7 million US federal employees are participating in the thrift savings plan. It is the biggest investment plan in the country with more than $845 billion in assets. 

Only federal and uniform service members are eligible to participate in this program. 

The TSP is a popular program due to the low administration fees and high returns after retirement. 

Let us identify the drawbacks of the thrift savings plan account in this blog. It will provide better insights into different funds for investment. Also, you will have a comprehensive idea related to account rollover. 

The thrift savings plan was introduced in 1986. It is an additional contribution plan within the Federal Employees Retirement System. 

Employees who are enrolled in federal services after January 1, 1984, become automatic TSP participants. However, Civil Service Retirement System employees need to make manual contributions to the TSP account. 

Usually, the federal employer deducts an employee’s TSP contributions from their salary. 

The purpose of the TSP is to help federal service members save money and grow their funds for the future. Essential features are – 

• Retirement savings – The TSP is a supplementary plan within the FERS. It helps federal employees to grow their source of retirement income. It is an additional source of revenue apart from the fixed Social Security and Basic Benefits plans. 
• Tax benefits – Taxes are deducted in a traditional TSP account at the time of contribution. This enables the funds to grow without tax implications. Moreover, it allows tax-free withdrawals during TSP distribution. 
• Matching contributions from the government – The federal government makes a 5 percent contribution to the TSP account. The participant’s contribution to the TSP account determines the government’s matching amount.  
• Diverse funds for investments – TSP offers different funds for investment. These include the C, G, I, S, F, and L funds. Each fund has a different rate of interest and serves different purposes. 

TSP Account Options

Federal employees can invest in 2 types of investment accounts. These include – 

• Traditional Thrift Savings Plan – Taxes are deducted during contributions into this account. A 10 percent penalty is charged from the withdrawal amount if the employee tries to withdraw before the age of 59 and a half years. There are no tax deductions at the time of withdrawal. 
• ROTH Thrift Savings Plan – There are no tax implications if the employee has crossed 59 and a half years. This means withdrawal from ROTH TSP accounts becomes tax-free. 

Thrift Savings Plan Contribution Limits

A thrift savings plan participant can invest up to $23,000 every year. This is inclusive of both types of accounts. For example, if an employee has contributed $10,000 to their traditional TSP account, they can add up to $13,000 to the ROTH account in that year. Additionally, federal employees who are 50 years or older and actively serving in the federal government can make additional contributions up to $7,500 in a year. Furthermore, a TSP account holder cannot exceed $69,000 in contributions in a calendar year. 

Thrift Savings Plan Withdrawal Options

Let us explore the distribution rules and withdrawal penalty for the thrift savings plan – 

• Partial Distribution – Federal employees above the age of 59 and a half years and serving in the government can make partial withdrawals. Participants must withdraw a minimum of $1,000 from TSP partial distributions. 
• Total Distribution – This plan allows federal employees to withdraw the entire funds in their TSP accounts. No further contributions can be made to the account once the funds are withdrawn. 
• Annuity Purchase – Federal employees can buy annuities by exchanging their TSP funds. It is essential to buy an annuity worth $3,500. An annuity purchase is an irreversible process. Additionally, TSP participants no longer have control of their TSP accounts. Purchasing annuities ensures a lifetime of monthly income. 
• Installments – TSP installments are a popular investment option. It helps employees to purchase annuities without dissolving their TSP accounts.  
• Required Minimum Distributions (RMDs) – 73-year-old federal employees are needed to take RMDs from the TSP account. 50 percent excise tax is deducted in case the employee fails to take their RMDs. 

Thrift Savings Plan Fund Options

TSP investment fund options include – 

• C Fund – Investing in the S&P 500 common US stocks. 
• I Fund – International stock investments. Non-US company-based stocks with high risks and high returns. 
• F Fund – Fixed income investment options into government and corporate bonds. 
• G Fund – Government securities investments. The fund has low risks and ensures stable income. Moreover, the thrift savings plan G fund rates of returns are used to calculate the rate of interest for TSP loan repayment. 
• S Fund – Small company stock investments. High returns in this type of fund. 

TSP Age Limit

The age limit for withdrawing from the thrift savings plan account is 59 and a half years. 

A heavy penalty is charged if the employee withdraws from the TSP account before the age threshold.  

Thrift Savings Plan Rollover Options

Rollover is the fund transfer from one retirement account into another. The process is common for employees who are switching jobs or separating from federal employment. 

2 types of TSP account rollover are possible. These are direct and indirect methods. 

Common types of direct transfer include – 

• Traditional TSP Rollover to Traditional Individual Retirement Account 
• Traditional IRA to Traditional TSP 
• Traditional TSP to Traditional 401k 
• Traditional 401k Rollover to Traditional IRA 
• Traditional 401k to Traditional TSP 
• ROTH TSP to ROTH IRA 

• No ROTH Conversion Options

The Thrift Savings Plan does not allow federal employees to roll over a traditional TSP account to a ROTH account. 

Employees cannot convert a traditional TSP into a ROTH account. ROTH TSP account funds growth without tax deductions. It is an ideal strategy for federal employees to reduce taxes and maximize retirement savings. 

Nevertheless, employees need to convert a traditional TSP account to a traditional IRA. Doing this makes them eligible for ROTH conversions. 

• Requirement of Beneficiary’s Consent

The beneficiary’s consent is mandatory to make TSP withdrawals and transfers. The beneficiary mentioned in the thrift savings plan form needs to sign for every action for the TSP account. 

Earlier, a physical signature of the beneficiary was mandatory for each withdrawal or transfer. However, TSP participants can now email to get permission.

• No Fund Preferences for TSP Distribution

There is no flexibility for selling the TSP funds. This means that federal employees cannot choose the TSP fund for distribution. 

TSP offers 5 different funds for investment. These include the G, C, I, S, and F funds. So, federal employees have to withdraw from all the funds if they invest in a diversified manner. 

Similarly, if an employee has invested only in the C and G funds, they must withdraw the money from both funds. So, the money withdrawn from the TSP funds is an accumulation of all the investment plans you participated in. It is not possible to withdraw from one fund only. 

• Mandatory Tax Withholding

The Federal Retirement Thrift Investment Board withholds 20 percent of the withdrawal amount. For example, if an employee wants to withdraw $15,000 from their TSP account, the IRS will hold back $3,000. This means the employee will get $12,000 as a result of tax implications. 

However, there are no such limitations in an IRA. Therefore, participants can make personalized withdrawal preferences from different types of funds.

NOTE: Installment is a type of TSP distribution where less than 20 percent of taxes are held back at the time of distribution. 

• No TSP Account Contribution after Retirement

TSP participants cannot contribute to the TSP account once they retire. It is essential to be employed in federal services to continue contributing to the thrift savings plan account.

A federal employee who has retired or separated from the government can keep their TSP account active. However, it is not possible to contribute to the account anymore. Moreover, the account remains active as long as there is $200 present in the TSP account.

Federal employees can make additional income by investing in the thrift savings plan. Here are the top reasons why one should participate in the TSP program – 

Diverse Investment Choices

TSP participants can invest in two types of thrift savings plan accounts. These are traditional and ROTH. Furthermore, TSP account holders get 6 types of investment fund options. The fund options include C, S, F, I, G, and L. This consolidates and strengthens your retirement portfolio. 

Tax Reduction Benefits

Federal employees get an immediate tax break if they invest in the TSP account. Participants can contribute to the traditional and ROTH accounts on a pre-tax and post-tax basis. Traditional accounts deduct taxes at the time of contribution. Therefore, the withdrawal amount becomes tax-free. Contrarily, ROTH accounts do not deduct taxes if the participant meets withdrawal eligibility criteria. 

Dynamic Withdrawal Choices

There are 5 types of withdrawal options from the TSP account provided the participant meets all eligibility criteria. For example, it is essential to withdraw a minimum of $1,000 in case of partial distribution. Similarly, one has to give up the TSP account if they purchase an annuity using the funds. Furthermore, the total distribution of the TSP funds dissolves the account. Last but not least, you can get monthly, quarterly, or annual installments from the TSP account while keeping the remaining funds intact. 

Matching Government Contributions

The federal government will contribute 5 percent of the amount invested in an employee’s TSP account during a calendar year. So, a federal employee will get $1,000 from the government if they contribute $1,000 to the TSP account.  

The TSP is an additional source of income for federal employees other than the basic benefits or pension plan. It offers higher returns compared to the stable income from pensions. 

The diversity and benefits of the thrift savings plan are manifold. However, there are limitations as well. 

At PSR Assurance, we have financial advisors to guide you through the federal employment journey. It helps to make appropriate retirement decisions and maximize your returns. 

Connect with us to explore the possibilities of growing your funds and securing your future.