Thrift Savings
Plan (TSP) Primer
This primer is not intended to provide
financial investment advice, its sole purpose is to explain what the TP is and
the options that it makes available to you. Also, in the interest of full
disclosure, much of the information in this primer was plagiarized from the TSP
web site, www.tsp.gov. This is a
rather lengthy primer but the TSP is vital to your retirement plans so it is to
your financial benefit to plough through it.. Even though it is lengthy is only covers
a minimum of what you need to know.
You are strongly encouraged to check out the TSP website and browse
through the information available.
TSP is a retirement savings and
investment plan for Federal employees and members of the uniformed services,
including the Ready Reserve. It was established by Congress in the Federal
Employees' Retirement System (FERS) Act of 1986 and offers the same types of
savings and tax benefits that many private corporations offer their employees
under 401(k) plans. It is a defined contribution plan, meaning that the
retirement income you receive from your TSP account will depend on how much you
and the USPS put into your account during your working years and the earnings
accumulated over that time.
The TSP is administered by Federal Retirement Thrift
Investment Board (FRTIB or "Board") which is an independent Government agency
that is managed by five presidentially appointed board members and an
Executive Director who are
required by law to manage the TSP prudently and solely in the interest of the
participants and their beneficiaries.
However, while you are
employed, the USPS is your primary TSP contact. You should inform the USPS about
any changes or corrections to personal information that might affect your TSP
account including address changes.
After you separate from the USPS, the TSP becomes your primary point of
contact.
For employees in
FERS the TSP is one of the three integral parts that make up your retirement
portfolio. The other two are Social
Security and your FERS annuity, i.e. your postal retirement. You will need all
three if you hope to have a comfortable retirement. If you’re a FERS employee
hired before August 1, 2010 and are not contributing your own money, you still
have a TSP account with accruing Agency Automatic Contributions equal to 1% of
your base salary every year into your account. However, in addition, they will match $1
for $1 on the first 3% you contribute and 50¢ per $1 on the next 2%. So, if you contribute at least 5% of
your base salary, the USPS will deposit an additional 4% of your base
salary. Thus you can receive an
additional 5% of "free money"
deposited into your account every year. For a postal worker making $55,000, that
equates to $2,750.
If you’re a FERS employee hired (or a
FERS or CSRS employee rehired) after July 31, 2010, the USPS has automatically
enrolled you in the TSP, and 3% of your basic pay is deducted from your paycheck
every pay period and deposited in your TSP account, unless you made a
contribution election to stop or change your contributions. If you’re FERS, you
also get contributions from the USPS, so the total automatic contribution to
your TSP account is 7% every pay period.
If you are
covered by the Civil Service Retirement System (CSRS) the TSP is a supplement to
your CSRS annuity but the USPS does not contribute any matching funds. Regardless of your retirement system,
participating in the TSP can significantly increase your retirement income, but
starting early is important. Contributing early gives the money in your account
more time to increase in value through the compounding of
earnings.
An
advantage the TSP has over private
funds is its low administrative and investment expense, currently .027%. The average fee for privately managed
defined contribution plans is .83%.
So for every $1,000 you have in your TSP you pay 27¢ for the "Board" to
manage it. If you chose to invest
in a private fund, you'll probably pay $8.30, or more, per thousand. That is a significant difference and,
over the years, as your account grows, that can amount to a huge
difference. For instance, $50,000
invested in the TSP, assuming a 7% annual rate of return, will grow to $377,742
in thirty years. That same $50,000,
with an .83% management fee, would only grow to $301,318.
A basic choice
you have to make is the tax
treatments for your contributions.
You can opt for traditional (pre-tax) contributions with tax-deferred
investment earnings, or Roth (after-tax) contributions with tax-free earnings at
retirement. It all depends on
whether you want to pay taxes on the money you contribute as you contribute it,
or wait until you retire and start making withdrawals. You do have the option of splitting your
TSP account, and contributions, into both traditional or Roth, it does not have
to be one or the other. The TSP
website has charts that show the results you could achieve depending on your
choice of traditional or Roth.
A common reason
for choosing the traditional tax deferred method is that many employees will be
in a higher tax bracket while working than when they retire, so they will pay a
lower rate on their withdrawals after they retire. If you chose this type of account you
will have to pay taxes on all of your withdrawals, whether they be contributions
or earnings.
Others prefer
the Roth accounts because they are uncertain as to what the tax rates will be
when they retire or anticipate that their account will have grown
significantly. If you chose the
Roth account you will not have to pay taxes on your withdrawals, whether they be
contributions or earnings.
The
maximum amount an employee can contribute during any year, a problem not many of
us have to deal with is $17,500. In
addition, participants over 50 can
make an additional "catch-up" contributions of $5,500 per year, for a total of
$23,000. If you can afford to
contribute $23,000 per year, why are you still working?
There
are numerous investment options available to you in the TSP and how you chose to
invest could make a huge difference in the size of your account when you
retire. You really need to take
some time to learn about TSP and what investment options are best for you. There are five basic funds, G Fund, F
Fund, C Fund S Fund and I Fund.
There are also five L Funds which contain a various mixture of the five
basic funds.
It
is important to understand the individual funds. The G Fund only invests in government
securities that are specially issued to the TSP. Thus this fund will provide interest
income without the risk of losing any principal. However, it has a low rate of return,
1.47% in 2012, and may or may not even keep up with inflation. Especially when you factor in taxes. The
interest rate is set once per month by the Treasury Department based on the
closing market prices of all Treasury securities with four or more years of
maturity.
The
other four basic funds are all index funds. That means they invest in broad market
sectors and simply follow the market.
They do not try to time the market by buying and selling stocks, they
simply match what the market does.
It is interesting to note that most managed funds that buy and sell, as
their managers analyze and predict market trends, wind up underperforming the
market in the long run. In other
words, you could well be better off staying with an index fund than trying to
time the market.
The
F Fund tracks the Barclays Capital U.S. Aggregate Bond Index which, as the name
implies, follows the U.S. bond markets.
This includes both government and corporate issued securities. This fund returned by 4.29%
in 2012.
The
C Fund replicates the Standard & Poor's (S&P) 500 stock index which
contains common stocks of 500 companies that represent the U.S. stock
markets. The dollar value of the
S&P 500 makes up roughly 75% of the value of the U.S. stock markets. This fund returned 16.07% in
2012.
The
S Fund tracks the Dow Jones U.S. Completion Total Stock Market (TSM) Index which
contains all common stocks not in the S&P 500. It makes up the remaining 25% of the
value of the U.S. stock markets.
This fund returned 18.57% in 2012.
The
I Fund replicates the MSCI Europe, Australasia, and Far East (EAFE) index which
covers the equity markets of 22 developed stock markets. These are not "emerging" markets such as
China or India due to the volatility of emerging markets. This fund returned 18.62 % in
2012.
You
can choose how to allocate your fund balance and future contributions however
you want. Everything in one fund or
a mixture of all. Factors to
consider are your how close you are to retirement, how much can you afford to
lose, and your comfort risk level.
Putting everything into the G fund is a no risk strategy but will give
you very little return. On the flip side, putting everything into the C, S or I
Funds is a high risk venture with possible high returns an high losses. For instance in 2006 the C fund lost
36.99%, the S Fund lost 38.32% while the I Fund lost 42.43%. So you need to decide how much risk you
are willing to take and allocate your investments
accordingly.
For
those employees who may not have the time, experience, or interest to manage
their
TSP
retirement savings, the TSP has created five L Funds, which
are:
L
2050 for participants who will need their money in the year 2045 or
later.
L
2040 For participants who will need their money between 2035 and
2044.
L
2030 for participants who will need their money between 2025 and 2034.
L
2020 or participants who will need their money between 2015 and 2024.
L
Income for participants who are already withdrawing their accounts in monthly
payments, or who plan to need their money between now and
2014
The
assumption underlying the L Funds is that participants with longer investment
time horizons are able to tolerate more risk while seeking higher returns. The
funds automatically adjust to reflect a reduced ability to sustain risk as the
investment time horizon approaches. Each L Fund invests in a mix of the five
individual TSP funds. The mix is chosen by experts based on each fund’s time
horizon.
The
L Funds’ asset allocations are designed to achieve the highest expected rate of
return for the amount of risk taken. If the time horizon is a long time from
now, the L Fund will be more exposed to risky assets, such as stocks in the C,
S, and I Funds. As time horizons shorten, allocations gradually shift toward
less volatile Government securities (G Fund). The TSP web site has an L
Fund pie chart with a sliding bar
at the bottom which you can manipulate to see how the mix of funds changes as
you approach your retirement date.
The
L Income Fund is designed to preserve your account balance while protecting
against inflation. Each L Fund is rebalanced each business day to restore the
fund to its intended investment mix. Each quarter, the funds’ asset allocations
are adjusted to slightly more
conservative
investments. When an L Fund reaches its designated time horizon, it will roll
into the L Income Fund, and a new fund will be added with a more distant time
horizon.
One
last thing to consider when choosing an L Fund. Assuming you plan to retire in 2040 you
might just put all of your money into the L 2040 fund. However, come 2040 and you retire, you
may not withdraw all of your money at once, you could opt for monthly
payments. In that case all of your
money will be in the L 2040 fund when you retire but you will only access most
of it in future years. So, you may consider putting some in the
L 2040 and some in the L 2050.
For
those who do want to actively manage their money, responding to or anticipating
market conditions, there are two types of investment transactions available to
you. The first are your
contribution allocations where you specify how you want to invest new money
going into
your
TSP account. Your contribution allocation will apply to all future deposits to
your account.
These
include: employee contributions; agency contributions (if you are FERS) any
money you move into the TSP from other retirement plans; and any TSP loan
payments. Your contribution allocation will not affect money that is already in
your account.
The
second are Interfund transfers which moves the money already in your account
among the TSP investment funds.
When you make an interfund transfer, you choose the new percentage you
want invested in each fund. You cannot move specific dollar amounts among the
funds.
Also,
you cannot move specific types of money among the funds. For example, if you
have traditional (including tax-exempt) and Roth balances in your account,
your interfund transfer will move a
proportional amount from each type of money into the funds that you have
specified.
Interfund
transfers are not unlimited. Each calendar month, your first two interfund
transfers
may
be used to redistribute money in your account among any or all of the TSP funds.
After the first two, your interfund transfers can only move money into the G
Fund (in which case, you will increase the percentage of your account held in
the G Fund by reducing the percentage held in one or more of the other TSP
funds). The G Fund is considered a
"Safe Haven", so you can always move money into the G Fund, but only twice per
month out of the G Fund.
Now
that we have covered how to put money into your , how can you take it out? There are three ways to get your money
out of the TSP:
•
A loan
•
An in-service withdrawal (i.e., a withdrawal while you are still employed by the
Federal Government)
•
A post-separation withdrawal (i.e., a withdrawal after you separate from
service)
Any
loan or withdrawal you take from your account will be paid proportionally from
your traditional and Roth balances, and from each TSP fund in which you have
investments. For example, you cannot request a loan or withdrawal from only the
taxable portion of your traditional balance that is invested in the G Fund. If
you have both traditional and Roth
balances
and you are invested in five TSP funds, both balances and all your fund
investments will be impacted by your loan or withdrawal.
You
repay your loan with interest. The interest rate is the interest rate for the G
Fund at the time your loan application is processed. The TSP also charges a
processing fee of $50 for each loan. This fee is used to cover the cost of
processing and servicing your loan. It is deducted from the amount of the loan that you receive.
Loan
repayments are made through payroll deductions. They are deducted from your pay
each
pay period in the amount to which you agreed. If you fail to repay your loan in
accordance with your Loan Agreement), or you do not repay your loan when you
separate from service, the
TSP
will report a taxable distribution to the IRS. If you have an outstanding loan
when you leave Federal service, you must pay it back within 90 days or the
outstanding balance will be treated as taxable income and there could possibly
an early withdrawal penalty tax.
Before
you take a loan, consider that your loan costs are not limited to the interest
and fee that you pay. The cost of a loan can be much more far-reaching. When you
borrow from your account, you miss out on the earnings that might have accrued
on the money you borrowed. Even though you must pay the money back to your
account with interest, the interest you pay to your
account
may be less than what you might have earned if you had kept the money in the
TSP.
There
are two types of TSP loans:
•
A general purpose loan
•
A loan for the purchase or construction of a primary residence.
You
can have only one general purpose and one residential loan outstanding at a
time. The total amount that you can borrow is limited to your own contributions
and the earnings on
those
contributions. You cannot borrow less than $1,000 or more than $50,000. You can
find out the amount you may be eligible to borrow from your TSP account by
visiting the TSP website or calling the ThriftLine (877-968-3778). You can also
use the Estimate Loan Payments calculator on the TSP website to estimate your
loan payment amount before you request a loan.
Also,
If you are a married FERS employee your spouse must consent to your loan by
signing the Loan Agreement. If you are a married CSRS participant, your spouse
will be notified of your loan. These rules apply even if you are separated from
your spouse.
Another
way to access your TSP funds is via In-Service
Withdrawals. In-service withdrawals
(i.e., withdrawals from your account while you are still employed) are available
to all active participants. The TSP does not charge a fee for making an
in-service withdrawal. However, the overall impact on your retirement savings
may be significant.
There
are two types of in-service withdrawals:
•
A financial hardship in-service withdrawal
•
An age-based in-service withdrawal
You
can make a financial hardship in-service withdrawal if you can certify, under
penalty of perjury, that you have a financial hardship as a result of a
recurring negative cash flow, legal expenses for separation or divorce, medical
expenses, or a personal casualty loss. You may withdraw only your contributions
and any earnings those contributions have accrued. You can request $1,000 or
more; however, the amount that you request cannot exceed the actual amount of
your certified financial hardship. Further, you may not make contributions to
your account
(and
if you are FERS, you will not receive the associated matching contributions) for
6 months after the disbursement of your funds.
You
can make an age-based in-service withdrawal anytime after you reach age 59½, as
long as you are still a civilian Federal employee. You may withdraw part or all
of your vested account balance. You can request a dollar amount of $1,000 or
more, or your entire account balance even if it is less than $1,000). You are
permitted to make only one age-based in-service withdrawal. If you make one, you
will not be eligible to make a partial withdrawal from your account after you
separate from service.
As
with a loan, if you are a married FERS employee your spouse must consent to your
in-service withdrawal. If you are a married CSRS participant, the TSP must
notify your spouse before an in-service withdrawal can be made. These rules
apply even if you are separated from
your
spouse.
You
must pay Federal income taxes on the taxable portion of in-service withdrawals
when they are paid directly to you. You will owe taxes on the portion of your
withdrawal that comes out of your traditional balance. You will not pay Federal
income taxes on the portion of your in-service withdrawal that comes from your
Roth contributions .Financial hardship in-service withdrawals may be subject to
an early withdrawal penalty tax if you are younger than age 59½ when you make
your withdrawal.
Your
final withdrawal options are the post-separation withdrawals. There are two
types
of post-separation withdrawals:
•
A partial withdrawal
•
A full withdrawal
With
a partial withdrawal you can take out $1,000 or more and leave the rest in your
account until you decide to withdraw it at a later date. You may make only one
partial withdrawal from your account. If you made an age-based in-service
withdrawal, you are not eligible for a
partial
withdrawal. After your first partial withdrawal, the next withdrawal must be a
full withdrawal.
Some
employees may want to make more than one partial withdraw as their needs
dictates. For instance, to purchase
a new car or go on a nice vacation.
One option to consider is to make a large partial withdrawal and make a
direct rollover into a private IRA.
Let's say you have $200,000 in your account, you could transfer $100,000
into a commercial IRA which allows you to withdraw money as you please and leave
the rest in your TSP. However, keep
in mind the difference in
management fees described earlier.
Also
it is key that you transfer the money directly into the new IRA. If you have the TSP send you a check you
have tax consequences. Take the
previous example where you make a partial withdrawal of $100,000. If you request a check the TSP will
withhold taxes and you will receive roughly $80,000. However, to avoid taxes on your
withdrawal you have to reinvest the entire $100,000 within 60 days, but you only
got $80,000. You have to come up
with the other $20,000. If you do
not reinvest the full $100,000, the difference is taxable and may be subject to
early withdrawal penalties if you are not 59½. If
you deposit the full amount, you can get your taxes refunded when you file your
tax return,
With
a Full withdrawal you choose how your entire account will be distributed using
one, or any combination, of three
withdrawal options available to you:
•
A single payment
•
A series of TSP monthly payments
•
A life annuity purchased for you by the TSP
A
single payment allows you to withdraw your entire TSP account at one time in one
payment. It is sometimes referred to as a “lump sum.”
TSP
monthly payments allow you to withdraw your entire account in a series of
payments that will be paid to you each month from your TSP account. You can ask
for a specific dollar amount each month or you can have the TSP calculate a
monthly payment based on your life expectancy. If you choose a specific dollar
amount, it must be at least $25. At
any time while you are receiving monthly payments, you can ask the TSP to stop
the monthly payments and pay you your remaining account balance in a single
payment. Also, once a year, you have the opportunity to make changes to the
dollar amount of the monthly payments you are receiving. You also have the
opportunity to make a one-time switch to receiving monthly payments based on a
dollar amount rather than monthly payments based on life
expectancy.
An
annuity pays a benefit to you (or to your survivor) every month for life. The
TSP purchases the annuity on your behalf from a private insurance company. You
can have the TSP purchase an annuity with all or any portion of your account
balance when you request a full withdrawal. In general, the amount you use for
the purchase of an annuity must be $3,500 or more.
You
have a choice of three basic annuity types:
•
A single life annuity paid only to you during your
lifetime
•
A joint life annuity with your spouse paid to you while you and your spouse are
alive. When one of you dies, payments are made to the survivor for the rest of
his or her life.
•
A joint life annuity with someone (other than your spouse) who has an insurable
interest in y
ou
paid to you while you and the person you choose are alive. When one of you dies,
payments are made to the survivor for his or her life.
If
you elect a joint annuity, you may be able to choose between a 50% or 100%
payment option to the survivor.
As
with the other withdrawal option there are spousal rights involved. If you are a
married FERS employee your spouse must consent to your partial withdrawal. If
you are a married CSRS participant, the TSP must notify your spouse before a
partial withdrawal can be made. If
your vested account balance at the time of your full withdrawal is more than
$3,500, your withdrawal will be subject to Federal law regarding spouses’
rights. These rules apply even if you are separated from your
spouse:
•
If you are a married FERS participant, your spouse is entitled to an annuity
with a 50% survivor benefit, level payments, and no cash refund feature. Your
spouse must waive the right to this particular annuity unless you use your
entire account balance to purchase it.
•
If you are a married CSRS participant, the TSP must notify your spouse before it
can process your withdrawal, regardless of which withdrawal option
You
could opt to leave all your money
in the TSP until you reach age 70½.
If you are separated from postal service, you are required to make a
withdrawal choice for your TSP account balance
by
April 1 of the year following the year you become age 70½. If you do not withdraw (or begin
withdrawing) your account by the required withdrawal deadline, your account
balance will be forfeited to the TSP. You can reclaim your account; however, you
will not receive earnings on your account from the time the account was
forfeited. At the same deadline,
you will also be subject to the IRS required minimum distribution rules. These
rules require you to receive a certain portion of your account each year based
on your life expectancy. The TSP will send you information about these rules if
they apply to you.
The
last topic deals with death benefits.
In the event of your death, your account will be distributed to the
beneficiary or beneficiaries you designate on the TSP’s Designation of
Beneficiary form. If you do not designate beneficiaries to receive your account,
it will be disbursed according to the following order of precedence required by
law:
1.
To your spouse
2.
If none, to your child or children equally, and to descendants of deceased
children by
representation.
3.
If none, to your parents equally or the surviving parent;
4.
If none, to the appointed executor or administrator of your estate;
or
5.
If none, to your next of kin who is entitled to your estate under the laws of
the state in which you resided at the time of your death.
For
this order of precedence, a child includes a natural child or an adopted child
but does not include a stepchild who has not been adopted. A parent does not
include a stepparent, unless your stepparent has adopted you. “By
representation” means that if your child predeceases you,
his
or her share will be divided equally among his or her
children.
You
should be aware that a will or any other document (such as a prenuptial
agreement) is not valid for the disposition of your TSP account. You must designate a beneficiary using
TSP-3 Designation of Beneficiary. The completed form must be properly signed,
witnessed, and received by the TSP on or before the date of your death. This is often a problem when the TSP
participant gets divorced, remarries but never fills out a new TSP-3 under the
false assumption that the will will make the new spouse the
beneficiary.
In
the event of your death, if your spouse is a beneficiary of your account and
your spouse’s share is $200 or more, a “beneficiary participant” account will be
established in your spouse’s name. Any death benefit processed from your account
for your spouse will be deposited into this TSP account and invested in the G
Fund. Your spouse can leave the money in the TSP
and
manage the investments in the TSP’s funds, combine the account with his or her
own TSP account, if applicable, or withdraw the money using any of the TSP
post-separation withdrawal options described earlier.
There
are numerous sources of information about the Thrift Savings
Plan.
.
The
most up-to-date information about the Plan in general, and your account in
particular, is on the TSP website, tsp.gov.
You
can also obtain limited information from the TSP’s automated voice response
system, the ThriftLine, 877-968-3778..
If
you need clarification about plan features or have additional questions about
your account, your best resource while you are still employed by the Federal
Government is your agency or service. It is responsible for correcting or
changing your personal TSP-related information and resolving any issues
regarding your contributions and loan payments. If necessary, it will
also
be able to contact the TSP on your behalf.
If
you are separated from Federal service, your primary resource is the
TSP:
Thrift
Savings Plan
P.O.Box
385021
Birmingham,
AL 35238
Telephone:
Call
the ThriftLine to speak to a Participant Service
Representative.
(7
am -9 pm Eastern time) 877-847-4385