TSP

The Thrift Board isn’t stopping with the implementation of the TSP Modernization Act, which is scheduled for September 15, 2019. There are several other changes that they are either considering or have already planned to implement.

In October of 2020, the default deferral rate for new employees will increase to 5% from the current 3%. This would allow all newly hired employees to receive the full government match. The Thrift Board has set a goal of having 80% of all participants contributing at least 5% of their income to the TSP. That is an important goal, and it will be hard to reach for lower-graded employees who are early in their career and have other important financial responsibilities.

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All employees should “strive for five” and, if thinking of limiting their TSP contributions, should ask themselves which of the “big three” savings goals (purchasing a home, educating their children, and funding their retirement) a bank will not loan them money for.

The current six-month prohibition on making TSP contributions after having taken a hardship withdrawal will be eliminated. It’s assumed that this change will coincide with the implementation of the TSP Modernization Act on September 15th.

The “Roth Tax Trap” is being eliminated at the same time the Act is being implemented. The Modernization Act did not address the issue that all withdrawals from the Thrift Savings Plan had to be proportional between Traditional and Roth balances. This proportionality requirement resulted in participants who had both Traditional Roth balances and who began withdrawing from the TSP prior to reaching the age of 59 ½, having the portion of their Roth withdrawal that was due to earnings be subject to federal income tax because their withdrawals were not considered to be “qualified”. Roth earnings are only free from federal income tax if Roth withdrawals are qualified; and to be qualified, the Roth balance must have been in the TSP for five years, and the participant must be age 59 ½ or older.

Beginning on September 15th, those who withdraw from their TSP accounts will be able to specify which balance (Traditional or Roth) they want their withdrawals to come from.

Expect a flurry of publicity from the Thrift Board as these changes near implementation. To stay in the loop, consider following the TSP on Facebook or Twitter and if you have not already, sign up for the Thrift Savings Plan Report here: https://www.fedweek.com/newsletters/.