The Thrift Savings Plan (TSP) is a federal retirement savings and investment plan similar to 401(k) plans offered by private sector companies. TSP is a voluntary contribution account. The amount of retirement income an employee will receive depends on the amount the employee and their federal agency, if applicable, contributes to the TSP and the interest or gain in value on those contributions.
Contributions are made on a pre-tax basis and the earnings and gains are tax-deferred until withdrawal, which is possible after the age of 59½. Any withdrawals prior to age 59 ½ are subject to a 10% federal tax penalty plus ordinary income taxes.
TSP contributions can be designated in any dollar amount or percentage of annual pay, however there are limitations set by the Internal Revenue Service for a maximum contribution. In 2008, that limit is $15,500.
The TSP serves as a supplement to the mandatory contributions of the Civil Service Retirement System, Federal Employees Retirement System, or the Uniformed Services Retirement System.
When an employee chooses to participate in the TSP, there are five investment options. Options vary in terms of volatility and risk, and allow for the customization of a retirement target date.
TSP offers many outstanding reasons for enrollment. TSP is completely voluntary and is on top of the federal retirement plan sponsored by your federal agency, over which you usually have very little control. TSP effectively allows you to manage your own money and earn a return on that money for retirement.
The minimum contribution to the TSP is $1 per pay period and even very small contributions will add up, so the flexibility of contributing is beneficial to all employees. TSP allows for immediate personal contributions upon the hire or rehire, although the matching employer contributions are subject to an open season waiting period. Newly hired employees can roll over other qualified retirement plan monies from a previous employer to the TSP. FERS employees are eligible for government-matched contributions and will see a significant increase in the ultimate value of the fund.
TSP, like all tax-deferred savings plans, has severe restrictions on the withdrawal of funds prior to retirement, but the TSP loan program does allow some access to funds. Withdrawals are legal for certain specified reasons but the money is taxable and is subject to an early withdrawal tax penalty of 10%.
TSP distributions after retirement involve several options and can dramatically affect your tax bracket. Using TSP distribution options requires diligent planning to avoid over-taxation.
As with all successful investments, the Thrift Savings Plan requires vigilance and a personal commitment to managing one’s own money. Employee Benefit Advisors can help. We will meet with you to discuss and review your retirement plans, including the TSP. After an assessment of your goals and current financial situation, our Federal Benefits Specialist will objectively evaluate all of your options and help guide you to ensure the right solutions.