TSP How it Works - APWU Iowa



TSP How it Works

by Mark Butler



Retirement planning for most civilian federal employees relies on a tripod of income streams and the “legs” of that tripod are Social Security, the Federal Employees Retirement System (FERS) and the Thrift Savings Plan (TSP). In many ways, the TSP is much like the private sector’s Error! Hyperlink reference not valid. and has similar rules regarding contribution limits and distributions.

So who is eligible for the TSP? There are two main categories of federal employees eligible to participate and those are civilian federal employees and members of the military including the Coast Guard. The benefits available under the TSP Error! Hyperlink reference not valid. a number of factors and there are limits based on the type of employee and when federal service began.

Military members may utilize the TSP but they do not get any sort of matching contribution unless the Service Secretary for their branch authorizes it as a special incentive in order to retain certain specialized talent. Currently, as of June 2010 no Service Secretary has authorized any matching funds.

For federal civilian employees, there are currently two categories and those are personnel under the Civil Service Retirement System (CSRS) and the Federal Employee Retirement System. This split occurred during the Reagan Administration and part of the reform involved making the pay of federal employees subject to Social Security withholding but also making federal employees eligible for Social Security but the cost was to reduce the federal pension benefit by 50 percent. Included in this change was also the institution of the Thrift Error! Hyperlink reference not valid. Plan.

For employees covered under CSRS, there is no matching contribution although the employee can contribute and take advantage of the various funds and the tax benefit of pre-tax withholding.

Employees covered under FERS, the vast majority of federal employees, the government will immediately contribute 1% of salary to the employees TSP account which is set up upon employment with the federal government. The employee’s contribution to the plan is then matched at 100% for the first 3% of an employees pay and at 50% match for the next 2% of pay. Once an employee has contributed 5% of pay there is no further matching although the employee is able to contribute more within the limits imposed by the IRS.

For employees under age 50, the annual limit that an employee can contribute is limited to $16,500 and employees age 50 and over are allowed to

make “catch-up” contributions of $5,500 for a total of $22,000 annually. It Is important to remember that the older employee must designate the additional funds as “catch-up” contributions and that the annual limit should be spread out over the entire year because once the annual limit of $16,500 is reached, there are no more contributions allowed and there are also no further matching funds contributed to the TSP Error! Hyperlink reference not valid. that year.

Just like a 401K, the contributions to the Thrift Error! Hyperlink reference not valid. Plan are not subject to taxation at the time of contribution. Additionally, all money earned in the plan is not taxed as long as it is in the TSP or a similarly qualified plan. Like a 401K, the taxes are paid when the money is withdrawn, presumably when the employee is at a lower tax rate and has less total taxable earnings. Additionally, just like a 401K, the money can be withdrawn without penalty after the employee reaches 59 and ½ and the owner of the TSP must begin distributions at 70 and ½ or be subject to significant tax penalties.

While there are plans to add a ROTH style TSP fund in the future, there are currently 10 different funds offered to TSP participants. Five of these are life cycle funds than either provide income, or are targeted toward a retirement date of 2010, 2020, 2030 or 2040. The others are the G (Government bonds), F (Money Market), S (Small Cap), I (International stock), C (common Error! Hyperlink reference not valid.). Any participant can have money diversified in anyway desired from either one fund or all 10. Lastly, vesting on an employee’s contribution occurs immediately and the government’s contribution is vested after 3 years of federal civilian service.

Overall the TSP is a very viable means to build a retirement nest egg and if managed properly can provide for a very Error! Hyperlink reference not valid. retirement. According to recently released government data, of the more than 3 million TSP account holders, there are currently 67 who have $1 million or more in their TSP. Needless to say, those people contributed more than the minimum required for full matching!

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