Thrift Savings Plan (TSP)

Explore the eligibility criteria for federal employees and uniformed service members to participate in the Thrift Savings Plan. Here is a breakdown of the guidelines – 

Federal Employees 

• Employees hired to federal services after January 1, 1984, are automatically enrolled into the TSP program under the Federal Employees Retirement System guidelines.
• Federal employees who were hired before January 1, 1984, fall under the Civil Service Retirement System (CSRS) but do not get matching contributions from the government. 

Other Eligible Members 

• Civilian federal employees from retirement systems other than FERS may also participate in the TSP program with different benefits and contribution guidelines.
  

The retirement system coverage and specific employment status determine the eligibility for TSP participation. Typically, federal employees are eligible to contribute to the TSP funds as soon as they start service. 

Thrift Savings Plan participants can get two types of loans under special circumstances – 

1. General Purpose Loan – This enables federal employees to borrow money from the TSP account and use it for any purpose without submitting any documentation. This type of loan has to be repaid within 60 months of application. It has a $50 one-time processing fee.   
2. Primary Residence Loan – This type of loan is given from the TSP account only for the purchase or construction of real estate for residential purposes with proper document submission. Employees will get 180 months to repay the loan with interest. The one-time fee for a Primary Residence Loan from the TSP account is $100. This fee is non-refundable. 

Loan Eligibility 

• Ensure applicants are not existing TSP loan defaulters. 
• At least $1000 should be contributed to the TSP account. 
• Needs to be in a pay status and is presently employed with federal services. 
• Additional criteria for a Primary Residence Loan include documentation for construction purposes. It applies only to building houses, townhouses, and mobile homes. This type of loan cannot be used to repay existing mortgages, renovation of properties, or purchase lands. 

Payroll Deductions

Payroll deductions automatically start from the salary account within 60 days for TSP loan repayment. No tax is deducted from the loan interest. However, tax is deductible from the repayment amount of the salary. These deductions are automatic. However, employees can make extra loan payments through personal cheques or money orders twice a month. 

Repayment Frequency 

Deductions on loan repayment happen at regular intervals based on the employers’ salary disbursement frequency either once or twice a month. 

Term of Loan 

Loans from the Thrift Savings Plan funds need to be repaid within 60-180 months depending on the amount and type of loan requested. 

Rate of Loan Interest 

The rates of the Thrift Savings Plan G Fund at the time of TSP loan application are the same rate for TSP loan repayment. This rate is fixed for the loan lifespan. 

Impact on TSP Account 

The loan amount is deducted at once from the TSP account while it gradually increases once the repayment starts monthly. 

Loan Default 

Failing to repay monthly loans following the TSP loan guidelines incur severe tax penalties while the loan will get a default status unless all expenses are repaid. 

Early Repayment Options 

Federal employees can repay their TSP loans early to avoid an extra rate of interest in the long repayment term. 

Expert Retirement Planning Advice 

• Loan applicants need to smartly schedule loan repayments to ensure their financial obligations are cleared while maintaining retirement goals. 
• Consult with your financial advisor before settling for a TSP loan to get alternative solutions. 

Several factors such as the employee’s age, traditional or ROTH TSP contributions, and the purpose of withdrawal impact tax implications. Some of the tax consequences for withdrawing from the TSP account include –  

Traditional Thrift Savings Plan Contributions 

• Tax-Free Growth – Contributions to the traditional TSP account grow with tax deductions until the time of withdrawal. 
• Withdrawal Taxation – 

1. Ordinary Income Tax: Withdrawal from the TSP account is subject to tax deduction as ordinary income tax for the withdrawal year.
2. State Income Tax: The state government can also levy a tax upon TSP account withdrawal.

• Early Withdrawal Penalty – If an employee withdraws money from the TSP account before the age of 59 and a half years, they have to pay a 10% penalty from the withdrawal amount. 

ROTH Thrift Savings Plan Contributions 

• Tax-Deducted Contributions: Contributions made to the ROTH TSP account grow with tax deductions and employees receive the entire sum present in this type of account during withdrawal. 
• Tax-Free Withdrawal: ROTH TSP contributions become tax-free on contributions and earnings under the following circumstances – 

1. The employee has reached 59 and a half years of age 
2. When the reason for withdrawal is death, disability, or financial hardships 

• Non-Qualified Distributions: Failing to meet any of the withdrawal criteria from the TSP account will levy income tax on contributions and a 10% penalty on earnings. 

Required Minimum Distributions (RMDs) 

• Age Criteria: Employees need to receive RMDs from traditional TSP accounts from the year they turn age 73. 
• Taxation: The federal government deducts income tax from the TSP account RMDs for one withdrawal in a financial year. 

Account Rollovers and Transfers 

1. Direct TSP Rollovers: Transferring funds from traditional TSP to traditional IRA or ROTH TSP to ROTH IRA accounts are direct TSP rollovers. It avoids tax deductions from the TSP contributions or transfers until withdrawals are made after account conversion. 
2. Indirect Rollovers: Federal employees who want to conduct indirect TSP fund rollovers need to complete the process within 60 days to avoid tax and penalties. 

The age, employment status, and specific situation determine the withdrawal conditions from the Thrift Savings Plan. Check out the withdrawal criteria from the TSP account – 

Separating from Federal Service 

The two primary withdrawal criteria from the TSP account for federal employees separating from employers include – 

1. Primary Rule: Employees who have resigned, retired, or changed services from federal employment can withdraw money from their TSP accounts. 
2. Secondary Options: If separated from federal employment or switching employers, a TSP account holder can withdraw money from their account partially or totally. Moreover, they can purchase lifetime annuities or choose to get periodic installments from their TSP account balance. Furthermore, participants can roll over their TSP account into traditional or ROTH IRA plans. 

Age-Related Criteria 

• Employees who have reached the age of 59 and a half years and are continuing federal services can withdraw from TSP accounts without any penalties. 
• Essential for employees to take RMDs from TSP accounts from the year they turn age 72. 

Financial Crisis 

• Federal employees who are facing legitimate financial hardships are eligible to withdraw from the TSP account under special IRS and TSP rules. 
• Proper documentation of the financial crisis should be presented to be eligible for hardship withdrawals from the TSP account. This could include medical expenses. 

Disability Conditions 

• Federal employees who are permanently differently-abled under certain circumstances can withdraw penalty-free money from their TSP accounts. 
• Appropriate documentation is required to support their employees’ disability-related withdrawals. 

Death of TSP Account Holder

• Appointed beneficiaries can withdraw from the TSP account without paying any income tax if the account holder passes away. 
• TSP account beneficiaries can choose between TSP distribution options from partial withdrawal, total withdrawal, lifetime annuity purchase, or installment payments based on the applicable TSP rules selected by the primary participant.