Thrift Saving Plan TSP

Thrift Savings Plan explained

A thrift savings plan TSP is a tax-deferred plan available to federal and uniformed services workers which includes the Ready Reserve.

They came about via the Federal Employees’ Retirement System Act of 1986

Thrift Savings Plan are defined-contribution plans with similar benefits as a 401k plan

Thrift Savings Plan eligibility

It’s available to;

• Federal workers under the Federal Employees Retirement System (FERS)
• Federal employees under the Civil Service Retirement System (CSRS)
• Members of the uniformed services
• Civilians under specific positions like Justices and Judges

Benefits of Thrift Savings Plan

This includes;

• Deductions are automatic(payroll)
• Investment options are diverse and include niche lifecycle funds
• It allows both traditional (pre-tax) and Roth (after-tax) savings (subject to IRS limits)
• Very low running expenses
• Agency/service contributions(employees under FERS or uniformed services under BRS
• In-service access of funds(established for your spouse in the event of your death)
• Diverse withdrawal options

Who manages Thrift Savings Plan

Federal Retirement Thrift Investment Board manages the TSP.

The Federal Retirement Thrift Investment Board is led by a five-member Board appointed by the president. The board then appoints Executive Director.

The Boards mandate includes;

• Hold plan assets in trust for TSP account holders.
• Record keeping
• Handle Day to day maintenance of TSP accounts
• Handle participant’s TSP-related problems or quarries

Thrift Savings Plan matching

Thrift Savings Plan government match

Account-holders under FERS or eligible BRS do qualify for the following deposits (by the government) into their TSP account;

·         Agency/Service Automatic Contribution(effective first pay-except BRS workers who joined service on or after January 1, 2018, which is 60 days.) and

·         Up to 4% of Agency/Service Match to your own TSP savings.

The table below summarizes how contributions match up.

Source: Office of Financial Readiness

Matches have no impact on income tax or Social Security.

Savings to a TSP is by choice. However, contributions are subject to “vesting.”

Thrift Savings Plan vesting

TSPs vesting is as follows;

• Own contributions

Always vested in own savings and earnings

• Agency/Service Matching Contributions

Vesting is immediate on matches from the federal government. Matching is only available to savers of the plan

• Agency/Service Contributions and their earnings of one percent(whether a contributor or not)

Vesting only occurs as per below;

Source: TSP Website

Please note;

• Vesting occurs in all categories should you die in service.
• Years in Civilian service don’t count towards vesting in a uniformed services (BRS) account and the reverse applies.
• If already completed the prescribed duration of service before the election, vesting is immediate in your entire account.
• The date of vesting is determined by the TSP Service Computation Date (TSP-SCD) which is the date that marks the beginning of a participant’s Federal service or the date the agency/service reports to the TSP. Both dates will never be earlier than January 1, 1984.
• Vesting doesn’t occur if you leave service before the vesting requirement. In this case, you forfeit the Agency/Service Automatic Contributions and their earnings
• Once 100% vested, the TSP account becomes portable.

·         CSRS and non-BRS account holders do not qualify for matching contributions.

Thrift Savings Plan contributions

Thrift savings plan maximum contribution

Contributors can save up to 100% of basic pay.

Uniformed members can include incentive pay, special pay, or bonus pay is considered part of basic pay as long as you have elected to contribute at least 1% of basic pay.

TSP deferral limit is as below;

Source: tsp.gov

Please note;

• The elective deferral limit is a combination of Pre-tax and your Roth contributions.
• The elective deferral limit is not applicable to the traditional contributions made from tax-exempt income earned in a combat zone
• Uniformed services members contributing to both uniformed services and a civilian TSP account as a FERS employee have their elective deferral limit as the total of pre-tax traditional employee and Roth contributions made in that calendar year.
• Elective deferrals are not inclusive of the one percent Agency/Service Automatic or Agency/Service Matching Contributions.

 Thrift Savings Plan catch up

This is available to account holders who turn 50 or older. Eligibility means you can save even more toward the IRC catch-up limit (IRC section 414(v)).

Source: tsp.gov

Catch up supplemental to;

• Employees’ elective deferral limit on pre-tax, after-tax, and tax-exempt contributions(IRC 415(c))
• Agency/Service Automatic one percent Contributions, and
• Agency/Service Matching Contributions

You cannot make catch-up from incentive pay, special pay, or bonus pay.

Tax-exempt pay earned when in combat ones can only fund Roth contributions toward the catch-up.

Withdrawal from Thrift Savings Plan

A participant who has separated from Government service can elect to withdraw all or a part of the entire balance of their TSP account balance using one or a combination of the withdrawal methods available.

Thrift Savings Plan withdrawal rules| Thrift savings plan distribution rules

Thrift savings plan in service withdrawal

Two types of in-service access are available for TSP account holders:

Financial hardship

This will be considered only if you can certify, under penalty of perjury, that you are undergoing financial hardship as a result of repeat negative cash flow due to;

·         Legal expenses for separation or divorce,

·         Medical expenses, or

·         Personal casualty loss.

You will access your savings and any earnings accrued. You can request $1,000 or more; however, amounts requested cannot be in excess of your certified financial hardship.

Age-based (59½” in-service withdrawal)

This can be made any time after you reach age 59½, and as long as you are still in employment. You can access part or full vested account balance. The participant can access $1,000 or more, or the entire account balance, traditional balance, or Roth balance (less than $1,000 is allowed).

You are allowed to make only 4 age-based in-service access per calendar year.

Please note that federal taxes (and state income taxes may) apply on the taxable amounts accessed, including the 10% early withdrawal penalty tax.

Spousal consent is needed for FERS or uniformed services workers for any in-service withdrawal. For CSRS workers, spouses must be notified before the in-service withdrawal is made. These rules are still applicable even if you are separated from your spouse.

Post-Employment withdrawal

Below are the Eligibility and general rules for a post-employment TSP withdrawal.

• Only eligible after the contributor has separated from service
• Post-employment withdrawal cannot be effected unless TSP loans are paid back in full or the loan is declared a taxable distribution. However, a TSP loan doesn’t affect eligibility for an in-service withdrawal.
• If separated from service and then later reemployed before the 31st full calendar day after separation you are not eligible for withdrawal from the TSP account.
• If a participant is reemployed in a TSP-eligible position more than 31 full calendar days after separation and has already made a withdrawal while separated, will not be eligible to make further access until they leave service again.
• Account holders can request to be paid back a portion of a single or installment payment that is not moved to the TSP account back to their personal account.
• If the saver participates both in the civilian TSP account and a uniformed services TSP account, withdrawal rules apply to each account separately, and separate withdrawal requests must be made for each account.
• Access can be from the traditional balance only, Roth balance only, or in pro-rata. Distributions from the traditional balance will be prorated between the pre-tax balance and any tax-exempt balance. Any distribution from the Roth balance will be prorated between savings in the Roth balance and Roth earnings balance(whichever is best for your tax situation). Take note, All prorated amounts are based on balances in each TSP Fund or source of contributions on the day the request is submitted

Thrift savings plan withdrawal options

Three different options are available when pulling out funds from your TSP. You are at liberty to use them in whatever combination that works for you.

• TSP Installment Payments

This can be paid out in timely installments (based on life expectancy) which can be monthly, quarterly, or annual basis. Idea is to spread the whole balance over your retirement (though there is no guarantee this will be achieved). The installments can be changed anytime or even stopped completely.

• Single Withdrawals

This is when the one-time distribution is requested. However, a minimum of $1,000 is required and can only be requested every 30 days. You can even access the entire account balance.

• Annuity

With this option, the balance is moved to an annuity provider (Metlife). The annuity provider guarantees a fixed income for a certain period. You can request payment for the rest of your life (based on life expectancy).

Please note that this option is neither flexible nor reversible you can’t walk back on your decision

Thrift savings plan rollover

Assets can be moved into a TSP—and vice versa.

Rollovers can be;

• Pre-tax funds from traditional IRAs, SIMPLE IRAs, and eligible employer plans into traditional TSA.
•  Qualified and nonqualified Roth distributions from Roth 401(k)s, Roth 403(b)s, and Roth 457(b)s into your Roth TSA account.

Installment payments that are based on life expectancy or expected to last 10 years or more cannot be rolled into a TSA nor can you roll in-service financial hardship withdrawals.

Funds can move into a TSA as:

• Transfer or Direct rollover.

You issue directions to your IRA or plan to send all or part of the money directly to the TSP.

• Rollover.

This is when funds are sent directly to you(less withholding taxes) by the IRA or plan and then you deposit them into the TSP yourself (usually within 60 days from the date you receive the funds).

Should you desire to roll over the entire amount of the distribution, you will need to top up an equal amount to the withholding earlier deducted by the IRA or plan. Any amounts not rolled are subject to federal income tax.

Take note that TSAs only accept rollovers from “eligible rollover distribution” (Roth rollovers) not accepted.

Also, take note that the money you move into the TSP does not count toward the IRC contribution limits.

Lastly, the traditional portion of a uniformed services TSP account with a tax-exempt balance, cannot be moved into a civilian TSP account. This means that a uniformed services account needs to be maintained to hold this tax-exempt money until withdrawn. The same doesn’t apply to the Roth balance

Thrift savings plan RMD

IRS-required minimum distribution (RMD) rules apply once an account holder reaches the age of 72 and is separated from federal service.

RMDs rules require that an account holder must receive a certain portion of your account each year based on life expectancy.

The following IRS Life Expectancy Tables are be used to calculate RMD payments;

• IRS Single Life Table is used for workers who have not yet turned 72 years old by the end of the calendar year in which the calculation is made.
• Uniform Lifetime Table is used for workers who turn age 72 before the end of that year.

Thrift savings plan early withdrawal |Thrift savings plan withdrawal penalty

Access before the age of 59½ may attract a 10% early withdrawal penalty tax on any taxable portion not moved or rolled over.

This penalty tax is in excess of the federal and state taxes that you may owe. Exceptions to early access penalty include;

• Access for medical expenses that exceed 10 percent of your adjusted gross income and are not reimbursed by health insurance.
• Meeting Costs for military reservists called to active duty.
• Distributions made after leaving current employer after age 55.

 Thrift Savings Plan designation of beneficiary

This is the participant’s formal indication of who will inherit their TSA funds in the unfortunate event of death(use Form TSP-3).

Remember TSAs do not use wills in determining a beneficiary.

Thrift Savings Plan beneficiary rules

TSP-3 form guides the distribution of funds left by a deceased member.

If  the participant did not sign a TSP3 form at the time of death, distribution to his survivors will be in the order below;

• Widow or widower.
• A child or children and descendants of deceased children by representation.
• The retiree’s parents or the surviving parent.
• Executor or administrator of the retiree’s estate.
• Any other of the retiree’s next of kin.

If a member purchases an annuity and happens to pass on before the first payment, the funds will revert back to the TSP.

Thrift Savings Plan divorce

Retirement Benefits Court Order (RBCO) can issue orders to divide your TSP account to your current or former spouse, or your dependents during divorce, annulment, and separation proceedings.

TSPs are exempt from the Qualified Domestic Relations Orders (QDROs) which apply in the private sector.

A court can freeze an account through an RBCO. However, a freeze will not affect savings or change contribution allocation or investment choices, and payments on existing loans will continue as usual.

Thrift savings plan taxes

Two tax treatments are available for your contributions:

• Traditional (pre-tax)

Account-holders have a choice of making pre-tax savings into the traditional TSP, hence funds flowing into the account are not taxed until accessed(Eligibility is pegged on adjusted gross income (AGI) and filing status)

• Roth (after-tax)

Qualified access is tax-free. Earnings are considered “qualified” as long as the following is met: 

1. Has been 5 years since January 1 of the calendar year the participant made the first Roth TSP contribution
2. The participant is at least age 59½, and permanently disabled (or deceased).

When you withdraw your money from the TSP, you will owe taxes on any traditional savings (except Roth TSP) and the earnings they have accrued.

Depending on the type of access, you can continue to defer the taxes by moving or rolling over your TSP payment to a traditional IRA or an eligible employer plan.

IRS allows the transfer or rollover of your traditional funds to a Roth IRA. 

Please remember that taxes are applicable on the full amount in the year of the transfer.

If your earnings are not qualified, you can defer paying taxes on them in many cases by moving your payment to a Roth IRA or Roth account run by an eligible employer plan.

Thrift savings plan 1099

Form 1099 is a series of IRS informational returns. There are different 1099 forms for reporting various types of payments received and taxes withheld in that year.

Bottom line

Limit larger TSP savings towards late in the year. This ensures you don’t reach the elective deferral limit way too early and miss out on the valuable Agency/ Service Match.

BRS and FERS members in nonpaid status returning to civilian jobs need to prioritize traditional TSP over Roth TSP savings. This ensures that they don’t miss out on Agency/Service Matches.