10 percent penalty will not be added to withdrawals made that same year and on. Those that are in any public safety positions can be eligible for this rule the year after they are 50.

Like a 401(k), you are able to get a loan through your TSP. If you do take a loan, you will have to pay back the loan along with the rate of interest that is assigned to G fund returns.

There are two kinds of loans that can be taken. The first is a standard loan that has a payback time frame of 5 years. The second is a loan for buying or building your home, which has a payback time frame of 15 years.

Those that want a home loan will need to apply for it and can be refused. The loan must at least be $1K but nothing over $50K.

If the loan is not paid back within the agreed timeframe or the borrower leaves their job before the loan is paid off, the Internal Revenue Service will consider it as an early withdrawal.

For employees over 59 and a half, you can make one in-service withdrawal, which will be considered as ordinary income for traditional accounts. Roth funds will not be taxed. There will be no premature withdrawal penalties.

Another withdrawal that can be made while in service is if you experience a situation considered a hardship. Hardship withdrawals can be made in such situations like medical care, divorce, or a personal loss. Taxes will be liable.

Early withdrawal penalties may apply to some situations. Furthermore, you will only be able to withdraw what you have contributed.

Those that leave their service can make multiple partial withdrawals but will face any taxes that are liable.

Another option is to make a full withdrawal, which can be split into monthly, quarterly, or annual payments, or they can also opt for a lump sum.

These are the options when you retire and will be liable to any taxes applicable to your withdrawals unless you are pulling from a Roth or made combat zone contributions.

Those that cash out their TSP before 59 and a half will face early withdrawal penalties.

For those that do not have any exemptions or do not make Roth contributions, here is a general idea of the taxes you will face:

Qualified withdrawals from your traditional account will be subject to ordinary income taxes. 

Money that is pulled from your TSP before the age of eligibility will face the full rate of income tax along with the 10 percent penalty. If you do this with a Roth, you could only face the 10 percent fee.