Are you part of the majority of federal civilian employees in the Federal Employee Retirement System? Or maybe you are a member of the uniformed services. If so, you probably have access to the Thrift Savings Plan, one of the workplace benefits that people receive as United States government employees.
The Thrift Savings Plan (TSP) is a 401(k) like plan for federal workers. It allows you to contribute to your retirement fund and receive a matching contribution from your federal agency.
According to recent statistics, over 5 million people participate in the TSP, which has more than $500 billion in assets under management.
One common issue for many federal employees is they don’t understand their TSP accounts and what it can offer them. If you find it hard to navigate, no sweat. Here’s a quick rundown of some must-know facts about your Thrift Savings Plan account that can be of benefit.
Thrift Savings Plan Basics
Just like with a 401(k), the Thrift Savings Plan is a defined-contribution plan. In this sort of plan, employees contribute money to their accounts. Contributions are from earned income.
Federal employees have six different investment options within the Thrift Savings Plan. In your TSP account, you choose how your money will be invested. Your retirement funds grow tax-deferred inside the account. And when you withdraw money, income tax will be due on the balance.
The future benefits of your TSP account will depend on how much money is put into it, how the money is invested, and how well it performs.
Traditional vs. Roth TSP Options
Like with many 401(k)s, you likely won’t be limited to just a traditional TSP account as your only retirement savings plan. In fact, your TSA likely offers both traditional and Roth options. You may even find some similarities between your options here and those of a traditional versus Roth IRA.
When you choose the traditional TSP, you contribute to your account with pre-tax dollars, paying tax on withdrawals in retirement. With the Roth option, the taxation is in reverse. You contribute post-tax income. In exchange, you won’t pay taxes on money you withdraw when you are retired.
Your annual contribution limit for 2018 is $18,500. Employees age 50 or older can make an additional $6,000 catch-up contribution annually.
FERS or CSRS: How Does It Affect the TSP?
For federal civilian employees, there are two retirement systems. If you were hired by the federal government prior to January 1, 1984, you fall under the Civil Service Retirement System (CSRS).
The TSP doesn’t come ‘automatically’ as part of CSRS employee benefits, but it is an optional supplement. Your primary retirement benefit will be a pension annuity, to which you may contribute up to 8% of pay.
If you so choose, you may also contribute part of your pay toward the TSP as well. Your TSP account won’t come with an agency match. It will be established by your agency after you have made your contribution election.
If your hire date was January 1, 1984 or later, you fall under FERS. Those hired after July 31, 2010, are automatically enrolled in the TSP. Unless you modify or halt your contributions, 3% of your pay is deposited into your TSP.
If you are a FERS employee hired before August 1, 2010, your TSP account receives a 1% contribution from your agency. You may also contribute another 4% for up to a 5% match based on your pay.
It’s important to note that if you are covered by CSRS, or you are a member of the uniformed services, the TSP becomes a supplemental benefit to your CSRS annuity or military retired pay.
What about Those Who Leave for Private-Sector Jobs?
Certain conditions may apply if you were part of CSRS at one point, then took a job in the private sector, and later came back to work for the U.S. government. Depending on your situation, your federal rehire may qualify you for enrollment in FERS and, by extension, the Thrift Savings Plan.
A federal employee benefits consultant can help you determine which system you belong to, if you are unsure based on your employment history.
What About Members of the Military?
Starting in 2018, the Blended Retirement System was implemented to offer more retirement benefit versatility. Beforehand, you had to remain in the military for at least 20 years to receive a pension. Now, you can choose a pension, a TSP account, or both if you want.
The best option for you will depend on your years of service. Consider consulting with a federal benefits-knowledgeable financial professional to explore your options. However, anyone entering the military now is automatically enrolled into the Blended Retirement System. That means their benefits will include a TSP and an annuity (if your period of service is 20 years or longer), albeit a reduced one.
As for the TSP, 1% of your base pay is automatically put toward your account. You may also put away another 4% for up to a 5% total match.
Distribution Options from the Thrift Savings Plan
So, we have covered quite a bit of ground on contributions and savings options with the TSP. What about the backend, when you are retired? What sort of choices do you have with the “distribution” of your TSP assets?
Even if you are a long-time contributor, you may not realize you have choices on how your assets are invested and distributed. In retirement, the balance you have built up in your Thrift Savings Plan will likely be some of your income.
Current Distribution Options Hold, But Changes Coming in 2019
But before you begin to withdraw money from your account, you need to know the TSP rules and regulations. Understanding them will help you avoid actions that can affect your options for accessing your money in the future.
Legislation passed back in November 2017 is slowly changing the flexibility of your distribution options for you and other federal employees. New rules will, among other things, permit more withdrawals in retirement by federal employees. However, these new rules of withdrawal won’t be fully effective until November 2019. In the meantime, current rules hold.
After you leave federal service, or after you turn 59.5 years old, your TSP gives you two withdrawal options for your money: a partial withdrawal or a full withdrawal. Not only that, two age milestones matter for how they apply in the TSP withdrawal rules: age 59.5 and age 70.5. Let’s go over your withdrawal options in more detail.
The Basics of Partial Withdrawals
The TSP permits only one partial withdrawal. Thereafter, you must leave your remaining money in your account for a later date. Reasons for taking a partial withdrawal may include high-cost “one-time” expenses: a roof replacement or a costly appliance purchase, for example.
You must meet these requirements to qualify for making a partial withdrawal:
- A prior partial withdrawal can’t have been made. Nor can you have one pending.
- You can’t have made an age-based, in-service withdrawal while in federal civilian or military employment.
- Your request must be for a minimum of $1,000 or more.
In-service withdrawals are subject to several rules. Among married FERS employees and uniformed services members, a spouse must give their consent to the in-service withdrawal.
By contrast, married CSRS employees’ spouses need only to receive notice of the in-service withdrawal. Learn more about TSP account in-service withdrawals and their particulars by visiting here.
The Basics of Full Withdrawals
When you have chosen to take all money from your account — a lump sum withdrawal — you have a number of income options or “government distribution options.” You can choose to:
- take a full lump-sum
- receive monthly payments over time
- buy an annuity that will give you lifetime payments
- combine any of these income options
Because the income tax implications can be substantial, it’s prudent to consider alternatives to cashing in your entire balance.
With a “systematic withdrawal,” you receive monthly payments over a period of time. You may receive a specific monthly amount. Or you can base the monthly amount on your life expectancy, which would be determined with actuarial tables from the IRS.
The TSP will adjust how much you receive monthly according to your life expectancy. Both options will begin drawing down your TSP account balance until depletion. Keep in mind that systematic withdrawals may offer only limited flexibility.
Basics of a Life Annuity, the Third Option
As a third option, you can take part or all of your TSP account balance as a life annuity, giving you monthly benefits for the rest of your life. You must purchase an annuity priced at a minimum of $3,500.
You get to choose your annuity amount over $3,500 because, as mentioned above, you have the freedom to combine income options. You may not want to put all your funds into the TSP life annuity, which your plan purchases from MetLife, the plan provider. Depending on the annuitization option you choose, the insurer may keep your balance once you pass away. But beware, this could cost your beneficiaries thousands if chosen incorrectly!!
This reinforces the importance of investigating and evaluating your options.
Consult a Federal-Benefits Consultant
Because the TSP is multi-faceted and offers you many options, you should reach out to one of our Chartered Federal Employee Benefits Consultants who are designated experts in federal employee retirement strategies. To request your free Consultations with one for a Chartered Federal Employee Benefits Consultants of your unique account, retirement goals, and ideal options to help you maximize the potential of your TSP account.
If you are looking for guidance, request your free consultant with a financial professionals at My Federal Retirement Help today.
Follow us on Social Media:
You made some decent points there. I looked on the internet for the issue and found most individuals will go along with with your website.