The Thrift Savings Plan (TSP) is a beneficial investment program for federal employees. It allows you to save and grow your funds to secure your retirement income in the long run. 

Understanding the basics of TSP empowers federal employees to create accurate financial strategies to meet their retirement objectives. 

TSP is the biggest contribution plan in the US. The Federal Retirement Thrift Investment Board regulates more than $845 billion in TSP assets. 

At present, there are more than 7 million TSP participants in the United States. The program only allows federal service and uniformed service members to make contributions.

This plan is similar to a 401(k) in the private sector. The low administration costs and high retirement returns make TSP one of federal employees’ most attractive investment options. 

We will cover all portions of the Thrift Savings Plan to help beginners and existing applicants manage their investment portfolios better.

The US Congress introduced the Thrift Savings Plan in the Federal Employees Retirement System Act of 1986. The plan offers similar tax and pension benefits to federal employees compared to the 403(b) and 401(k) plans for non-profit and corporate organizations. It helps federal employees automatically contribute to their TSP account and save for the future. Additionally, employees get a matching contribution from the government in their TSP account based on the funds invested in a financial year. 

The primary objective of the Thrift Savings Plan is to help federal service members save money for their retirement tax-efficiently. Prominent TSP features are – 

• Retirement Savings—Investing in TSP secures a source of retirement income for federal employees and enhances supplementary retirement plans such as Social Security and Federal Employees Health Benefits. 
• Tax-Friendly Contributions—A 22% tax is deducted from the Traditional TSP account at withdrawal time. In contrast, the same amount of tax is deducted from the contribution amount each month in a ROTH TSP account. 
• Low Administration Fees—Federal employees who have joined services in 1987 or later are automatically enlisted in the TSP program based on FERS guidelines. The account management fee is negligible, and participants can consistently contribute to their savings accounts until retirement and beyond. 
• Flexibility of Fund Transfer—Federal employees also have the TSP account rollover facility. This means they can switch their TSP account to a non-government retirement account such as the 401(k) or the 403(b). The rollover method, direct or indirect, determines the type of tax exemptions in the fund transfer process.  
• Matching Contributions from the Government—The US federal government makes a 5 percent matching contribution equal to the employees’ investment amount. For example, if you contribute $1,000 to your TSP account, the government will add $1,000 to the account. 
• Diverse Investment Options—The Thrift Savings Plan offers diverse investment funds, helping employees distribute their contributions into different types of funds to maximize income. 

TSP is an exclusive retirement investment program due to its concentrated participant base, government-matching contributions, and simple investment options.

Participants of the Thrift Savings Plan can contribute a portion of their basic pay monthly to the TSP account. The amount is automatically deducted from the employee’s salary and invested in their preferred TSP investment funds. 

The Internal Revenue Service (IRS) department regulates the rules related to TSP accounts. The IRS sets the contribution limits and forwards 1 percent of an employee’s basic pay into the TSP account. Additionally, the IRS is responsible for matching the contributions into the Thrift Savings Plan account from the government’s side. Furthermore, the IRS also sets the tax deductions and benefits for the TSP account. 

Types of TSP Accounts

Let us understand the rules and regulations for the two types of TSP accounts. 

Traditional TSP – There are tax deductions on the amount contributed to the traditional TSP account. This means that there are no taxes at the time of withdrawal. However, the state and federal governments will impose an income tax from the TSP amount for the withdrawal year. Additionally, a 10 percent penalty from the withdrawal amount is deducted if the federal employee takes money from the account before the age of 59 and a half years. 

ROTH TSP – ROTH TSP contributions are not subject to tax deductions. This means that tax is not levied on the contributed amount. However, federal employees need to clear their taxes when withdrawing. Furthermore, ROTH TSP contributions and earnings become tax-free if the federal employee has reached 59 and a half years or in case of financial hardships. 

Contribution Limit for the Thrift Savings Plan

The contribution limit for traditional and ROTH thrift savings plan accounts is $23,000/year collectively. A federal employee with both TSP accounts can contribute up to $23,000. So, if the employee contributed $11,000 to the traditional TSP account, they can add up to $12,000 to the ROTH TSP account for that financial year. Furthermore, 50-years or older federal employees can make a catch-up contribution to the TSP account. The additional contribution limit is $7,500/year. 

Thrift Savings Plan Age Limit

The age limit for withdrawal from the TSP account is 59 and a half years. So, all federal employees who have reached this allotted age can withdraw from the Thrift Savings Plan account regardless of active service or retirement. Four withdrawals are allowed from the TSP account in a financial year if the service member is still active and has reached the defined age limit. 

Federal employees who are 59 and a half years old can make penalty-free withdrawals from their TSP accounts.  

The federal government can withhold 20 percent of the federal employee’s withdrawal from the traditional TSP account. This amount is held back as income tax. It is possible to avoid this tax deferral if the TSP account is rolled over into a non-government retirement account. 

Understand the guidelines for TSP participation – 

• Federal employees who joined services after January 1, 1984, are automatically enrolled in the Thrift Savings Plan under the Federal Employees Retirement System (FERS). 
• Federal employees who joined services before January 1, 1984, are enrolled in the Civil Service Retirement System (CSRS) without a matching contribution option from the federal government. 
• Uniformed service members on active duty in the US military, Coast Guard, space programs, marines, and Navy are also eligible to invest in TSP. 
• Members of the US Congress can enrol in the TSP program. 
• Non-appropriated employees regulated by the Department of Defense can actively participate in Thrift Savings Plan. 

We are here to guide you through the thrift savings plan fund performances for the different types of TSP investment fund options to diversify and maximize your retirement savings. The options include – 

Thrift Savings Plan C Fund

The common stock index investment fund helps federal employees invest in profit-sharing for S&P 500 companies with high return risks. These are considered the largest companies with high-profit chances in the United States. 

Thrift Savings Plan I Fund

The international investment stock fund enables federal service members to invest in stocks of non-US companies. This type of investment fund has high risks of return and high chances of profit. 

Thrift Savings Plan F Fund

Federal employees can invest in the US bond market through this fixed-income investment fund. Employees can explore different bond options, such as government bonds, corporate bonds, and mortgage securities. This fund offers higher returns than the G fund. 

Thrift Savings Plan L Fund

This is an age-based investment fund option for federal employees. The Lifecycle is a cumulative fund that includes the benefits and facilities of all other five types of funds. It helps balance money growth as retirement approaches, reducing the risks of the return. 

Thrift Savings Plan G Fund

This is a government growth security investment fund regulated by the US Treasury Department. It is an ideal source of stable income after retirement and has moderate to low risks. Additionally, people who wish to draw loans from their TSP accounts must adhere to the Thrift Savings Plan G Fund rates of return, which are considered the interest rate for loan repayment. 

Thrift Savings Plan S Fund

The small-cap index investment fund allows investors to contribute money to the stock market for small- to medium-sized businesses in the US. This type of fund offers high growth opportunities and volatility. 

Each investment fund has a different objective but helps federal employees in their overall venture to secure a retirement income. 

The C, S, and I funds provide the best investment options within the Thrift Savings Plan. However, the L and F funds are equally beneficial in providing a sure and steady income. An ideal investment strategy for the TSP funds includes 80% in the C and 10% each in the S and I funds. The market risks are higher in this type of investment fund, and so is the rate of interest. This increases the chances of higher returns in the long term. 

Participants of the Thrift Savings Plan can get two types of loans from their TSP accounts in special situations. These loans are – 

General Purpose Loan

Federal employees can request this type of loan from their TSP accounts for any requirement without any documentation. The general purpose loan must be repaid within 60 months or 5 years of application. Before the loan is disbursed, a one-time processing fee of $50 will be deducted. 

Primary Residence Loan

A type of loan given to federal employees from the TSP account to help purchase or construct real estate. A one-time processing fee of $100 is levied on the primary residence loan. It is mandatory to submit appropriate documentation to acquire this type of loan. Furthermore, this loan cannot be used to repair an old house. The loan amount needs to be repaid within 15 years or 180 months. 

Terms and Conditions to Get TSP Loans

Let us navigate the rules and regulations to get loans from the TSP account – 

• The TSP account holder should not be an existing loan defaulter. 
• The federal employee has a minimum of $1,000 in their Thrift Savings Plan account (Traditional and ROTH inclusive). 
• The employee is in active federal services. 
• Primary residence loans cannot be used to repay existing mortgages, renovate properties, or purchase lands. 
• TSP loan repayment is paid through automatic payroll deductions that begin 60 days from the loan disbursement. 
• Federal employees can repay extra TSP loans twice a month through personal checks or money orders. 
• The loan repayment frequency is once or twice a month based on the salary disbursement rules from the employer. 
• The loans from the TSP account must be repaid within 5-15 years, depending on the type of loan requested. 
• The rates of return from the TSP G fund at the time of loan request are considered the fixed interest rate for the entire lifespan of both loan types. 
• The TSP account balance starts to increase once the loan repayment procedure starts. 
• Failure to repay loans makes the federal employee a tax defaulter, and severe tax penalties are levied unless the loan amount is fully repaid and the default status is cleared. 
• Additional or manual loan repayments help federal employees reduce the interest rate for the loan term. 

This section will discuss the opportunities for federal service members to withdraw their TSP funds before, during, or post-retirement. So, what are the options? 

Thrift Savings Plan Distribution Options

TSP distribution allows federal employees to withdraw their funds using different methods. Take an in-depth look into different withdrawal options for your TSP account – 

Partial Withdrawal

Federal employees who have reached the age of 59 and a half and are still actively serving the federal government can withdraw a partial amount from their TSP account four times in a financial year. However, each partial withdrawal has to be a minimum of $1,000. 

Total Distribution

In this type of withdrawal, a federal employee can draw the entire savings from their Thrift Savings Plan account. Therefore, the account is dissolved, and the participant cannot make further contributions once the total distribution process is completed, leaving the account with zero balance. 

Annuity Purchase

TSP participants can buy lifetime annuities from third-party vendors in exchange for their thrift savings plan funds. In this type of distribution, purchasing an annuity worth $3,500 is mandatory. TSP account holders will have to give up control of the account once an annuity is purchased because this is an irreversible process. Annuities are handed out to federal employees every month based on the exchanged amount from the TSP funds. 

Installments

TSP installments are a popular option for federal employees. They allow them to receive monthly, quarterly, or annual payments in replacement for their TSP funds without giving up complete control of the Thrift Savings Plan account. This enables participants to continue with their TSP investments. 

Required Minimum Distributions (RMDS)

All federal employees with an active TSP account must take the RMDs once they reach the age of 73. The RMD age was increased from 72 to 73 in 2023. Failing to take the RMDs will result in additional penalties and taxes. The IRS will levy a shortfall excise tax of 50 percent in such cases. 

Rollover TSP to ROTH or Traditional IRA

Federal employees can avoid the 20 percent income tax withholding from their traditional TSP account if they select to roll it over into an eligible traditional IRA. However, taxes will be deducted once the rollover is complete and the account holder wants to withdraw money from this type of account. Additionally, rolling over a ROTH TSP to a ROTH IRA provides tax-deferred benefits for contributions and withdrawals. 

Additional TSP Withdrawal Rules

The federal employee’s age, medical condition, and employment status determine the TSP account withdrawal rules. The conditions are as follows – 

• Federal employees who have retired or changed federal employment can withdraw money from the TSP accounts. 
• TSP participants can make total or partial withdrawals from their accounts provided they have ended federal employment or switched from the federal to the corporate sector. 
• Federal employees facing emergencies due to financial hardships can withdraw from their TSP account without any penalties. 
• Submission of medical, disability, or death-related documents is essential to make a financial hardship withdrawal from the TSP account.
• Permanently disabled federal employees are eligible for penalty-free TSP withdrawals in case of injuries during active service term. Proper documentation to support the disability condition is mandatory for this type of withdrawal. 
• Thrift Savings Plan account beneficiaries can withdraw if the account holder has passed away. 
• Beneficiaries will receive a partial or total distribution from the TSP account according to the terms the deceased account holder selected. 

Rollover is the process of transferring a retirement account into another type of retirement account. This means the funds from one retirement account are rolled over into another if the employee is switching jobs. It is not mandatory to rollover a retirement account only at the time of separation from employment. There are no hard and fast rules for rolling over a retirement account; it is completely the employee’s discretion when and which account they want to roll over. Some of the common retirement investment accounts include TSP for federal employees, 401k for corporate employees, and the IRA for individual assistance. 

Let us explore the different types of rollover strategies further. 

Types of Rollover

TSP rollover is only eligible for federal employees with an active TSP account who are ending their federal services or switching from federal services to other types of employment. The rollover options are – 

Transfer or Direct Rollover

This type of fund transfer occurs between broker to broker or bank account to bank account. Direct rollovers are applicable for the following types of situations –

• Traditional 401k Rollover to Traditional IRA 
• Traditional TSP Rollover to Traditional IRA 
• ROTH TSP to ROTH IRA 
• Traditional IRA to Traditional TSP 
• ROTH 401k to ROTH IRA 
• ROTH TSP to ROTH 401k 
• ROTH IRA to ROTH TSP 
• Traditional TSP to Traditional 401k 
• Traditional 401k to Traditional TSP 

Indirect Rollover

Indirect rollovers are the process where the funds from a retirement account are handed over to the account holder instead of being submitted into another type of retirement account. In this type of conversion, it is essential to complete the indirect retirement account rollover process manually within 60 days. Failing to follow the guidelines can impose a 20% income tax withholding for the account conversion. 

Best Reasons to Rollover A TSP Account

Check out the benefits of a Thrift Savings Plan account rollover – 

Dynamic Investment Options

Participants can access a wide range of investment funds for an IRA compared to the limited funds in the Thrift Savings Plan. 

Improved Control and Adaptability

Rolling over TSP into an IRA provides rebalancing options and flexible withdrawal choices compared to the strict withdrawal rules for TSP accounts. 

No RMD Obligations

Employees don’t need to take RMDs from their ROTH IRA accounts compared to the RMD rules for the TSP account. A TSP participant is required to get RMDs when they reach the age of 73 years or pay hefty excise taxes in case of failure. Additionally, the money in the ROTH IRA account grows free from tax deductions. 

Account Simplification

Rolling over your TSP account into an IRA mitigates the complexities of managing multiple TSP funds. Account management significantly improves with easier fund performance tracking, asset allocation, reduced paperwork, and tax reporting. Additionally, unlike various restrictions in the TSP account, IRAs have simple withdrawal and loan options. 

Improved Beneficiary Assistance

IRAs offer account holders flexible beneficiary plans and estate planning options compared to TSP. 

Competitive Administration Fees

The administration and account management fees for IRAs are lower than those for TSP accounts. Moreover, IRAs offer additional services to justify the costs. 

The federal employee’s age, type of TSP contributions, and withdrawal purpose significantly impact the tax considerations for Thrift Savings Plan distributions. The tax consequences are – 

• Traditional TSP account contributions are subject to tax deductions. 
• Traditional TSP accounts are free from income tax deductions at withdrawal time. 
• A 10 percent penalty is applicable on early TSP withdrawal before the age of 59 and a half years. 
• ROTH TSP account contributions do not apply taxes. 
• The ROTH TSP account contributions and withdrawals become tax-free if the federal employee has reached the age threshold. 
• No taxes are levied if the withdrawal reason is death, disability, or financial hardship. 
• Failure to meet distribution rules will apply withdrawal penalties and deduct additional taxes on earnings. 
• The federal government charges income tax on the TSP account RMDs during disbursement in that financial year. 
• Direct rollovers from the TSP retirement account into other eligible retirement accounts and vice versa help to avoid tax withholding on earnings and contributions. 
• Once the rollover process is complete and the funds are transferred from one account to another, taxes are deducted at withdrawal time. 
• Federal employees must complete the indirect rollover of retirement accounts within 60 days to avoid taxes and penalties. 

PSR Assurance has a team of expert financial advisors who help federal employees select appropriate investment funds, manage retirement portfolios, and provide financial consultation to meet their long-term goals. 

Our retirement consultants can update federal employee’s personal information on the TSP government website. Additionally, we explain the benefits of appointing a beneficiary for the Thrift Savings Plan account. 

Explore our specialized assistance to maximize federal retirement benefits. Check out the ways how we can help you – 

• Flexible and profitable TSP contribution plans 
• Retirement goal-oriented financial consulting 
• Navigate through the withdrawal options and penalties 
• Smart allocation of TSP funds 
• Strategize to maximize investment returns upon retirement 
• Add beneficiaries to TSP accounts 
• Offers education resources and guidance related to investment guidelines 
• Coordinate with federal employers on behalf of the employee 
• Promotes best practices to reduce taxable retirement income 

Connect with us today and secure your financial future with reliable Thrift Savings Plan investment assistance.