Thrift Savings Plan

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The Thrift Savings Plan (TSP) is a defined contribution pension plan for United States government civilian employees and members of the uniformed services. It was started in 1987 as a major component of the Federal Employees Retirement System (FERS), the overhauled retirement system for new civilian employees. It is managed by an independent agency, the Federal Retirement Thrift Investment Board (FRTIB).

As of December 31, 2023, TSP has approximately 7 million participants (of which approximately 4.1 million are actively participating through payroll deductions), and more than $845.4 billion in assets under management;[1] it purports to be the largest defined contribution plan in the world.

All employees and uniformed members may enroll and withdraw from the TSP at any time, as often as desired. However, only civilian employees under FERS and new uniformed service enlistees under the Blended Retirement System (BRS) are eligible for matching contributions.[2]

New and rehired FERS employees are automatically enrolled upon hire and have 5% of their pay automatically deducted (which not coincidentally is the minimum an employee can have withheld and still receive the maximum matching funds), unless they choose to opt-out.[3] Employees are automatically established a TSP account with 1% of their pay deposited (even if not participating, this does not stop), and are additionally matched at dollar-for-dollar up to the first 3% of pay, then at $0.50/$1 for the next 2% (thus, at 5% of pay, with automatic and matching contributions an additional 5% is deposited). Employees may contribute above that (in terms of whole percentages or whole dollar amounts only) up to IRS limitations, but those contributions are not matched. Also, "catch-up" contributions are allowed for employees age 50 or older[4] up to IRS limitations (whole dollars only), but those contributions are also not matched.

Employees are automatically vested for their contributions and agency matching contributions, and associated earnings on those, from day one, but are not vested in agency automatic contributions and associated earnings on those until three years after employment (two years for members of the uniformed services and some categories of civilian employees); if the employee leaves those contributions are forfeited[5] (and used to pay administrative fees, which makes the TSP among the lowest-cost plans available). An employee having forfeited funds, if s/he returns to civil service, cannot reclaim those funds.

Both traditional and Roth TSP accounts are available for employee contributions; however, agency automatic and agency matching contributions are automatically deposited into a traditional account as they are tax-deferred contributions. In addition the TSP allows, in some cases, rollovers from other employer defined contribution plans (but rollovers from IRA's are not allowed).

The TSP offers 15 fund options, five of which operate like traditional index mutual funds and five are "Lifecycle" (target-date) funds:

  • G (Government) Fund—invests in special government securities not offered to the general public; the return is specified by law as the weighted average yield of Government securities having at least four years until maturity. This is the only fund where a positive return on investment (though not necessarily enough to keep up with inflation) is guaranteed as the securities are guaranteed by the "full faith and credit" of the US Government (all other funds require the employee to affirmatively acknowledge the potential risk of loss in the investment).[6]
  • C (Common Stock) Fund—invests in the BlackRock Equity Index Fund, which attempts to match the total return version of the S&P 500.
  • F (Fixed Income) Fund—invests in the BlackRock U.S. Debt Index Fund, which attempts to track the Barclays Capital Aggregate Bond Index.
  • S (Small Capitalization Stock) Fund—invests in the BlackRock Extended Market Index Fund, which attempts to track the Dow Jones U.S. Completion TSM index.
  • I (International Stock) Fund—invests in the BlackRock EAFE Index Fund, which attempts to track the net version of the MSCI EAFE index.
  • L (Lifecycle) Funds—invests in a specified mix of the five traditional funds. Those funds with target years in the distant future have higher percentages of investments in the C, I, and S Funds, and as the target year approaches the percentages shift to investments with higher percentages in the G and F Funds. As of 2020 there are ten such Lifecycle funds established, the L Income Fund (primarily for retired employees who are withdrawing from TSP, though any TSP participant may invest) and nine funds for future retirees (named in five year increments, with the fund named for the upcoming year designed for employees close to retirement, and the fund named for the most-distant year designed for newer, younger employees; the current names range from L2025 to L2065). Each fund for future retirees is designed for retirees planning to retire in that year, or two years on either side. Every five years, in years ending in zero and five, the fund for that target year is merged into the L Income fund (with its assets shifted to those of the L Income Fund), and a new fund established with its name taking on the year 50 years after its establishment (e.g. in 2025 a new fund will be established which will be called the L2075 Fund; the original plan was to merge the L2025 Fund into the L Income Fund and establish the L2070 Fund, but this was changed to do so in July 2024).
  • Beginning in mid-2022, participants have also been offered a "mutual fund index window" which will allow a part (but not all) of contributions to be invested in mutual funds offered by the private sector (it is estimated that around 5,000 such offerings are available). The FRTIB has been uniformly opposed to politically motivated changes in how TSP's investments are handled (whether they be left-wing proposals to divest from fossil fuel companies, or right-wing proposals to divest from Chinese companies), taking its fiduciary responsibility seriously; the mutual fund window would allow participants greater options such as "green" funds or funds without Chinese investments. However, only a portion of a participant's account may be invested within the window, and the fees are structured to be very steep so as to discourage investment outside the traditional offerings (as well as to preclude non-participants from subsidizing those costs).[7]

Unless an employee or service member chooses a different fund upon entering Federal or military service, civilian employees will automatically have their contributions established in an L fund based on an expected retirement date of 63, while members of the uniformed services will automatically have their contributions established in the G Fund. Employees may move their existing and future contributions (each are handled separately) between funds. In any calendar month the contributions may be moved as twice to whatever fund(s) are desired, but after that all movements are into the G Fund only.

During employment an employee may take out a loan against his/her balance. Two types of loans are available: a general purpose loan and a primary residence loan; an employee may have either two general purpose loans, or one of each type, outstanding. The minimum loan is $1,000 and the maximum is $50,000 (a $50 processing fee applies and is included in the loan amount), with terms being five years for the general purpose loan and 15 years for the primary residence loan. If married the spouse must consent. Interest is charged at the current G Fund rate of return, and payments are made via mandatory payroll deduction (though additional payments outside of this process may be made). Once a loan is paid off the employee must wait 60 days until another loan of that type is taken. If the employee separates from civil service, the loan must be repaid within 60 days or it is considered taxable income.

An employee also may make withdrawals against his/her balance. These withdrawals are permanent reductions in the balance, and are subject to tax and early withdrawal penalties if applicable:

  • Age-based withdrawal: an employee aged 59 1/2 or older may take out up to four withdrawals per year.
  • Hardship withdrawal: an employee may take out a withdrawal for one of four reasons (negative cash flow, medical expenses, personal casualty loss, or legal expenses for a marital separation or divorce).

If an employee has two accounts, s/he can only withdraw from those associated with active employment. But if both are active (e.g., an account related to reservist service and one related to Federal employment), s/he can withdraw from both.

At retirement an employee can no longer take out loans nor can future contributions be made. If the balance is under $200 it is automatically cashed out but can be rolled over into a different plan.[8] The employee can choose from any combination of the following options with regards to the balance (however, upon reaching age 72 -- or upon retirement if older than 72 -- the employee must withdraw at least the minimum amount per IRS life expectancy tables; TSP will do this automatically if the employee does not):

  • Leave the balance, or part of it, in the account
  • Withdraw the balance, or part of it, either via rollover or cash out, purchase an annuity, or via periodic payments (based on either an amount stipulated by the employee—which can be monthly, quarterly, or annually). However, unlike IRA's and 401(k) plans, employees who retire before age 59 1/2 are not penalized for withdrawals from TSP.

If a participant dies, then any unpaid balance is paid to the beneficiary(ies) designated.[9] If the participant did not designate any beneficiary(ies), then the "statutory order of precedence"[10] is used, as follows:

  • To the widow or widower,
  • To any surviving children (in equal shares) or their descendants,
  • To any surviving parent or parents,
  • To the court-appointed executor or administrator of the estate,
  • To the next of kin as determined by the laws of the state where the employee/retiree lived at death.

References

  1. https://www.frtib.gov/ReadingRoom/FinStmts/TSP-FS-Dec2020.pdf
  2. A prior law allowed the Department of Defense to designate any military position as eligible for matching contributions; none was so designated. A small pilot program, operated by the Army during the later 1980's, allowed for matching contributions for enlistees. The program has since ended and as of December 31, 2018 only five Soldiers are still serving and receiving matching contributions under that law. The BRS requires the enlistee to serve for two years before receiving matching contributions.
  3. Employees hired prior to that date, for the most part, have 3% of their pay automatically deducted unless choosing to opt-out; the original rule was that an employee was not automatically enrolled and had to opt-in, which did not change upon implementation of automatic enrollment rules.
  4. Under IRS rules, an employee needs only to turn 50 sometime during the year to begin catch-up contributions, so an employee with a December 31 birthday can begin contributing on January 1 of the year s/he turns 50.
  5. If an employee dies while employed, the matching contributions and associated earnings are "deemed" to be vested at death and can be withdrawn by his/her beneficiaries/heirs.
  6. From time to time G Fund securities issuance is suspended when the overall Federal debt ceiling is reached; in those cases, amounts are credited to the account as if activity was continuing; once the debt ceiling is lifted all amounts due plus accrued interest are paid.
  7. https://www.fedsmith.com/2022/01/27/tsp-mutual-fund-window-more-options-risk-expenses/
  8. Balances of under $5 are forfeited to the TSP, but employees can later reclaim them.
  9. However, if the beneficiary(ies) caused the death of the account holder, they are not paid, but are treated as having predeceased the account holder.
  10. The order of precedence is also used for payment of insurance benefits under the FEGLI, unused portions of a Federal Employees Retirement System (FERS) annuity, and unpaid compensation.

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