Difference between revisions of "Thrift Savings Plan"
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Revision as of 22:11, March 31, 2019
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.
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 are eligible for matching contributions.
New FERS employees are automatically enrolled upon hire and have 3% of their pay automatically deducted, unless they choose to withdraw. 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 up to IRS limitations (whole dollars only), but those contributions are also not matched.
Employees are automatically vested for their contributions and associated earnings on those from day one, but are not vested in automatic/matching contributions and associated earnings on those until three years after employment (two years in some cases); if the employee leaves those contributions are forfeited (and used to pay administrative fees, which makes the TSP among the lowest-cost plans available).
Both traditional and Roth TSP accounts are available for the employee's contribution (the agency automatic and matching contributions are automatically deposited into a traditional account). In addition the TSP allows, in some cases, rollovers from other employer defined contribution plans.
The TSP offers ten 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. This is the only fund where a positive return on investment is guaranteed as the securities are guaranteed by the "full faith and credit" of the US Government.
- 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 predominantly in the G and F Funds. Every ten years, in years ending in zero, the fund for that target year is merged into the L Income fund, and a new fund established.[1] Unless a new employee chooses differently, s/he will automatically have all contributions established in an L fund based on an expected retirement date of 62[2].
- L Income -- individuals currently receiving monthly payments
- L2020 -- individuals with retirement dates between 2015 and 2024
- L2030 -- individuals with retirement dates between 2025 and 2034
- L2040 -- individuals with retirement dates between 2035 and 2044
- L2050 -- individuals with retirement dates in 2045 or thereafter
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 to 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 only 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), 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 age 59 1/2 or older may take out one withdrawal during employment, but afterwards can only withdraw the total amount of his/her balance.[3]
- 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). In addition to tax penalties and loss of potential future earnings, for the next six months an employee may not contribute or receive matching contributions (except for automatic ones), and afterwards is not automatically re-enrolled in TSP but must complete the paperwork to do so.
At retirement an employee can no longer take out loans. If the balance is under $200 it is automatically cashed out but can be rolled over into a different plan.[4] The employee can choose from any combination of the following options with regards to the balance:
- Leave the balance, or part of it, in the account (at age 70 1/2 the balance must either be withdrawn entirely or an annuity purchased, if neither is done the account is forfeited but can be reclaimed; however no earnings are paid during the abandonment period)
- Withdraw the balance, or part of it, either via rollover or cash out, or via monthly payments by purchasing an annuity or a specified amount (based on either an amount stipulated by the employee or using IRS life expectancy tables), but the amount can only be changed annually and the payments cannot be discontinued[5]
If a participant dies, then any unpaid balance is paid to the beneficiary(ies) designated. If the participant did not designate any beneficiary(ies), then the "statutory order of precedence"[6] 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
- ↑ Current legislation has this changing, beginning in 2020, to every five years, consistent with target date funds offered in the private sector, but implementing regulations have not been established. The expected date of changes such as this, and others mentioned below, is September 2019; the law requires implementation by November 1, 2019.
- ↑ Members of the uniformed services have their contributions placed in the G Fund.
- ↑ Current legislation has this changing to four withdrawals per year, and removing the requirement to later remove the total balance at retirement if done, but implementing regulations have not been established.
- ↑ Balances of under $5 are forfeited to the TSP, but employees can later reclaim them.
- ↑ Current legislation has this changing to monthly, quarterly, or annual payments, and allowing the amount to be changed as frequently as desired including discontinuing them, but implementing regulations have not been established.
- ↑ 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.
