By Brian Bloxom, ChFEBCSM
Most federal employees are eligible to participate in the thrift savings plan (TSP). The TSP is an important tool in your retirement toolbox, designed to work alongside your other benefits. The TSP is similar in some respects to traditional nongovernmental retirement plans such as the IRA and 401(k), exclusively offered to federal employees (including civilian employees as well as members of the uniformed services).
Contributing To A TSP Account
Employees may elect to contribute any amount of their gross pay in increments of 1% (up to the IRS maximum ($19,500 for 2021). Employees age 50 and over may make catch-up contributions up to the IRS limit ($6,500 for 2021). (1) The employee’s agency will contribute to the TSP account in two ways: automatic agency contributions and matching contributions.
All TSP participants receive an automatic agency contribution equal to 1% of their gross pay, regardless of how much they contribute (including if the employee makes no contribution).
The agency will match the first 3% of an employee’s contribution dollar for dollar. If an employee contributes more than 3%, then the agency will match half of the next 2%. The maximum matching contribution is 4%. Employees may choose to contribute more than 5%, but will not receive any additional matching contributions. (2)
TSP Auto-Enrollment
All employees who began service (or were rehired) on or after October 1, 2020, were automatically enrolled in the TSP with a contribution rate of 5%. Employees under the Federal Employees Retirement System (FERS) who were hired between August 1, 2010, and September 30, 2020, were automatically enrolled in the TSP at a contribution rate of 3%. Employees under the Civil Service Retirement System (CSRS) were not automatically enrolled in the TSP, but can set up an account manually through their agencies. (3) If you were auto-enrolled in the TSP and do not wish to participate, you can receive a refund of your contributions if you make a refund request within 90 days of your first contribution. (4)
Traditional And Roth Contributions
Also similar to a private sector 401(k) or IRA, the TSP offers the option to make traditional (tax-deferred) contributions or Roth (post-tax) contributions, or a combination of both. Agency matching contributions are based on the total contribution amount, regardless of whether the employee elects a traditional or Roth option, and the annual contribution limits are the same regardless of contribution type.
Participants cannot withdraw from a traditional TSP account until age 59½ without incurring a 10% early withdrawal penalty. Since contributions to Roth TSP accounts have already been taxed, a participant may withdraw contributions penalty-free at any time. Earnings, however, are subject to the same five-year rule as 401(k) and IRA accounts, meaning that at least five years must have elapsed since January 1st of the year when an employee established the Roth account or performed a Roth conversion, (5) and the plan participant must have reached age 59½ before Roth earnings become tax-free.
Transfers And Rollovers
Employees who worked in the private and/or nonprofit sector(s) before beginning employment in the federal government may wish to combine their prior retirement accounts into their TSP accounts. The TSP accepts “indirect” rollovers for most traditional accounts, wherein an employee receives a distribution check from the old plan and must deposit the funds into the new plan within 60 days to avoid the 10% early withdrawal penalty. Roth money cannot be rolled over indirectly; only direct transfers to the TSP account are permitted. Funds from Roth IRA accounts cannot be combined with a TSP account regardless of method. (6)
How We Can Help
TSP is an important component of retirement for federal employees; it is one of three post-retirement income streams for employees under FERS. (Most federal employees are currently under FERS, as no new employees have been enrolled under CSRS since 1984.) If you are a federal employee and would like to explore how we can help you better understand your benefits and retirement options, reach out to us today by calling our office at 703-832-0164, sending an email to brian@sentinelwealthpartners.com, or using our online calendar.
About Brian
Brian Bloxom is an Independent Financial Advisor, Chartered Federal Employee Benefits Consultant (ChFEBCSM), and Chartered Retirement Planning Counselor (CRPC) with 25 years of experience in financial advising. He founded Sentinel Wealth Partners to serve retirees, individuals approaching retirement, and individuals managing complex retirement plans such as company plans or federal benefits plans. His expertise and dedication to helping his clients achieve their goals make him a trusted resource that will help you feel confident in your customized retirement plan. Brian’s mission is to be available to his clients—all the time. He’s here to solve your problems, relieve your anxiety, and give you optimism for retirement. Because ultimately, your retirement should be about well-deserved enjoyment, and not about stress or anxiety. When he’s not working, you can find Brian spending time with his wife, Jessica, and their two sons, Spencer and Preston. He enjoys coaching soccer, serving in his community, golfing, and relaxing at his vacation home at Lake Anna, VA. To learn more about Brian, connect with him on LinkedIn.
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(2) https://www.tsp.gov/making-contributions/contribution-types/
(3) https://www.tsp.gov/making-contributions/start-change-stop-contributions/
(4) https://www.tsp.gov/making-contributions/automatic-enrollment-refunds/