By Phil West, WCI Contributor
You may be wondering if a Thrift Savings Plan (TSP) is right for you, but perhaps the other important question to ask is if you’re right for a TSP. Here, we’ll provide an overview of who’s eligible for a TSP, the contribution limits, and the rules around withdrawals and distributions.
What Is the Thrift Savings Plan?
First, let’s define a TSP, per the government’s website dedicated to the program. It is “a retirement savings and investment plan for federal government employees and uniformed services members, including the Ready Reserve. Established by Congress in the Federal Employees’ Retirement System Act of 1986, the TSP offers the same types of savings and tax benefits that many private corporations offer their employees under 401(k) plans.”
What Are the Investment Limits for the Thrift Savings Plan?
For 2023, there’s an annual elective deferral limit of $22,500 per the IRS, with a $7,500 “catch-up” limit for those 50 and older (we anticipate the limit to increase to $23,000 for 2024). There’s also an annual additions limit of $66,000 [$68,000 in 2024], defined as the total amount of all the contributions you make in a calendar year. Allocate at minimum 5% of your income to the TSP to get the full match from the government.
We advised previously about the TSP:
“While most people should probably use a tax-deferred option instead of a Roth option during their peak earnings years, that is not the case for most TSP-eligible folks. Those in the military are probably in a ridiculously low tax bracket (thanks to low pay, probably no state taxes, and a large percentage of their income from non-taxable allowances and tax-exempt war zone pay) now, so they should generally use the Roth option. In addition, many military and federal workers will have a pension in retirement, and the more taxable income you will have in retirement filling the brackets, the better Roth retirement account contributions become.”
More information here:
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Is the Thrift Savings Plan Only for Federal Employees?
The TSP site notes, “Most employees of the United States government are eligible to participate in the TSP.”
Eligibility classes include:
- A Federal Employees Retirement System (FERS) employee (generally if you were hired on or after January 1, 1984)
- A Civil Service Retirement System (CSRS) employee (generally if you were hired before January 1, 1984, and did not convert to FERS)
- A member of the uniformed services (active duty or Ready Reserve)
- A civilian in certain other categories of government service
The site also notes that in addition to having coverage from an eligible retirement system, you must also be:
- Actively employed by the federal government as a civilian employee or as a member of the uniformed services,
- In a pay status in order to contribute, and
- Working full- or part-time.
If you’re a service member or government worker and you then separate from that employment, you can still keep your TSP account as long as you have at least $200 in the vested account. You can also roll over money from eligible retirement plans—such as a 401(k), 403(b), or traditional IRA—to your existing TSP account. It also encourages people to do so, saying, “There are multiple advantages to rollover contributions to the TSP, and you can use this option even after you retire.”
We endorsed this as well, writing, “The TSP may be the best 401(k) in the country,” detailing its many virtues before declaring, “The TSP is such a great 401(k) that savvy folks don't roll their money out of it when they leave the military. Instead, they keep it open and roll money into it at every opportunity.”
Are You Automatically Enrolled in the Thrift Savings Plan?
It depends on what type of federal employee you are. Here’s what the TSP site says:
- If you’re a FERS employee hired on or after October 1, 2020, your agency has automatically enrolled you in the TSP and 5% of your basic salary is deducted each pay period and deposited in the traditional balance of your TSP account.
- If you’re a CSRS employee, your account is established by your agency after you make a contribution election using your agency’s electronic payroll system or complete and submit Form TSP-1.
- For BRS members of uniformed services, your automatic enrollment in the TSP begins after 60 days of service. At that time, your service begins deducting 5% of your basic pay each pay period from your paycheck and deposits it into the traditional balance of your TSP account.
- If you’re a member of the uniformed services who is not covered by the Blended Retirement System (BRS), your TSP account is established by your service after you make a contribution election using your service’s electronic payroll system (typically myPay for Army, Air Force, Navy, Marine Corps or Direct Access for Coast Guard and NOAA Corps), or complete and submit Form TSP-U-1.
More information here:
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At What Age Can You Withdraw From the Thrift Savings Plan?
The TSP site notes, “There are two types of TSP withdrawals for active federal civilian workers and members of the uniformed services: financial hardship and age-59½.” It’s also possible to borrow money from yourself via a TSP loan.
In the case of the financial hardship withdrawal, you have to meet certain criteria to qualify. The site also cautions, “Your financial hardship withdrawal is subject to federal income tax and, in some cases, state income tax. If you’re younger than 59½, you may have to pay a 10% early withdrawal penalty tax.”
What Happens to My Thrift Savings Plan Account If I Die?
If you don’t designate a beneficiary, there’s a progression that the TSP follows, first awarding the money to your spouse, and then after that, “to your child or children equally, with the share due any deceased child divided equally among that child’s descendants,” to parents, and then “to the appointed executor or administrator of your estate.” If none of those categories exist, it would go to next of kin as determined by the laws of the state in which you resided at the time of death.
It generally takes 30-45 days to process a death benefits claim once a participant’s information and identified beneficiaries have been verified.
For additional information about personal finance for military physicians, be sure to check out our previous writings on the topic.
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